Journal Entries

This recurring website feature highlights articles from The GASB Report, the GASB’s monthly newsletter. The current article appeared in the July 2011 issue.

GASB Seeks Comments on Preliminary Views on Recognition and Measurement of Elements of Financial Statements

The GASB recently issued a Preliminary Views related to recognition of elements of financial statements and measurement approaches. The document, Recognition of Elements of Financial Statements and Measurement Approaches, is designed to convey and solicit comments on the Board’s views at an early project stage on the manner in which and timing of when an item should be reported or recognized on state and local government financial statements and how the amount of the item reported on those statements should be determined.

The GASB is seeking public comment on the views described in the document prior to developing more detailed proposals. The deadline for comment is September 30, 2011.
This project is ultimately expected to result in the issuance of a Concepts Statement. Concepts Statements are intended to provide a framework of interrelated objectives and fundamental concepts that can be used as a basis for establishing consistent financial reporting standards that can be applied to solve numerous financial accounting and reporting issues.

Recognition of Elements of Financial Statements

Recognition concepts encompass two aspects of state and local financial statements. The measurement focus of a specific financial statement determines what items should be reported as elements of that financial statement. The related basis of accounting determines when those items should be reported.

The Preliminary Views proposes a recognition framework for both the economic resources measurement focus and the near-term financial resources measurement focus. One component of this framework is that an item, on a conceptual basis, should be recognized, and therefore reported as an element of financial statements prepared using the economic resources measurement focus, if the item both meets the definition of an element and is measurable with a sufficient degree of reliability.

Because of certain inconsistencies in the current financial resources measurement focus model, the framework being proposed would include a component that, on a conceptual basis, would replace that model with the near-term financial resources measurement focus, which recognizes balances from a near-term perspective and flows of financial resources for the reporting period.

Near-term refers to the period after the end of the reporting period during which financial resources at period-end can be converted to cash to satisfy obligations for spending for the reporting period. Consistent with the objective of developing a conceptually sound model, the near-term financial resources measurement focus is based on a symmetrical concept: assets include resources that are normally receivable at period-end and due to convert to cash within the near term (as well as cash and financial resources that are available to be converted to cash within the near term), and liabilities include those normally payable at period-end and due within the near term.

In keeping with the concept of interperiod equity, another component of this proposed framework would include proposed concepts related to the recognition of deferred outflows of resources or deferred inflows of resources in financial statements prepared using the economic resources measurement focus when the following types of transactions occur:

  • Outflows of resources that do not meet the definition of an asset and are inherently related to services that the government will provide in future periods
     
  • Inflows of resources that do not meet the definition of a liability and can only be used in the future
     
  • Inflows of resources related to items that were not previously recognized as assets in the financial statements (future resources)
     
  • Outflows of resources and inflows of resources related to changes in the fair value of recognized assets and liabilities when the item is related to an outflow of resources or inflow of resources that will occur in the future. 
This proposed framework provides that, on a conceptual basis, deferred outflows of resources or deferred inflows of resources would be recognized in financial statements prepared using the near-term financial resources measurement focus when the following transactions occur:

  • Outflows of resources that do not meet the definition of an asset and are inherently related to future spending
     
  • Inflows of resources that do not meet the definition of a liability and can only be used for spending in the future.
Measurement Approaches

A measurement approach is a broad concept focusing on whether an asset or liability presented in a financial statement should be reported at an amount that reflects the value when the asset was acquired or the liability incurred or whether the asset or liability should be remeasured and reported at an amount that reflects the value at the date of the financial statements.

The document proposes a framework for when each of two primary measurement approaches, on a conceptual basis, should be used. The primary measurement approaches are:

  • Initial-Transaction-Date-Based Measurement (Initial Amount)—The transaction price or amount assigned when an asset was acquired or a liability was incurred, including subsequent modifications to that price or amount, such as through amortization or depreciation.
     
  • Current-Financial-Statement-Date-Based Measurement (Remeasured Amount)—The amount assigned when an asset or liability is remeasured as of the financial statement date, including fair value; current acquisition, sales, and settlement price; replacement cost; and value-in-use.
On a conceptual basis, it is the Board’s preliminary view that initial amounts would be the more appropriate measure for assets that are used directly in providing services (for example, capital assets). This component of the proposed framework was developed after evaluating the effects of each of the measurement approaches on the objectives of financial reporting and recognizing that neither primary measurement approach is best for all objectives. Use of initial amounts would provide better information about the cost of current-year services. Use of remeasured amounts would provide better information about the remaining service potential of these assets. The Board believes that, from a conceptual standpoint, the information about cost of services would have greater relevance for these assets because of the importance of providing information that can be used to assess interperiod equity.

Another component of this proposed framework is that, on a conceptual basis, remeasured amounts would be the more appropriate measure for assets that will be converted to cash (for example, financial assets). The usefulness of financial assets is in their conversion to cash—whether that be through the sale of the asset or its collection in due course—which can then be used to acquire services or to meet existing obligations. A remeasured amount would be most relevant to the objective of assessing financial position and the ability to satisfy obligations as they become due because it presents financial assets using a consistent scale of measurement—that of values related to the date of the financial statements.

Another component of this proposed framework is that, on a conceptual basis, remeasured amounts would be the more appropriate measure for variable-payment liabilities, such as compensated absences. Remeasured amounts for these liabilities would be more relevant to all objectives of financial reporting because they are closer to the amount necessary to settle the liability than are initial amounts.

If ultimately issued as a Concepts Statement, the proposed concepts would improve financial reporting by bolstering the framework through which the Board can enhance consistency in future standards. These proposed concepts address recognition of elements of financial statements and measurement approaches that are necessary components of a complete framework for reporting in traditional financial statements. These proposed concepts, when finalized, also may benefit preparers and auditors when evaluating transactions for which there are no existing standards or in implementing existing standards.

The Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches, may be downloaded at no charge from the GASB website, www.gasb.org.