Project Pages

Financial Reporting Model—Reexamination of Statements 34, 35, 37, 41, and 46 and Interpretation 6

Project Description: The objective of this project is to make improvements to the financial reporting model, including Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and other reporting model-related pronouncements (Statements No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities, No. 37, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus, No. 41, Budgetary Comparison Schedules—Perspective Differences, and No. 46, Net Assets Restricted by Enabling Legislation, and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements). The objective of these improvements would be to enhance the effectiveness of the model in providing information that is essential for decision-making and enhance the ability to assess a government’s accounting and address certain application issues, based upon the results of the pre-agenda research on the financial reporting model.

Status:
Added to Current Agenda: September 2015
Research results reported to the Board: July 2015
Added to Research Agenda: August 2013

FINANCIAL REPORTING MODEL—PROJECT PLAN

Background: Statement 34 was the culmination of 15 years of research, deliberation, and due process. In Statement 34, the GASB established the present blueprint for state and local government financial reporting—the format and measurement focus of the basic financial statements, certain related notes to the financial statements, and required supplementary information including management’s discussion and analysis (MD&A). Among its many features, Statement 34 introduced government-wide financial statements containing accrual information—which notably included the reporting of infrastructure, other capital assets, and long-term liabilities—for activities previously reported only on a modified accrual basis in the governmental funds. Statement 34 also required a narrative MD&A to precede the financial statements, added the presentation of the original budget to the budgetary comparison schedule, introduced major fund reporting in the governmental and enterprise funds, and added note disclosures related to capital asset and long-term liability activity during the reporting period.

Statement 34 was first effective for periods beginning after June 15, 2001. Most provisions of the Statement became effective in three phases, beginning with the largest governments. Up to an additional 4 years were allowed for Phase 1 (annual revenues of $100 million or more) and Phase 2 ($10 million to $100 million) governments to retroactively report existing infrastructure assets. Phase 3 governments (below $10 million) were allowed to report general infrastructure prospectively.

The financial reporting model has a pervasive influence over the effectiveness of financial reporting by state and local governments and the ability of that reporting to achieve the objectives of financial reporting. As a result, the GASB decided that it was important, as part of its commitment to maintaining the effectiveness of its standards, to reexamine the current financial reporting model now that it has been in place for a sufficient length of time. The pre-agenda research showed that most of the components of the financial reporting model are effective; however, a number of areas where improvements may be made were identified.

In conjunction with this project, the efforts of developing recognition concepts for information presented in governmental funds would be continued. The Board’s conceptual framework project on recognition was put on hold pending reexamination of the financial reporting model. Feedback to the Preliminary Views issued in June 2011 included recommendations that recognition concepts for governmental funds should be developed in conjunction with a reexamination of the financial reporting model.

Accounting and Financial Reporting Issues:

Management’s Discussion and Analysis (MD&A)—Explore options for enhancing the financial statement analysis component, consider the elimination of requirements that are boilerplate and no longer necessary for understanding the financial reporting model, and clarify guidance for presenting currently known facts, decisions, or conditions that are expected to have a significant effect on financial position or results of operations.

Government-Wide Financial Statements—Explore alternatives for the format of the statement of activities and consider whether a government-wide statement of cash flows should be required, and if so, how those cash flows should be presented.

Major Funds—Explore options for providing additional information about debt service funds, either individual or in aggregate.

Governmental Fund Financial Statements—Explore a conceptually consistent measurement focus and basis of accounting and develop a presentation format for governmental fund financial statements consistent with the measurement focus and basis of accounting. In conjunction with this project, the conceptual framework project on recognition of element of financial statements would be recommenced.

Proprietary Fund and Business-Type Activity Financial Statements—Evaluate operating indicator alternatives in conjunction with evaluating the guidance for the separate presentation of operating and nonoperating revenues and expenses.

Fiduciary Fund Financial Statements—Explore where the fiduciary fund financial statements should be presented in the basic financial statements.

Budgetary Comparisons—Explore the appropriate method of communication (either as basic financial statements or required supplementary information) for budgetary comparison information and consider whether and, if so, which budget variances should be required to be presented.

Other Issues—As appropriate and in conjunction with other topics, explore options that would permit more timely financial reporting or that would reduce complexity overall.

Project History:
  • Pre-agenda research approved: August 2013
  • Research results reported to the Board: July 2015
  • Added to current technical agenda: September 2015
  • Deliberations began: October 2015
  • Task force established? Yes
Current Developments: In January through March 2016, the Board considered several recognition approaches for governmental fund financial statements, format alternatives for the government-wide statement of activities, statement of cash flows alternatives, and the issue of whether fiduciary activities should be presented in government-wide financial statements.

Board Meetings Topics to be considered
August–September 2016: Government-wide/governmental funds/fiduciary funds: finalize models and illustrations.
October 2016: Discuss preballot draft of an Invitation to Comment, if necessary.
December 2016: Discuss ballot draft and issue Invitation to Comment, if necessary.

