Spending for relief efforts related to the coronavirus pandemic appears likely to lead to increased scrutiny of the federal government’s finances for years to come.
In this environment, the Federal Accounting Standards Advisory Board (FASAB) passed a milestone in October with its 30th anniversary as the standard setter for federal agency accounting. FASAB is continuing its work to improve the federal reporting model, assist agencies in implementing a new lease accounting standard, and help federal employees get the accounting training they need through virtual means during the pandemic at substantial savings to the government.
In this Q&A, FASAB Chair George Scott, CPA, CGMA, describes the work the board is doing to improve federal financial reporting for the benefit of the public.
Can you talk about the importance of federal accounting standards at a time when expenses are significantly exceeding revenues? Are you confident that users are getting the information they need right now?
Scott: Let me address both those questions at once. Accrual-based federal accounting standards truly are the underpinning of reliable and complete financial statements of the federal components and consolidated federal government. Specifically, they provide an economic perspective, a long-term view of the financial implications of government policy.
Part of our mission is to serve the public interest by issuing standards that improve federal financial reporting for both external users, which is typical for accounting standard-setting organizations, but also for internal users, which is broader. As a byproduct, we are tasked with assisting in improving internal controls within the federal environment. I believe we have been successful in promoting all of the above.
The board’s accounting standards play a significant role in fulfilling the government's responsibility for public accountability. Am I confident that users are getting the information they need? User needs change and evolve over time, and the board makes every effort to monitor those needs and changes. One of the crowning achievements of this board is fiscal sustainability reporting guidance.
When I speak to groups, I am still amazed that I am asked if the federal government issues annual financial statements. Entities have issued annual financial statements for decades, but many people are not aware that the federal government issues an annual financial report. I always direct them to the website of the U.S. Department of the Treasury, which houses that report. One document, The Citizens Guide, is an excellent summary of where the federal government stands financially. It is in layman's terms, and it is easily understood. It is a hard message to hear that fiscal sustainability may not be possible for some programs in their current format. You mentioned that revenues are significantly below expenses, which, unfortunately, is an impact that is projected to continue for years. That information is in the annual financial report, but again I am not sure how many people, outside of the federal government, the executive branch, Congress, and those with direct interest in federal financial activity, have even realized it's available.
That information is so fundamental. It affects not only the citizens now, but it is going to affect our children, our grandchildren, our great-grandchildren.
How has the coronavirus pandemic affected the preparers, and what has FASAB done to ease the burden without compromising the information that the users need?
Scott: When the board met in April, one of our key objectives was to consider how the board was going to respond to the pandemic. The board approved a three-pronged approach. First, we wanted to encourage technical inquiries by federal agencies on issues they were facing around the pandemic. Staff streamlined the technical inquiry process on our website, and the staff immediately connects with the inquirer. At this point, most of the questions raised are already addressed in the existing standards, and staff has easily been able to assist those inquiring agencies. The board continually monitors inquiries to determine if it needs to issue standard amendments or additional guidance.
Second, we considered the postponement of the implementation of recent standards. Fortunately, there were no significant standards with implementation dates in the next 24 months other than leases, which I will address later.
Lastly, the board committed to jointly work together with the Office of Management and Budget (OMB), Treasury, and the Government Accountability Office (GAO) to proactively identify and prioritize accounting issues specifically related to COVID-19. In doing so, we hope the appropriate entity will be able to address arising issues quickly and effectively with collaboration among the four parties.
Additionally, at the beginning of the last fiscal year, the board wanted to emphasize and formalize our educational and our community outreach. We had already started this process of educational outreach to federal agencies and other organizations before the pandemic. The staff began developing several training programs and education courses that now FASAB provides for free. With so many federal staff working from home, completing continuing education requirements in this pandemic has been difficult. So over the last few months we have provided virtual educational sessions to over 9,000 participants. Considering the training programs that we've been able to provide our community, the federal government probably has saved tens of thousands, if not hundreds of thousands, of out-of-pocket costs and travel costs for federal employees.
FASAB only has nine full-time staff and nine part-time board members with a budget of only about $2 million. In relation to our budget and staffing, our contribution back to the federal government is significant. We will continue to provide educational and community outreach as part of our core service to our community.
