|EDWARD M. KLASNY, CPA, is a member of GASB,
a retired partner and national director of public sector
accounting and auditing for Ernst & Whinney (now Ernst
& Young LLP) and a past chairman of the AICPA Government
Accounting and Auditing Committee (GAAC). His e-mail address
is email@example.com .
JAMES M. WILLIAMS, CPA, CGFM, is a partner and national
director of public sector accounting and assurances services
for Ernst & Young LLP, a former member of the AICPA GAAC
and represents the Institute on GASB’s Governmental Accounting
Standards Advisory Council. His e-mail address is firstname.lastname@example.org
The views expressed in this article are those of Mr. Klasny. Official positions of GASB are determined only after extensive due process and deliberations of the board.
tate and local governments must change their financial reporting. The focus is shifting from straightforward stewardship reports that include only accountability information to a more corporate-style analysis of the long-term impact of financial management decisions. The expected result: Reports will be based on more-consistent information about an entity’s financial condition and will have greater relevance. This change is mandated by GASB Statement no. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, issued last June (for statement text see JofA, Oct.99, page 112). GASB arrived at the new model based on research that included the views of national preparers and user groups, gathered at many public hearings and focus groups. We review the model’s key elements, the implementation guidance and GASB expectations of how the change will affect state and local governments and the financial community.
THE MODEL OVERVIEW
The new model calls for financial statements integrated with governmentwide reporting and enhanced fund reporting. It also requires management’s discussion and analysis ( MD&A ) and seeks to clarify a number of previously troublesome GAAP issues.
Statement no. 34 calls for a government entity’s financial management to present MD&A as required supplementary information (RSI) before the basic financial statements. In response to users’ need for a summary of a government’s operations and financial position, GASB broadened the number of subjects that MD&A must address to include
- An objective discussion of the basic financial statements and condensed financial information comparing current and prior years.
- An analysis of the overall financial position and results of operations.
- Analysis of balances and transactions of individual funds.
- Analysis of significant variations between the original and final budget and the final budget and actual results for the general fund.
- A description of significant capital-asset and long-term-debt activity during the year.
- Known facts, decisions or conditions expected to have a significant impact on financial position or results of operations.
The model’s most dramatic change is to the handling of governmentwide reporting, bringing together government activities, business-type activities and discretely presented component units. Each is to be reported with a flow-of-economic-resources measurement focus and the accrual basis of accounting. This is a major step because until now government followed only the modified-accrual basis. The change is important to potential lenders and taxpayers because of the need to capitalize and depreciate general capital assets. (The capital-asset reporting requirement, discussed later, involves general infrastructure assets.)
The statement of activities is to be presented in a “net cost” reporting format. The approach is based on a format developed by the AICPA state and local government accounting committee and published by the AICPA in 1981 as Accounting and Financial Reporting by State and Local Governments—An Experiment.
Reporting on infrastructure assets (long-lived capital assets such as roads and bridges) has been a contentious issue for many government preparers. Some say the value of the information doesn’t justify the cost, complexity and effort involved to collect it. GASB, however, concluded after extensive due process that infrastructure reporting is vital to demonstrating accountability for all government assets and the cost of its services.
The board is delaying implementing infrastructure-asset reporting and for now is even allowing estimated costs for infrastructure assets acquired before the effective dates of the model, but Statement no. 34 requires prospective reporting of major general infrastructure assets acquired after the model is implemented. However, as you’ll see in the implementation section, there are exceptions for smaller governments.
The model provides practical guidance on establishing estimated costs and reporting general infrastructure assets. If historical cost information isn’t available, governments are expected to report estimated historical cost for major general infrastructure assets acquired in fiscal years ending after June 30, 1980. GASB provides ways to estimate historical cost and to calculate accumulated depreciation and depreciation at transition.
GASB won’t require governments electing the “modified approach” to report depreciation on eligible infrastructure assets if they meet two requirements:
- They have an asset-management system with characteristics specified in the model.
- They can document that eligible infrastructure assets are being preserved at or above a condition the government establishes and discloses.
The governments must perform condition assessments every three years, and the results of the three most recent ones must show the assets are being preserved at about the established condition level. The model requires the RSI to include the results of these assessments; in addition, it requires annual information about the estimated amount needed to maintain the established condition level and the amounts actually expensed for the past five years.
The “modified approach” will likely appeal to governments that use such an approach to manage certain general infrastructure asset networks, such as managing a state highway department highway system. GASB also is exploring a project to determine whether a preservation-maintenance approach can be based on condition standards.
