Government Accounting Advisor: Consideration of a New Approach to Governmental Fund Financial Statements

The Governmental Accounting Standards Board (GASB) is considering making improvements to the existing financial reporting model for governmental fund financial statements. They are reconsidering their form and content, measurement focus, and basis of accounting, to make them more effective, consistent, and understandable.

In December 2016, the GASB staff published an Invitation to Comment (ITC) on Financial Reporting Model Improvements-Governmental Funds. Comments were due to the Board by March 31, 2017. Public hearings and user forums on the ITC were held in April and May of 2017.

Under consideration are improvements in the following areas:

  • Recognition approach (basis of accounting and measurement focus).
  • Format of the fund financial statements.
  • Terminology.
  • Reconciliation to the government-wide financials.
  • Required statement of cash flows for certain approaches.

The three financial resources approaches being considered are:

  • Near-term.
  • Short-term (working capital).
  • Long-term (total financial resources).

Required cash flow statements are being considered for the short-term and long-term approaches, as well as condensing the governmental funds to government-wide reconciliation for all approaches.

Near-term Approach

This approach focuses on a near-term perspective for both governmental fund activities and flows of financial resources. The near-term recognition approach reports spending and resources available for spending that were acquired during the reporting period. This approach excludes items of a long-term nature and the results are more comparable to budgetary information.

The near-term approach would generally include in its perspective the 60 to 90 days following the end of the reporting period. If this approach is taken, the Board would decide whether or not to prescribe a specific length of time following the end of the reporting period that would be considered near-term.

Assets and liabilities would include those that are receivable or payable at the period end and those normally due to convert to cash in the near term. Long-term receivables and debt would be recognized as payments became due. Normally means normally for governments in general, not specifically for a certain government. Due means the date the payment is scheduled or expected to be made. So normally due means when most governments would receive/pay if a scheduled date exists, or when receipt/payment would be expected by most governments.

The near-term approach would reflect a net position, or fund balance, of the residual amount (or deficiency) of only the near-term assets, liabilities, and inflows and outflows of resources at the period end. This approach would not give a comprehensive picture of the governmental activities, as no long-term assets or liabilities, including pension and other postemployment benefit liabilities, are presented. It could be argued this is what the government-wide financial statements are for and that the near-term is to compare more with budget.

The Board does not currently propose adding a statement of cash flows to the near-term approach. There are those who disagree with not presenting a cash flow statement under this approach, but it is not being considered by the GASB at this time.

Short-term Approach

This approach focuses on the governmental entity’s one-year fiscal period or operating cycle and is sometimes referred to as the working capital approach. It shows resource inflows and outflows for the fiscal period and period-end balances related to short-term assets and liabilities. Short-term is defined as one year. Under the short-term approach, cash, claims to cash, prepaids, inventory, and equity securities of another entity are considered financial resources. This approach also considers the subsequent operating cycle.

The short-term approach focuses on a) assessing the entity’s ability to operate and pay liabilities in the subsequent operating cycle, b) analyzing whether or not the entity has the ability to fund its short-term obligations, and c) assessing whether the governmental entity has the resources beyond those needed to meet current-year obligations to meet any new or additional needs.

This approach is based on the concept of assets and liabilities being symmetrical. Assets include cash and other financial resources receivable at the period-end and those normally due to convert to cash in the subsequent operating cycle, including inventories and prepaid items to be consumed in the subsequent operating cycle. Liabilities include those due at the period-end as well as those normally due in the subsequent operating cycle. Normally due under the short-term approach has the same meaning as it does for the near-term approach.

The net position element, or fund balance, under the short-term approach would reflect the net amount (or deficiency) of short-term assets and deferred outflows of resources over short-term liabilities and deferred inflows of resources at the end of the reporting period. Again, this approach would not show a comprehensive picture of the government’s activities, as it excludes long-term assets and liabilities. The reconciliation to the government-wide financial statements would highlight the differences and, again, the government-wide financial statements present the more complete and comprehensive picture.

Long-term Approach

The long-term approach recognizes the effects of transactions when they occur, regardless of when cash is received or paid, and is sometimes referred to as the total financial resources approach. The long-term approach does not recognize capital assets and their related debt. It does show information related to financial assets and liabilities which will help users of the financial statements assess the government’s ability to meet service needs and pay financial obligations that it has incurred (except for capital activities). Shorter-term information would be provided through the use of a classified balance sheet presentation with current defined as one year.

The long-term approach is also based on the concept of symmetry for assets and liabilities. All assets and liabilities are reported except for capital assets and their related debt. The net position, or fund balance, would be the remaining amount (or deficiency) of assets and deferred outflows of resources over liabilities and deferred inflows of resources at the end of the reporting period. This approach is still not designed to represent a comprehensive look at the position of the government. The reconciliation to the government-wide financial statements would highlight the differences. As with other approaches, the government-wide financials would provide the comprehensive picture of the financial position of the government.

Where to Find More Information

The written comments and transcripts of the public hearings and user forums will become part of the Board’s public file. The written comments are posted on the GASB’s website. The Invitation to Comment (ITC) can be downloaded from the GASB’s website at www.gasb.org . The ITC includes a complete description of each of the three approaches under consideration as well as background information, illustrations of financial statements under the current approach and the proposed approaches, a comparison of the recognition approaches, and a discussion of selected transactions.

Current Timeline

The GASB intends to redeliberate these issues based on feedback received during the summer of 2017 and spring of 2018. Their current schedule shows discussion of a preballot draft of Preliminary Views in May 2018, followed by an exposure draft, and a final statement in late 2021.