Budgetary comparisons: method of communication.

Proprietary funds/BTA: operating indicator (operating/nonoperating presentation issue).
January–March 2017: Comment period, if necessary.
January–March 2017: Budgetary comparisons: variances.

Proprietary funds/BTA: operating indicator (operating/nonoperating presentation issue).
April 2017: Public hearings/user forums, if necessary.
May–November 2017: Redeliberate issues based on due process feedback, if necessary.
December 2017: Task force meeting.
January 2018: Finalize reporting model(s) and illustrations.
March 2018: Finalize views on reporting model(s) and illustrations.
April 2018: Discuss preballot draft of a Preliminary Views.
May 2018: Discuss ballot draft and issue Preliminary Views.
June–September 2018: Comment period and field test.

Deliberate issues related to management’s discussion and analysis, presentation of debt service fund information, definition and presentation of extraordinary and special items.
October 2018: Public hearings/user forums.
November 2018–September 2019: Redeliberate issues related to recognition concepts, government-wide financial statements, governmental fund financial statements, proprietary fund financial statements, fiduciary fund financial statements, and budgetary comparisons based upon due process feedback.
October 2019: Discuss draft standards section of an Exposure Draft.
November 2019: Discuss preballot draft of an Exposure Draft.
December 2019 (T/C): Discuss ballot draft and issue Exposure Draft.
December 2019–April 2020: Comment period.
April 2020: Public hearings.
May 2020–March 2021: Redeliberate issues related to recognition concepts, management’s discussion and analysis, government-wide financial statements, governmental fund financial statements, proprietary fund financial statements, fiduciary fund financial statements, budgetary presentations, and extraordinary and special items based upon due process feedback.
April 2021: Discuss preballot draft of a final Statement.
May 2021: Discuss ballot draft and issue final Statement.


FINANCIAL REPORTING MODEL—RECENT MINUTES


Minutes of Meetings, May 10-11, 2016

The Board discussed three general approaches to the recognition of elements of financial statements and presentation for governmental fund financial statements: near-term financial resources, working capital, and total financial resources. For each approach, the Board discussed messages conveyed by financial statements, recognition concepts, potential benefits and challenges, and illustrative financial statements.

The Board also reviewed initial sections of a draft Invitation to Comment that describe alternatives pursuant to the format of the resources flows statement for governmental funds, a statement of cash flows for governmental funds, and the format of the government-wide statement of activities. After the discussion, the Board tentatively decided to obtain feedback on all three recognition approaches and the related issues tentatively presented in the draft Invitation to Comment from the task force at the June 2016 meeting.

Minutes of Meetings, March 29-31, 2016

The Board discussed three general approaches to the recognition of elements of financial statements and presentation for governmental fund financial statements: near-term financial resources, working capital, and total financial resources. For each approach, the Board discussed the relationship with the objectives of financial reporting, messages conveyed by financial statements, recognition concepts, potential benefits and challenges, recognition of specific transactions, and pre-agenda research. After the discussion, the Board tentatively decided to further develop all three approaches.

The Board also discussed two alternatives for the presentation of the governmental funds resource flows statement: the existing format of the statement of revenues, expenditures, and changes in fund balances and a format that separates short-term (or current) activities from long-term activities. The Board tentatively decided to present both alternatives in an Invitation to Comment.

The Board considered three alternatives related to the appropriateness of a reconciliation between the statements of cash flows and the resource flows statements of governmental fund financial statements. The three alternatives discussed were (1) reconciliation of net change in net position to net change in cash, (2) no reconciliation, and (3) reconsideration of the cash flows classifications for governmental funds. The Board tentatively decided that a reconciliation should not be presented in an Invitation to Comment.

The Board then discussed the appropriate presentation for cash flows from purchases and sales of investments of an internal investment pool if a statement of cash flows for governmental funds were to be required. The four options considered were (1) designation to a single fund, (2) allocation to each participating fund, (3) disclosure of the amounts in the notes, and (4) retention of the existing guidance. The Board tentatively decided to retain the existing guidance that cash flows from purchases and sales of pooled investments should be neither reported in statements of cash flows for individual funds nor disclosed.

The Board continued by deliberating whether fiduciary activities should be reported in the government-wide financial statements and tentatively decided that they should continue to be reported only as fund financial statements in the basic financial statements.

Finally, the Board discussed issues related to presenting functional or programmatic expenses by natural classification, tentatively agreeing to use the Invitation to Comment to gather additional feedback on whether certain natural classifications should be required to be presented.

Minutes of Meetings, February 16-18, 2016

The Board continued discussion of two general approaches to the recognition of elements of financial statements and presentation for governmental fund financial statements. The two approaches discussed by the Board include: near-term financial resources and working capital. The working capital approach included two different versions: working capital with past-due compensation liabilities and working capital with current shortfall in compensation liabilities. For each approach, the Board discussed the relationship with the objectives of financial reporting, messages conveyed by financial statements, recognition concepts, potential benefits and challenges, recognition of specific transactions, and pre-agenda research. After the discussion, the Board tentatively decided to further develop the near-term financial resources approach and the version of the working capital approach with past-due compensation liabilities. In addition, the Board tentatively agreed to develop a total financial resources approach.
The Board discussed four alternatives for the presentation of the governmental funds resource flows statement and tentatively decided to further explore the existing format of the statement of revenues, expenditures, and changes in fund balances and a format that separates short-term (or current) activities from long-term activities (for example, capital outlays).