You're doing foundational work on the entire federal reporting model. What's the objective of this project, and how do you expect to bring it about or have it come together?
Scott: Financial statement models are always in evolutionary development. Several years ago, the board enhanced the federal reporting model concepts as the foundation for reexamining the entire federal reporting model. The board is approaching this monumental task in phases — with management’s discussion and analysis (MD&A) and budgetary reporting first.
While we are in the research phase of both projects, during our October meeting, the board approved a timeline for MD&A pilots, followed by discussions with user focus groups to evaluate the effectiveness of the pilots. The pilots will be guided by the vision statement and objectives the board has been developing. The board’s overall goal is to provide flexibility in presenting an MD&A that holistically relates a comprehensive financial story, including significant risks, trends, and performance results affecting financial position and condition of the reporting entity while not requiring a prescriptive list of sections. The board’s intent is to allow the preparers the flexibility to address the specific needs of the users of the annual reports without prescriptive format constraints. The preparers understand the needs of their users, and they should be able to develop an MD&A in a concise, focused manner, addressing only those essential issues.
Budgetary reporting is very much in the early stages of the research phase. Major considerations will include who the audience is and what information they need for budgetary reporting in a comprehensive annual financial report.
Obviously, there are other components of the reporting model we will reexamine. MD&A and budgetary reporting are the first priorities.
Let’s talk about the Department of Defense (DOD). It's so massive that it has never passed an audit, but it has really been working toward the day when it will. Does that affect your work in any way? One of the thorny issues is whether there is a way the board can approach classified activity so Defense can be audited.
Scott: Obviously, the board is supportive of DOD completing its audit and receiving an unmodified opinion, but that is true for every federal agency. We do encourage technical inquiries, and DOD has come to us several times in the last few years with technical inquiries — and an organization as massive and unique as DOD has some unique accounting issues.
Whether it's DOD or any agency that comes to us with these types of issues, the first question the board will ask in the research phase is, "Is it unique to this agency or is it a broader issue?" So we want to make sure that when we address any issue or inquiry, we have a complete perspective of the implications across the spectrum of the federal government.
As to classified activity reporting, the board has addressed this in [Statement of Federal Financial Accounting Standards (SFFAS)] 56, Classified Activities, which provides latitude for agencies that have significant reporting issues with classified activity to allow for the protection of information vital to the security of the United States. However, this is not required. The application of the guidance is only if there is no alternative. Otherwise, all other guidance is to be applied. Part of the board’s mission is to increase accountability and transparency through financial reporting, but it acknowledges, in some instances, financial information vital to the security of the United States must be protected. The board has taken an approach that is similarly used in the federal budget reporting environment.
How about lease accounting? Can you talk about the deferral and what that means for preparers?
Scott: At the February meeting, the board was already considering deferral of the lease standard. It was becoming obvious that the actual implementation of [SFFAS] 54, Leases, would be difficult because of the technology issues of changing massive federal systems as well as technical implementation guidance that all agencies would need for a successful implementation. We will also continue to monitor the effect of COVID-19 and what, if any, timing impact that may have in the future.
Based on the feedback from the FASAB staff and federal preparer community, the board delayed implementation to fiscal year 2024.
You're working on standards relating to accounting for government land and disclosures about private/public partnerships. What's the thinking going into that?
Scott: Let me address them separately.
In 2016, the board agreed that there should be consistent accountability and reporting of land managed by the federal government. Currently, land is reported in a variety of ways — historical cost, no cost, deemed cost, and units — which the board believed obscured land accountability, especially since the federal government manages over 600 million acres or approximately 30% of U.S. surface land. The board, after considering a variety of reporting methods, determined that the most cost-effective and informative presentation was on a nonfinancial basis of estimated acreage. Secondarily, the predominant use (conservation-preservation, operational, and commercial) of such land was also considered critical to improve accountability.
The board is close to final balloting on an accounting and reporting of government land standard. The standard would not go into full effect until fiscal year 2026 but would require acreage information to be reported in required supplementary information beginning in fiscal year 2022 and become basic information in 2026. In addition, the board has approved a government land standard implementation project to monitor implementation progress and develop timely implementation guidance and standard revisions as necessary. This will ensure successful implementation.
