The GASB--A Report on the Status of its Major Agenda items

The Governmental Accounting Standards Board (GASB) entered its fifth year with a full slate of important projects on its agenda. Measurement focus/basis of accounting, risk financing and insurance, cash flow reporting, and the reexamination of the governmental financial reporting model are just a few of the major projects, in various stages of completion, that are on the GASB's agenda.

The Board is committed to coordinating the implementation dates of certain projects (measurement focus, pensions, and risk financing, for example) so that state and local governments can avoid the possibility of having to make, and explain, significant adjustments to their fund balances year after year.

Measurement Focus and Basis of Accounting (MFBA)

Many people consider this project--MFBA for governmental funds--to be the single most significant project the Board will undertake. The December 1988 issue of The CPA Journal included an article on the project by William T. Wrege and R. Penny Marquette. Their article presents a comprehensive summary of the provisions in the GASB's December 15, 1987, exposure draft (ED) Measurement Focus and Basis of Accounting-Governmental Funds and a comparison of the proposal with the existing standards. The Board received close to 200 responses to the ED expressing various levels of support, or disagreement, with the proposal.

The Board has discussed the responses to the ED at each of its monthly meetings and has reached tentative conclusions about revising certain provisions in the ED, but has not departed from the flow of financial resources as the measurement focus for governmental funds. However, because of modifications to some of the more significant provisions in the ED, the Board believes it is necessary to issue a revised exposure draft to obtain input from the constituency on the changes made.

Inventories

The ED provided for the use of either the consumption method or the purchase method to record governmental fund material and supplies inventories. Many respondents disagreed with allowing the use of either method, instead suggesting that one method be chosen as the standard. The Board decided that the revised ED would require the use of the consumption method.

Tax Revenues

Many of the respondents to the ED also commented on the proposed tax revenue (and receivable) recognition requirements. In response to the concerns, the Board has tentatively determined that the revised ED will require tax revenues to be recognized as follows. Generally, tax revenues would be recognized when: 1) the underlying event takes place; 2) the government has demanded the taxes from the taxpayer by establishing a due date as of fiscal year-end or, for taxpayer-assessed taxes, as of the fiscal year-end or shortly thereafter; and 3) there is acknowledgement of the demand (for taxpayer-assessed taxes). Thus, a single general standard would be applied to all tax revenues. The revised ED will propose the following specific requirements for recognizing tax revenue.

Sales tax payments received or reported during the fiscal year, net of an allowance for refunds, would be recognized as revenue for the year. Revenue would also be recognized during the fiscal period for payments received or reported (acknowledged) before financial statements are issued if the amounts are: 1) related to sales made before fiscal year- end (underlying event); and 2) due to be paid within 30 days of fiscal year-end.

Income tax withholdings and estimated payments received or reported during the fiscal year, net of an allowance for refunds, would be recognized as revenue for the year. Revenue would also be recognized during the fiscal period for withholdings and estimated payments received or reported (acknowledged) before financial statements are issued if the amounts are: 1) related to income earned before fiscal year-end (underlying event); and 2) due to be paid within 30 days of fiscal year-end.

For both sales and income taxes there would not be an accrual for unreported amounts because there has not been an acknowledgment of the demand by the taxpayer.

Property (or ad valorem) tax revenues should be recognized in the budgetary (fiscal) period for which they are levied, provided the government has demanded the taxes and there has been an acknowledgment of the demand, regardless of when the amounts are received by the taxing government. The demand date for property taxes is the due date (which is the last day before penalties and interest begin to accrue), and the acknowledgment of the demand is the billing of property owners for the taxes. Property taxes received before the revenue recognition criteria are met should be reported as deferred revenues. Property taxes are sometimes due to be paid during the period that precedes the budgetary (fiscal) period for which levied and, thus, before revenue recognition criteria are met. In those cases, property tax receivables and deferred revenues should be reported when the taxes become due. Property tax revenues, receivables, and deferred revenues should be reduced by an allowance for amounts estimated to be uncollectible.

Compensated Absences

Respondents generally did not quarrel with the Board's proposed expenditure recognition standards--at least the effect on the operating statement for governmental funds. Many respondents did, however, object to the effect the proposal would have on governmental funds' balance sheets.

The Board considered modifying the governmental reporting model as a solution. The objective was to preserve, to some extent, the "traditional" fund balance because that number (or concept), over the years, has become meaningful to many users of governmental financial statements. Many of the critics of the MFBA proposal believe that changing the definition of fund balance, as the ED would do, is simply too drastic and would not be understood by those who have grown up with fund balance as we know it now.

The Board has tentatively agreed to separate the issues of recognizing the compensated absences expenditure and measuring the liability from the MFBA project (and the revised ED) to allow sufficient time for more thorough deliberation. The Board did agree, however, that the revised ED should discuss how current compensated absences liabilities would be measured because those amounts would clearly affect "current" fund balance.

Risk Financing and Insurance

This project is related to the MFBA project in the sense that it deals with the measurement of an expenditure/liability in government funds. Its scope is broader, however, because it is not limited to governmental funds, but rather is concerned with expenditure/expense and liability measurement for all fund types. It is important to note that the decisions that ultimately result from the Board's deliberations on the financial reporting of compensated absences (and, generally, all noncurrent operating liabilities) will also determine the financial reporting for liabilities measured in accordance with the provisions of the final standard for risk financing and insurance. In December 1988, the GASB issued an ED of a proposed statement which would establish accounting and financial reporting standards for risk financing and insurance-related activities of state and local governmental entities, including public entity risk pools. The risks of loss that are included within the scope of the project include torts; theft of, damage to, or destruction of assets; business interruption; errors or omissions; job related illnesses or injuries to employees; and acts of God. Also included are accident and health, dental, and other medical insurance plans that may or may not be covered by insurance contracts.