The elements of fund reporting have not changed much. Separate statements are required for each fund category (governmental, proprietary and fiduciary). However, major funds, as defined in the standard, are reported in separate columns, with nonmajor funds of that category reported in another column, labeled “other.”
Reporting fund types (such as special revenue and capital projects) is no longer required for governmental funds in the basic financial statements. For fund reporting, fund categories will continue to apply their current-measurement focus and basis of accounting (that is, the flow-of-current-financial-resources measurement focus and the modified-accrual basis of accounting for governmental funds).
The model establishes two new fund types—permanent funds (governmental) and private-purpose trust funds (fiduciary). Governments must present a summary reconciliation to the governmentwide financial statements at the bottom of fund financial statements or in a separate schedule, which will be extensive for government funds because of the difference in the measurement focus and basis of accounting.
ENTERPRISE, FIDUCIARY AND INTERNAL SERVICE FUND CHANGES
Because past practices were inconsistent, GASB
has made the conditions under which a government uses enterprise and
fiduciary funds more restrictive. For example, the model now says
enterprise funds may be used when a fee is charged to
external users for goods or services. In addition, an enterprise
fund is required if an activity is financed with debt
secured solely by a pledge of its net revenues from fees, has laws
or regulations requiring that costs of providing services be
recovered with fees or has pricing policies that establish fees
designed to recover its costs. Also, “net assets” replaces
contributed capital and retained earning for enterprise fund equity
because of the change to the net assets format.
The model says that a government should use fiduciary funds only to report assets held in a trustee or agency capacity for others—not when used to support the government’s own programs, which should be reported in another fund category.
Governments report all internal service funds in total in a separate column in the proprietary fund financial statements. For governmentwide reporting, however, governments eliminate most internal service fund amounts to avoid “grossing-up” the financial statements; amounts that aren’t eliminated are generally reported as government activities.
Budgetary comparison schedules showing the original budget, the final budget and actual amounts on the budgetary basis are required as RSI for the general fund and for each major special revenue fund that has a legally adopted annual budget. However, governments may elect to report these budgetary comparisons as a basic financial statement.
GASB recognizes that implementing the model will be a challenge, so it has established phased implementation based on a government’s total annual revenues for the first fiscal year ending after June 15, 1999. For those with revenues of more than $100 million (called phase one governments), implementation begins after June 15, 2001; for $10 million to $100 million (phase two) governments, implementation begins after June 15, 2002; and for governments with less than $10 million of revenue (phase three), it begins after June 15, 2003.
The retroactive reporting of major general infrastructure assets provision requires phase one and phase two governments to report such assets four years after the respective implementation dates. Phase three governments are encouraged, but not required, to report them retroactively.
GASB made a significant effort to make implementation as easy as possible. The discussion in Appendix B, “Basis for Conclusion,” provides more detailed information of what is required and why. Appendix C, “Illustrations,” contains an example of MD&A and extensive financial statement displays.
To further aid implementation, GASB is issuing two types of guides. Plain language guides, to be issued soon, will help users understand and analyze the new financial statements. A question-and-answer guide scheduled for this quarter will assist preparers in implementing the new basic financial statements.
GASB recently approved other Statement no. 34 projects that will:
- Apply the new reporting to colleges and universities.
- Interpret the application of the modified-accrual basis of accounting for government funds.
- Reevaluate required note disclosures.
Preparers and auditors need to understand Statement no. 34’s requirements as soon as possible. Preparers should develop a plan for implementation that includes an early start for developing the accrual information they will need to report government activities in the governmentwide financial statements. The new model also raises significant audit issues, including infrastructure assets and materiality determinations, which the AICPA will address this year.
Governments will need capital-asset records that support the opening balances at transition of capital assets and accumulated depreciation and enable the calculation of depreciation for governmentwide reporting of general government capital assets. Although retroactive reporting of general government infrastructure assets isn’t required until four years after the model’s implementation, governments need to understand that any debt related to such infrastructure will be included in the governmentwide statement of net assets upon implementation. Governments that do not report the depreciated value of infrastructure assets will report fewer net assets than a government that does, with some governments conceivably reporting more liabilities than assets.
LOOKING TO THE FUTURE
The new millennium will be an era of greater accountability, as governments strive to meet the continuing demands for services in a society of increasing technological complexity. And the new model will be the linchpin for meeting fresh challenges and more-relevant reporting requirements.