And then public/private?
Scott: For public/private partnerships, we issued [SFFAS] 49, Public-Private Partnerships: Disclosure Requirements, in 2016, which only addressed disclosures of public/private partnerships. The principles establish a P3 definition and identify risk-based characteristics that need to exist before considering the P3 arrangement or transaction for disclosure. If these characteristics and other criteria are met, the statement requires the disclosure of quantitative and qualitative information. The information will assist users in understanding the nature of P3s, such as the relative benefits/revenues received in exchange for the government's consideration, the contractual terms governing payments to and from the government, and related risks to the government including those deemed remote.
The next phase of this project will address the recognition and measurement of such activity in the basic financial statements.
What are you most proud of in your time on the board?
Scott: Let me mention two. First is how the board and the staff have reacted in this pandemic environment. I mentioned the educational training and outreach program. I'm very proud that this has become a focus and passion of the staff and board.
The board only meets six times a year, every other month. However, the board has agreed unanimously that if we need additional special meetings to maintain board momentum, that is an option. In fact, we may have such a meeting in early December because we have several standards that are either in exposure draft or in ballot stage and we want to make sure these projects stay on target. These will be short meetings, focused only on one or two topics. The board members are all part time, and so to contribute even more to keep our agenda moving forward on a timely basis just shows their commitment to the community.
Second, the other area, which we've already discussed, is the reexamination of the reporting model and evaluating the purpose, the presentation, and the transparency of financial reporting in a comprehensive approach.
What future projects are foremost on your mind?
Scott: There are three potential projects that the board will be considering in the near future, which I will mention briefly. They consist of a reexamination of existing standards, a standard on intangibles, and a standard on subscription-based IT arrangements.
Currently the board, jointly with the Accounting and Auditing Policy Committee (AAPC), released exposure drafts on amendments and implementation guidance to [SFFAS] 54, Leases. The board identified projects on intangibles and subscription-based IT arrangements through board discussion and the development of the exposure drafts on leases. There were over 75 members on the leases implementation task force, and with such an extensive representation, we received incredible feedback on leases as well as other issues.
As to the potential standards reexamination project, the goal is to develop a process to review the existing standards on a regular basis. Some of our standards are more than 20 years old and have not been seriously reexamined. We have inconsistencies in practice of some of these standards. We have identified confusion and difficulties in applying some of the requirements and the need for more clarifications around some issues. User needs and conditions evolve, and some of these standards even have terminology conflicts with our new standards. The goal is to develop a codification. But before we can do that, we really need to look at these older standards. Hopefully, this will ease the difficulty of preparing our first codification.
Is there anything that I didn't ask you that you wanted to say?
Scott: Well, I would mention that on Oct. 10, FASAB celebrated its 30th anniversary.
That's great, congratulations!
Scott: Unfortunately we're in the middle of a pandemic, so we can't hold an in-person celebration, so we have developed a YouTube presentation and will issue a special newsletter. As we celebrate the occasion and continue to navigate the effects of COVID-19, we do so utilizing an array of virtual videoconferencing tools and other remote communication methods. FASAB members, staff, and volunteers have successfully assisted the board in this trying time to move our agenda forward. As we reflect on the last three decades, FASAB has built upon its historic beginnings to meet the needs of the federal financial management community it was created to serve.
FASAB continues to break barriers in financial reporting and leads the way in fiscal sustainability reporting. The board has issued standards and guidance on a broad array of topics, many unique to the federal environment. Guidance includes social insurance, long-term fiscal projections, deferred maintenance and repairs, public-private partnerships, the introduction of nonfinancial information in the basic financial statements, and the incorporation of financial performance results, among other accomplishments.
This year has challenged all of us in ways we never could have imagined. However, our commitment to FASAB’s mission is as strong as ever. I would like to express my gratitude to all those engaged in the board’s mission — my fellow board members, FASAB’s executive director and her staff, the members of the Appointments Panel, those serving on FASAB task forces, members of the AAPC, and all who read and respond to our requests for input. Everyone’s passion and commitment make the board’s work possible.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.