In addition, the Board considered three alternatives for the presentation of the government-wide statement of activities and tentatively decided to further explore the existing format for the statement of activities and a traditional format with expenses presented by function or program. The Board directed the staff to further consider communication methods for presenting functional expenses by natural classification.

Finally, the Board considered issues related to presenting statements of cash flows and tentatively decided to further develop a statement of cash flows for governmental funds that could be presented as part of the working capital approach or the total financial resources approach.

Minutes of Meetings, January 5-6, 2016

The Board continued discussion of three general approaches to the recognition of elements of financial statements and presentation for governmental fund financial statements. The three approaches discussed by the Board include near-term financial resources, near-term financial resources with current-period operating liabilities, and working capital (formerly referred to as short-term accrual). For each approach, the Board discussed the relationship with the objectives of financial reporting, messages conveyed by financial statements, recognition concepts, potential benefits and challenges, recognition of specific transactions, and pre-agenda research. After the discussion, the Board tentatively decided to further develop the near-term financial resources approach, working capital approach, and a working capital approach with a variation to recognition of post-employment benefits and compensated absences. The Board also tentatively decided to further explore the following four presentation alternatives for resources flows: statement of revenues, expenditures, and changes in fund balances (current format); cash flows statement categories; recurring transactions separated from one-time and limited-time transactions; and short-term (or current) activities separated from long-term activities.

Minutes of Meetings, November 18-20, 2015

The Board considered five general approaches to the recognition of elements of financial statements and presentation for governmental fund financial statements. The five potential approaches discussed by the Board include near-term financial resources, near-term financial resources with current-period operating liabilities, working capital (formerly referred to as short-term accrual), cash basis, and multiple measurement focuses/bases of accounting. The Board discussed the general features of each approach as well as the potential benefits and challenges that are associated with each approach. After the discussion, the Board tentatively decided to further develop the near-term financial resources, near-term financial resources with current-period operating liabilities, and working capital approaches.

Minutes of Meetings, October 6-8, 2015

In its initial deliberations of the project, the Board discussed the conclusions related to users of financial statements and the objectives of financial reporting that serve as the foundation of the financial reporting model introduced by Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. The Board generally agreed that these foundational viewpoints remain valid, although details about the meaning of certain language, such as current financial resources and short-term, may be reconsidered during the course of the project. The Board also generally reconfirmed its previous tentative decision that the messages that should be conveyed in current financial resources financial statements should at a minimum include:
  • The current financial resources and claims against current financial resources of the entity at the reporting date
  • The balance of current financial resources at the reporting date that is available for spending in future periods
  • The amounts and sources of inflows and outflows of current financial resources during the reporting period.
Minutes of Meetings, July 21-23, 2015

The staff presented a capstone report on the five phases of the financial reporting model reexamination research. The research activities include a literature review, archival research, stakeholder roundtables, stakeholder surveys, and individual stakeholder interviews. The Board will consider whether a project should be added to the current technical agenda at the September meeting.


FINANCIAL REPORTING MODEL—TENTATIVE BOARD DECISIONS TO DATE

The Board tentatively decided that:
  • The conclusions related to users of financial statements and the objectives of financial reporting that serve as the foundation of the financial reporting model introduced by Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, remain valid, although details about the meaning of certain language, such as current financial resources and short-term, may be reconsidered during the course of the project.
  • Governmental fund financial statements should present a short-term view of a government’s financial position and flows of resources should retain the existing fund structure to maintain an appropriate linkage to budgetary reporting.
  • The near-term financial resources approach, working capital approach, and total financial resources approach will be further developed.
  • The following two presentation alternatives for resources flows will be presented in the Invitation to Comment: the existing format of the statement of revenues, expenditures, and changes in fund balances and current and long-term activity format.
  • A governmental funds statement of cash flows in conjunction with both the working capital and total financial resources recognition approaches will be further explored.
  • A reconciliation between the governmental funds statement of cash flows and the resource flows statements will not be presented in the Invitation to Comment.
  • The current guidance regarding balances in cash management pools should be applied to the statement of cash flows for governmental funds.
  • Fiduciary activities should continue to be recorded only as fund financial statements in the basic financial statements.
  • The following alternatives for the presentation of the government-wide statement of activities will continue to be explored in the Invitation to Comment: the current format and a traditional format with expenses presented by function or program.
  • The Invitation to Comment will be used to obtain feedback on the value of additionally presenting information about functional or programmatic expenses by natural classification and related issues, such as the cost of presenting that information and whether certain natural classifications should be prescribed.