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:
Invitation to Comment issued: December 2016
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 time. The pre-agenda research showed that most of the components of the financial reporting model are effective; however, the research identified several areas for potential improvements.

In conjunction with this project, the efforts to develop 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: The project is considering the following 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 individually 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
  • Task force established? Yes
  • Deliberations began: October 2015
  • Task force meeting held: June 2016
  • Invitation to Comment cleared: December 2016
  • Comment period:  January–March 2017
  • Public hearing and user forum held: April 2017
  • Task force meeting held: September 2017
Current Developments: The comment period for the Invitation to Comment, Financial Reporting Model Improvements—Governmental Funds, concluded on March 31, 2017. Public hearings and user forums will be held in April and May 2017. Outreach to relevant industries on the proprietary fund/BTA operating indicator (operating/nonoperating issue) was conducted.

Work Plan:

Board Meetings Topics to be considered
October  2017—March 2018: Redeliberate issues based on due process and task force feedback.

Address recognition/presentation of permanent funds.
April 2018: Review draft of a Preliminary Views.
May 2018: Discuss preballot draft of a Preliminary Views.
July 2018: Discuss ballot draft and consider a Preliminary Views for approval.
August–November 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.
January 2019: Public hearings/user forums.
March–November 2019: Redeliberate issues related to recognition approaches, government-wide financial statements, governmental fund financial statements, proprietary fund financial statements, fiduciary fund financial statements, and budgetary comparisons based upon due process feedback.
January 2020: Discuss first draft of the standards section of an Exposure Draft.
March 2020: Discuss preballot draft of an Exposure Draft.
April 2020 (T/C): Discuss ballot draft and consider an Exposure Draft for approval.
May–July 2020: Comment period.
August 2020: Public hearings.
September 2020–July 2021: Redeliberate issues related to recognition approaches, 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.
August 2021: Discuss draft of a final Statement.
September 2021: Discuss preballot draft of a final Statement.
November 2021: Discuss ballot draft and consider a final Statement for approval.


FINANCIAL REPORTING MODEL—RECENT MINUTES


Minutes of Meetings, September 27 and 28, 2017

The Board continued deliberations on topics to be presented in the Preliminary Views, specifically the proposals related to the format of the government-wide statement of activities and presentation of information about natural classification of expenses. The Board discussed four alternatives and tentatively decided to propose that the existing format of the government-wide statement of activities be presented with a schedule of natural classification of expenses by function or program. The Board then tentatively decided to propose that the information conveyed in a schedule of natural classification of expenses be presented in general purpose external financial reports as supplementary information.

Minutes of Task Force Meeting, September 26, 2017

The task force discussed feedback received on the Invitation to Comment (ITC), Financial Reporting Model Improvements—Governmental Funds, and provided input to the Board on developing preliminary views on the major issues in the ITC.

The task force first discussed the feedback related to the shorter term and budgetary perspective that has been the focus of governmental funds. Many task force members supported governmental fund financial statements continuing to present information that (1) reflects a shorter time perspective than the information presented in the government-wide financial statements; (2) focuses on financial, rather than economic resources; and (3) facilitates comparisons with a government’s budgetary information.

The task force then discussed the feedback on the definition of financial resources, specifically with respect to inventory and prepaid items. Some task force members expressed that this discussion would be more appropriate after the Board selects one of the three recognition approaches.

The task force also discussed the common recognition suggestions in the feedback to the ITC focusing on identifying fatal flaws in the approaches and which one(s) they would suggest the Board consider for the Preliminary Views (PV). The commonly suggested approaches included:
  • Near-term financial resources as presented in the ITC
  • Near-term financial resources with changes to accrued interest and tax and revenue anticipation notes
  • Short-term financial resources as presented in the ITC
  • Short-term financial resources without certain liabilities (capital debt and postemployment benefits, for example)
  • Long-term financial resources as presented in the ITC
  • Long-term financial resources with columnar presentation of capital assets and debt
  • Current financial resources with modifications
  • Economic resources.
Many task force members were not in support of the Board further considering:
  • Near-term financial resources as presented in the ITC
  • Short-term financial resources as presented in the ITC
  • Long-term financial resources as presented in the ITC
  • Long-term financial resources with columnar presentation of capital assets and debt
  • Economic resources.
Support was expressed by those task force members for the Board further considering (1) near-term financial resources with modifications, (2) short-term financial resources with modifications, or (3) current financial resources with modifications. Some task force members believe that there is not a persuasive argument to abandon the current financial resources measurement focus and that, instead, the GASB should be focusing on fixing the conceptual inconsistencies within the existing measurement focus. It is important to note that (1) and (3) are similar because the near-term financial resources approach was the closest to the current financial resources approach and included modifications to increase the conceptual consistency. Additional modifications to the current financial resources approach suggested by task force members included:
  • Specifying a single period of availability
  • Recognition of prepaid items and inventory (as discussed above)
  • Recognition of debt principal payments or just short-term debt principal payments
  • Recognition of long-term receivables.
The task force members then discussed the feedback on a same-page reconciliation of the governmental fund financial statements to the government-wide financial statements. Although many task force members were supportive of a reconciliation between the government-wide financial statements and the governmental fund financial statements, those task force members were not supportive of it being on the same page.

The task force members next discussed the feedback received on a statement of cash flows for governmental funds. Many task force members stated that a statement of cash flows for governmental funds would not be necessary if the funds retain a shorter term focus (for example, the near-term or current financial resources recognition approach) in the PV. Some task force members stated that the cost of preparing the statement of cash flows would exceed the benefits of the information conveyed in the statement. If a statement of cash flows is to be presented in the PV, some task force members expressed that the statement should be prepared only for certain governmental funds or for all governmental funds in the aggregate.

