The User's Perspective
GASB Changes the Appearance of Governmental Financial Statements
In June, the GASB approved Statement No. 63, Financial Reporting of Deferred Outflows of Resources,Deferred Inflows of Resources, and Net Position, which changes how governments will organize their statements of financial position (such as the current government-wide statement of net assets and the governmental funds balance sheet). Under these new standards, financial statements will include deferred outflows of resources and deferred inflows of resources (“deferrals”), in addition to assets and liabilities, and will report net position instead of net assets.
Why Was This Guidance Needed?
Prior to the issuance of Statement 63, it was unclear where deferrals should be reported on the statement of net assets and the balance sheet.
GASB Concepts Statement No. 4, Elements of Financial Statements, identifies and defines the five elements that make up a statement of financial position: assets, liabilities, deferred outflows of resources, deferred inflows of resources, and net position. However, Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, which was issued eight years prior, requires the presentation of assets, liabilities, and net assets. As a result, guidance was needed to address the financial statement presentation of deferred outflows of resources, deferred inflows of resources, and net position.
This was especially important because two GASB pronouncements require the reporting of deferrals. Statement No. 53, Accounting and Financial Reporting for Derivative Instruments provides for the deferral of annual changes in the fair value of hedging derivatives. The guidance in Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements requires that up-front payments a government receives in those transactions should be reported as deferred inflows of resources and amortized over the length of the transaction, rather than recognized as revenue right away. The GASB’s current reexamination of its pension accounting and financial reporting standards (see the article in this issue) may also result in the reporting of deferrals.
So, What Are Deferrals, Anyway?
Simply put, deferrals are transactions that have occurred in the current or prior periods but are actually related to future periods, but are not assets or liabilities. State and local governments are increasingly involved in transactions in the current year that lead to the consumption or acquisition of net assets (assets less liabilities) that are related to future periods. Concepts Statement 4 identifies these types of transactions, respectively, as deferred outflows of resources and deferred inflows of resources.
A deferred inflow of resources could relate to a service concession arrangement that involves a public toll road. A private corporation might give a state transportation authority a $1 billion upfront payment under a 50-year agreement that obligates that company to operate and maintain the toll road and allows it to collect tolls from those who use it. Under Statement 60, rather than recognizing the $1 billion payment as revenue immediately, the state would record a deferred inflow of resources to the extent that it did not incur any liabilities as a result of the arrangement and recognize a portion the upfront payment as revenue in each year of the agreement.
A deferred outflow of resources also could involve a government’s hedging derivative agreement in which the fair value becomes negative. If the hedge is determined to be effectively offsetting the changes in fair value of the debt, then Statement 53 requires the government to record a liability and a corresponding deferred outflow of resources, rather than recognize the decrease in fair value as a reduction of investment income.
What Is Net Position?
Net position is defined as the residual of all other elements presented in a statement of financial position or, said another way, the difference between assets and deferred outflows of resources on the one hand and liabilities and deferred inflows of resources on the other hand.
Under Statement 63, to emphasize the difference in the nature of the elements, deferred inflows of resources are to be displayed separately from liabilities, and deferred outflows of resources are to be displayed separately from assets.
What Will the Financial Statements Look Like Now?
Statement 63 specifies that the statement of net position should report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position and lays out two formats that may be used:
- Assets plus deferred outflows of resources minus liabilities minus deferred inflows of resources equal net position (a net position format)
- Assets plus deferred outflows of resources equal liabilities plus deferred inflows of resources plus net position (a balance sheet format)
It also specifies that the statement of net position should report the residual amount as net position rather than net assets.
Under Statement 63, net position should be displayed in three components similar to those currently required for net assets:
- Net investment in capital assets—capital assets, net of accumulated depreciation, reduced by the outstanding balances of debt and deferred inflows of resources related to the acquisition, construction, or improvement of those assets.
- Restricted—restricted assets reduced by liabilities and deferred inflows of resources related to those assets.
- Unrestricted—amounts not required to be reported in the other components of net position.
By presenting deferrals separately from assets and liabilities, the statement of net position will provide users of governmental financial statements with information about transactions that have already occurred but should be recognized as revenues or expenses in future periods. In other words, it will provide users with information about how past transactions that are not assets or liabilities will continue to impact a government’s financial statements in the future periods.
Regarding interperiod equity—the degree to which a government finances each year’s costs with revenues from that year—the separate reporting of the deferred amounts gives the reader information about the extent to which the government is “better or worse off” as a result of transactions that have already occurred but affect future operations.
What about Disclosures?
If multiple types of deferred outflows of resources or deferred inflows of resources are aggregated on the face of the financial statements, then governments will provide details about the different types of deferrals in the note disclosures.
If the amount reported for a component of net position is significantly impacted by deferrals, a government will include a note explaining the effect of the deferred amounts on the net position balances. For example, if a deferred inflow of resources from a service concession arrangement significantly affects the unrestricted portion of net position, the government would include a note describing the effects.
When Will Governments Make These Changes?
The provisions of Statement 63 are effective for financial statements for periods ending December 31, 2012, and later. Governments are encouraged to implement earlier than that, and some will in order to implement Statements 53 and 60.
- Statement of Net Position project page
- Deferrals project page
- Derivatives project page
- Service Concession Arrangements project page