Journal Entries

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

GASB Issues Exposure Draft Addressing Technical Corrections Necessary to Resolve Conflicting Guidance

At the October meeting, the GASB approved an Exposure Draft of a proposed Statement, Technical Corrections, an amendment of GASB Statements No. 10 and No. 62. The proposal is designed to improve accounting and financial reporting for governmental financial reporting entities by resolving conflicting guidance that resulted from the issuance of two recent pronouncements: Statements No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.

Since the release of Statement 54, questions have arisen regarding differences between the provisions of Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and Statement 54, regarding the reporting of risk financing activities. At the same time, since the release of Statement 62, questions have also come to light with respect to reporting differences between the provisions of Statements No. 13, Accounting for Operating Leases with Scheduled Rent Increases, No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, and Statement 62, regarding the reporting of certain operating lease transactions and the reporting of the acquisition of a loan or a group of loans.

Risk Financing Activities

Statement 10, which was issued in 1989, establishes guidance for state and local governmental entities’ risk financing and insurance-related activities. Paragraph 63 requires that if a single fund is used to account for an entity’s risk financing activities, it should either be the general fund or an internal service fund.

Statement 54, which was issued in 2009, enhances the usefulness of fund balance information by providing greater clarity with respect to the related fund balance classifications that can be applied more consistently and by clarifying the fund type definitions. Though the definition of a special revenue fund provided in Statement 54 would allow for certain risk financing activities to be reported in a special revenue fund, the specific guidance provided in paragraph 63 of Statement 10 was not superseded. Consequently, the Exposure Draft proposes to amend Statement 10 by removing paragraph 63. As a result, if the proposal becomes a final standard, governments would base their decisions about governmental fund type usage for risk financing activities on the definitions in Statement 54.

Operating Leases

Statement 13 establishes guidance for governments that enter into operating leases with scheduled rate increases. The guidance provided in paragraphs 6(a) and 6(b) of Statement 13 allows the lessor government to recognize operating lease payments on either a straight-line basis over the lease term or based on the estimated fair value of the rental.

Statement 62, which was issued in December 2010, incorporated into the GASB’s authoritative literature certain guidance that is included in Financial Accounting Standards Board (FASB) and American Institute of Certified Public Accountants (AICPA) pronouncements as long as it does not conflict with or contradict GASB pronouncements. The guidance on reporting operating leases that originated from FASB Statement No. 13, Accounting for Leases, was incorporated into the GASB authoritative literature with the issuance of Statement 62.

The Exposure Draft proposes to amend Statement 62 by modifying the specific guidance on accounting for operating lease payments that vary from a straight-line basis and eliminate any uncertainty regarding the application of Statement 13.

Purchase of Loans or Groups of Loans

Statement 48 establishes guidance for governments that exchange an interest in their expected cash flows from collecting specific receivables or specific future revenues for immediate cash payments. The guidance contained in paragraph 13 of Statement 48 requires that the transferee government recognize the receivables acquired at the purchase price.

However, Statement 62 brought into the GASB’s authoritative literature guidance on the reporting of the purchase of a loan or group of loans that is contained in FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.

The Exposure Draft proposes to amend Statement 62 by modifying the specific guidance on accounting for the difference between the initial investment and the principal amount of a purchased loan or group of loans and result in guidance that is consistent with the requirements in Statement 48.

Proposed Effective Date

The requirements of this proposed Statement would be effective for periods ending after June 15, 2012, with earlier application encouraged.

How to Obtain Copies of the Exposure Draft

Copies of the Exposure Draft may be downloaded free of charge from www.gasb.org. The comment deadline is December 16, 2011. Additional details on how to provide comments to the GASB on this proposal are available in the front of the Exposure Draft.