The task force members also discussed the appropriateness of the four categories of cash flows currently used in the statement of cash flows for proprietary funds (operating activities, noncapital financing activities, capital and related financing activities, and investing activities). Some task force members believed that the four categories would be appropriate for governmental fund cash. Other task force members stated that three categories (operating, investing, financing) should be used to classify governmental fund cash flows. However, some task force members stated that if the classifications were changed, they should be changed for proprietary funds and business-type activities as well, to provide consistency.

Minutes of Meetings, June 28–29, 2017

The Board continued deliberating a topic to be presented in the upcoming Preliminary Views—the classification of operating and nonoperating revenues and expenses in proprietary fund and business-type activity financial statements. The Board tentatively decided to propose a direct definition of nonoperating revenues and expenses and to derive the definition for operating revenues and expenses from the definition of nonoperating revenues and expenses. The Board tentatively decided to propose that the definition of nonoperating revenues and expenses include subsidies received and provided, revenues and expenses of financing, resources from the disposal of capital assets and inventory, and investment income and expenses. Sale of inventory held for resale in the ordinary course of operations is not considered a disposal of inventory for purposes of this definition. In addition, the Board tentatively agreed with the proposed schedule of discussing feedback from the Invitation to Comment, Financial Reporting Model Improvements—Governmental Funds, and developing a Preliminary Views.

Minutes of Meetings, May 23–25, 2017

The Board continued deliberations on topics to be presented in the Preliminary Views, specifically the industry outreach conducted by the project staff regarding the high-level alternatives for defining operating and nonoperating activities in proprietary fund and business-type activity financial statements.

The Board tentatively decided that the self-sustaining or subsidized alternative, with modifications, should be developed at a high level for the purposes of defining operating and nonoperating revenues and expenses. Specifically, the potential modifications include (1) whether additional subtotals should be required or allowed; (2) whether the definition of nonoperating activities should include financial, investing, and ancillary activities in addition to subsidies; and (3) whether operating activities should include certain taxes and grants that are closely associated with operating activities.

Minutes of Meetings, January 17-19, 2017

The Board continued deliberations on topics to be presented in the Preliminary Views, specifically the high-level alternatives for defining operating and nonoperating activities in proprietary fund and business-type activity financial statements. The general themes of the alternatives included (a) self-sustaining or subsidized, (b) financial performance, (c) recurring or nonrecurring, and (d) debt covenant compliance. The Board will not make a tentative decision on the approach to defining operating activities until additional outreach efforts with industry groups to gather feedback regarding the proposed alternatives has been completed.

Minutes of Meetings, December 5-8, 2016

The Board reviewed a ballot draft of the Invitation to Comment, Financial Reporting Model Improvements—Governmental Funds, and provided clarifying edits. After reviewing the Invitation to Comment and providing clarifying edits, the Board did not object to the issuance of the Invitation to Comment.

The Board then began deliberations of additional topics to be presented in the Preliminary Views. Two topics were introduced: (1) budgetary comparison reporting and (2) presentation and classification of operating and nonoperating revenues and expenses in proprietary fund and business-type activity financial statements.

First, the Board discussed the communication method for budgetary comparison information. Following discussion of alternatives, the Board tentatively agreed that budgetary comparison information should be proposed to be presented using a single primary method of communication and tentatively agreed that budgetary comparison information should be proposed to be presented in RSI.

The Board then discussed presentation of budget variances as part of budgetary comparison information. The Board tentatively agreed to propose that governments present specific budget variances and that governments should report the variance between:
  • Final budget and actual amounts
  • Original budget and final budget amounts.
Finally, the Board discussed presentation and classification of operating and nonoperating revenues and expenses for proprietary fund and business-type activity financial statements. The Board tentatively decided to propose that financial statements for business-type entities continue to distinguish between operating and nonoperating revenues and expenses. Additionally, the Board tentatively agreed to propose that both the resource flows statement and the statement of cash flows be presented using the same definition of operating activities and to develop a new definition for operating activities.

Minutes Archive


FINANCIAL REPORTING MODEL—TENTATIVE BOARD DECISIONS TO DATE


The Invitation to Comment, Financial Reporting Model Improvements—Governmental Funds, was issued in December 2016.

With respect to topics to be included in a Preliminary Views document, the Board tentatively decided to propose that:
  • Budgetary comparison information be presented using a single primary method of communication.
  • Budgetary comparison information be reported as required supplementary information.
  • Governments present specific budget variances as part of budgetary comparison information.
  • Governments report the variances between:
    • Final budget and actual amounts
    • Original budget and final budget amounts.
  • For business-type activities and proprietary funds:
    • Financial statements for business-type entities continue to distinguish between operating and nonoperating revenues and expenses.
    • Both the resource flows statement and the statement of cash flows be presented using the same definition of operating activities
    • The definition of nonoperating revenues and expenses be directly defined and to derive the definition of operating revenues and expenses from the definition of nonoperating revenues and expenses.
    • The definition of nonoperating revenues and expenses include (1) subsidies received and provided, (2) revenues and expenses of financing, (3) resources from the disposal of capital assets and inventory, and (4) investment income and expenses.
    • Subsidies be defined as “resources provided by another party or fund for the purpose of keeping the rates lower than otherwise would be necessary for the level of goods and services to be provided.”
    • Resources provided for the purchase of capital assets meet the definition of subsidies.
    • A subtotal for operating income (loss) and noncapital subsidies be presented.
  • The existing format of the government-wide statement of activities be presented with a schedule of natural classification of expenses by function or program.
  • The information conveyed in a schedule of natural classification of expenses be presented in general purpose external financial reports as supplementary information.