Financial Reporting Model
Project Description: The objective of this pre-agenda research is to reexamine the financial reporting model, including Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, as well as reporting model-related pronouncements including Statement No. 35, Basic Financial Statements—and Management's Discussion and Analysis—for Public Colleges and Universities, Statement No. 37, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments: Omnibus, Statement No. 41, Budgetary Comparison Schedules—Perspective Differences, Statement 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 major provisions that will be reconsidered are those related to management’s discussion and analysis, government-wide financial statements, fund financial statements, capital asset reporting, budgetary comparisons, special purpose government reporting, and related notes to financial statements.
Status: Added to Research Agenda: August 2013
Financial Reporting Model—Project Plan
Major Research Issues: Statement 34 established the present blueprint for state and local government financial reporting—the basic financial statements, 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 capital assets, including infrastructure, 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, improved upon 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.
Background: Statement 34 establishes the basic financial reporting model. The GASB’s reexamination of existing standards typically takes place after a pronouncement has been in effect long enough to be fully evaluated. In practice, pronouncements are added to the potential reexamination projects list after they have been fully effective for 5 years and evaluations are generally initiated after 10 years. Statement 34’s requirements have been effective for more than 5 years, including the extended implementation period for retroactive infrastructure reporting (which was not fully effective for 5 years until the second quarter of 2012).
There is a growing body of research that the GASB can leverage in an evaluation of the effectiveness of Statement 34. Most recently, a Crain Memorial Research Grant awarded in 2011 funded research on practice experience with the infrastructure reporting requirements of Statement 34, particularly regarding the use of the alternative modified approach. Some of the findings of that research echo an academic study of the use of the modified approach by state governments, Puerto Rico, and the District of Columbia.1 Another academic study reviewed the factors that determine the infrastructure information needs of public sector managers and offers recommendations for improving the reporting of infrastructure.2
Another Crain Memorial Research Grant, awarded in 2012, is funding research regarding the value of information resulting from Statement 34 to municipal bond analysts—specifically, MD&A, the government-wide statements, and the budgetary comparison. That research is expected to be completed in summer 2013. A study published in 2012 concluded that financial ratios based on government-wide financial statements are statistically significant in the credit ratings of state governments.3 Another study found that accrual-based financial ratios using information from the government-wide financial statements have significant incremental value in addition to fund-based measures.4
Research on the financial reporting model is view by some constituents as necessary for the development and acceptance of recognition concepts, particularly those pursuant to the current financial resources measurement focus. The Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches, proposed that the current financial resources measurement focus be replaced with the near-term financial resources measurement focus. Some respondents to the Preliminary Views recommended that further work on those recognition concepts be performed in conjunction with a reexamination of the reporting model.
The potential project on the financial reporting model was ranked second in 2013 in the GASAC’s annual prioritization (first among potential reexamination projects).
Government-Wide Financial Statements
The principal new feature introduced to the financial reporting model by Statement 34 were two accrual-based financial statements encompassing the entire financial reporting entity—the government-wide statement of net assets (now statement of net position) and statement of activities. The focus of a review of the government-wide financial statements will be to assess whether they have been effective in providing decision-useful information and supporting assessments of operational accountability. In general, this research will seek to assess effectiveness by identifying the importance of government-wide information to users, the purposes for which the information is used, and how these purposes differ from the uses of fund financial statements. Specific topics could include:
- The relative usefulness of government-wide financial statements
- The separation of governmental activities and business-type activities
- Capital asset reporting, including general infrastructure assets
- Net position categories
- The net (expense) revenue format of the statement of activities
- Program revenues and general revenues
- The level of detail for reporting assets, liabilities, expenses, and revenues
- Special and extraordinary items
- Related disclosures, such as capital assets and long-term liabilities.
Statement 34 introduced major fund reporting for governmental and enterprise funds. Statement 34 also required reconciliations of the fund financial statements with the government-wide statements. Information from a government’s original adopted budget was added to the budgetary comparison. In the proprietary funds, the direct method was required for reporting cash flows. In general, an evaluation of the fund reporting requirements of Statement 34 will focus on the usefulness of fund information as it is required to be reported, perhaps in comparison with alternative methods of reporting funds. Specific topics could include:
- The relative usefulness of major fund and fund-type reporting
- Whether the quantitative and qualitative criteria for identifying major funds lead to reporting of the number and types of funds that users need to see
- The value-added of including original budget information in the budgetary comparison
- Reporting of budgetary comparisons as basic financial statements versus required supplementary information
- Reconciliations of governmental funds to governmental activities, proprietary funds operating cash flows to operating income (loss), and budgetary basis to GAAP basis
- The direct method of reporting proprietary fund cash flows.
1Vermeer, T.E., T.K. Patton, and A.K. Styles. 2011. Reporting of general infrastructure assets under GASB Statement No. 34. Accounting Horizons 25 (2): 381–407.
2Jones, S., D.A. Hensher, J. Rose, and R.G. Walker. 2012. Infrastructure asset reporting options: a stated preference experiment. Accounting Horizons 26 (3): 465–491.
3Johnson, C.L., S.N. Kioko, and W.B. Hildreth. 2012. Government-wide financial statements and credit risk. Public Budgeting & Finance 32 (1): 80–104.
4Pridgen, A.K. and W.M. Wilder. 2013. Relevance of GASB No. 34 to financial reporting by municipal governments. Accounting Horizons 27 (2): 175–204.
Current Developments: In October and November 2013, the project staff conducted 8 general-purpose government and 3 special-purpose government roundtables. The participants at each roundtable included 11-15 stakeholders representing a variety of users, preparers, and auditors.
From September through December 2013, the initial data collection phase of the archival research was performed. Selected data was obtained from the comprehensive annual financial reports of approximately 50 states, 95 counties, 98 cities, 70 school districts, and 62 special-purpose governments of varying sizes.
Research Work Plan: Following the initial exploratory research involving the literature review, archival research, and 11 roundtables, the next phase of the research will involve broad-based, extensive surveys of preparers, auditors, and users. Depending on the number of issues identified in the initial research, the preparer survey could be administered as two separate surveys. In addition, a survey of governments using the modified approach will be conducted. The results of the surveys will inform the topics that will be pursued via in-depth interviews with preparers, auditors, and users.
|Board Meetings||Research Activities
|Exploratory research: Review relevant research, perform archival research, and conduct staff-research roundtables|
|December 2013:||Analyze results of exploratory research and develop detailed research plan.|
|January–September 2014:||Develop and administer surveys, analyze results, and prepare for interview research|
|October 2014–April 2015:||Conduct interview research|
|April–May 2015:||Analyze results of research and draft research memorandum|
|June 2015:||Obtain feedback from the GASAC on preliminary analysis|
|October 2015–April 2016:||Discuss research memorandum with Board|
|January 2014:||Begin summarizing and analyzing feedback received in research roundtables and data collected from archival research, continue literature review.|
|Complete summarizing and analyzing feedback received in research roundtables and data collected from archival research; complete literature review.|
|February-June 2014:||Develop, pretest, and administer preparer survey.|
||Develop, pretest, and administer auditor survey and modified approach survey.|
|July-October 2014:||Develop, pretest, and administer user survey.|
|September-November 2014:||Summarize and analyze survey results.|
|November 2014:||Develop interview protocol.|
|December 2014-June 2015:||Conduct interview research.|
|June-July 2015:||Analyze results of research and draft research memorandum.|
|July 2015 (T/C):||Discuss research memorandum with Board.|