The ED generally requires public entity risk pools to follow the current accounting and financial reporting standards for similar business enterprises, as set forth primarily in SFAS 60, Accounting and Reporting by Insurance Enterprises. State and local governmental entities other than public entity risk pools would be required to report an estimated loss from a contingency as an expenditure/expense and as a liability if both of these conditions are met:

* Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability had been incurred at the date of the financial statements.

* The amount of the loss can be reasonably estimated.

If a governmental entity other than a pool uses a single fund to account for its risk financing activities, that fund should be either the general fund or an internal service fund. Both funds must use the method described above for reporting liabilities from claims. However, if an internal service fund is used, the entity may use an actuarial funding method, including a provision for future catastrophe losses, to calculate the amount that the internal service fund charges other funds of the entity. Charges made on that basis would be reported as revenue in the internal service fund and as expenditure/expenses in the other funds of the entity. Charges in excess of those amounts would be reported as interfund transfers. Any surplus fund balance in an internal service fund resulting from use of a provision for catastrophe losses would be reported as a designation of equity for future catastrophe losses.

Financial Reporting

The financial reporting project has been ongoing since the creation of the GASB in 1984. The Board originally envisioned the project as having five distinct phases--each to be addressed in a logical sequence. The results of the first two phases of the reporting project are embodied in the GASB's first research report, The Needs of Users of Governmental Financial Reports (User Needs) and GASB Concepts Statement 1, Objectives of Financial Reporting (Objectives), respectively. The third phase of the reporting project, concerning the determination of the financial reporting entity, is roughly at the half-way point. A discussion memorandum (DM) was issued and the Board is in the process of reaching tentative conclusions. The fourth phase, the reexamination of the reporting model is also well underway. The Board is currently working on model-related projects such as cash flow reporting, capital reporting, budgetary reporting for capital projects, and to an extent, the project on measurement focus for business-type activities. In addition, research is being done on different levels of aggregation for general purpose financial statements. The final phase of the reporting project, service efforts and accomplishments reporting, has gotten off to a good start with teams of academic researchers studying a variety of possible service areas for measuring performance in governmental financial reporting.

The Financial Reporting Entity

The GASB's proposed definition of the reporting entity based on accountability represents a somewhat different perspective than the existing entity concept, which is based on the notion of responsibility and control. The Board has tentatively agreed that the governmental reporting entity should include the primary government and all component units that the primary government is accountable for. Accountability in this sense, is manifest in the appointment by the primary government of a controlling majority of an organization's governing board. Underlying the entity definition is the widely accepted notion that all functions of government must be responsible to elected governing officials at the federal, state, or local level.

The Financial Reporting Model

Virtually every project that has appeared on the GASB's agenda has financial reporting implications to some extent. However, there is a group of related projects currently underway that are expected to provide significant input to the reexamination of the governmental financial reporting model.

Business-Type Activities. Despite its title, the GASB's project on measurement focus for governmental business-type activities has significant financial reporting implications. The two basic issues discussed in this project's DM are: 1) how should business-type activities be defined; and 2) what is the most appropriate measurement focus for business-type activities?

The measurement focus issue is the key to whether governmental funds will be aggregated with enterprise funds, assuming that aggregation is appropriate. That is, if both governmental funds and enterprise funds use a financial resources measurement focus for combined reporting purposes, the financial resources flows can be aggregated without concern over whether or not there is a need to display the depreciation of governmental fund capital assets. But, if governmental funds measure financial resources and enterprise funds measure economic resources in the combined statements, aggregation would require some means (such as the "capital" fund) for reporting the using-up of general fixed assets. Changing the enterprise fund measurement focus to financial resources would not preclude the preparation of supplementary statements on an economic flows basis. Similarly, there is nothing to preclude retaining the economic resource flow focus for enterprise funds with supplementary statements on a financial resources flow basis.

The definition issue is important because the existing definition of enterprise funds is weak, resulting in inconsistencies in reporting. For example, those who do not find depreciation of assets used in business- type activities to be useful tend to report business-type activities in special revenue funds or as departments within the general fund. As the previous paragraph implies, it is conceivable that the primary measurement focus of business-type activities (that is, proprietary fund, public authorities, etc.) could change to a financial resource flow basis. Obviously, such a change would diminish the need to define business-type activities.

Capital Reporting. A DM on capital reporting was issued on March 1, 1989 seeking opinions on a variety of issues. The DM introduces a governmental "plant fund" concept as an alternative to the present fund and account group reporting of capital transactions and illustrates various financial statement presentations of that concept, including both a capital account group and a capital fund.

Cash Flow Reporting. Cash flow reporting was added to the project agenda primarily because of the confusion that arose regarding the applicability of SFAS 95, Statement of Cash Flows, to governments. The Board decided it would be in the best interests of the constituency to add a cash flows project to the agenda and eliminate any confusion about SFAS 95. The Board issued an ED in November 1988.

The major differences between the ED and SFAS 95 are that: 1) four categories are used for classifying cash transactions instead of three; 2) the definition of the "operating" category is narrower; and 3) "net cash provided by operations" may be reconciled to operating income rather than to net income. Generally, all other applicable provisions of SFAS 95 are present. The Board is analyzing the responses to the ED.

Research on Aggregation. The issue of whether governments should prepare consolidated financial statements instead of, or in addition to, fund-based statements has been debated for years. Research seems to point to the same general conclusion: fund or fund-type information alone is more useful than consolidated information alone. This does not imply, however, that statements presenting consolidated data with (or supplemental to) fund-based data are not more useful than statements presenting only fund-based data.

User needs showed that "users clearly consider fund type statements more useful than consolidated statements." Thus, there is mounting evidence that fund-based information should not be replaced with consolidated data.