The User's Perspective

November 2006

Plenty of Opportunities to Let GASB Know What You Think

            An article in this issue of The User's Perspective describes an Invitation to Comment (ITC) issued by the Governmental Accounting Standards Board (GASB) in October on issues related to the reporting of fund balance. The ITC is just one of five documents the GASB will issue before June 2007 to gather public input on potential new and revised standards of accounting and financial reporting. The only way to ensure that financial reports provide the information you need is to let the GASB know what works for you and what does not. Responding to the GASB's proposals by completing a survey, writing a letter, or participating in a forum or hearing is vitally important to assisting the GASB in issuing standards that result in decision-useful information. This article describes the other four proposals that will be issued over the next seven months.

Pension Disclosures

            GASB Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, on retiree health insurance and other postemployment benefits (OPEB) essentially are an extension of the GASB's pension accounting and reporting standards. However, in several cases, the OPEB standards made improvements to the pension disclosure requirements. The purpose of this project is to replicate those improvements for pensions where appropriate. For example, the OPEB standards require that the funded status information-including the amount of the unfunded actuarial liability-for the most recent actuarial valuation be presented in the notes to the financial statements. This would have the benefit of ensuring that you receive some funding information, even if the supplementary schedule of funding progress is not appended to the financial statements, which is frequently the case in municipal bond official statements. The information also is expected to receive greater auditor scrutiny in the notes than it does in required supplementary information.

            Another example relates to one of the six allowable actuarial cost allocation methods, the aggregate method. This method does not produce an unfunded actuarial liability, and therefore governments that use it are not required to present a funding progress schedule for their pensions. The OPEB standards require that such governments use the entry age cost method to prepare and present a funding progress schedule for their OPEB. This requirement would be extended to pensions as well.

            Impact on the financial report: Additional useful information about pensions will be disclosed in the notes and, in some cases, required supplementary information. For the first time, users will be able to obtain information about the funded status of pensions that use the aggregate cost method.

            Expected issue date: December 2006.

            Contacts: Karl Johnson (

                           Michelle Czerkawski (

            More information: Pension disclosures project page

Intangible Assets

            Statement 34 raised many issues by requiring the reporting of all capital assets for the first time. The definition of capital assets included intangible assets, such as easements. This project is intended to answer the flood of questions Statement 34 prompted from governments about whether particular assets were intangible and, if so, how to report them. The proposed standards would apply to nonfinancial assets that lack physical substance and have useful lives extending beyond a single reporting period (in other words, generally more than one year). The proposal discusses when intangible assets-such as computer software, water rights, patents, and trademarks-should be reported in the financial statements at historical cost, as well as when and how to amortize that cost.

            Impact on the financial report: Assets not previously reported will be added to the accrual-based financial statements, which will increase net assets-specifically, the "invested in capital assets, net of related debt" component of net assets. If an intangible asset has a finite useful life, its cost will be reported in annual installments as amortization expenses in the accrual-based financial statements, rather than being reported in a lump sum in the year it was acquired or developed and put into service. This would result in a government's annual costs being more accurately depicted.

            Expected issue date: December 2006.

            Contacts: Greg Driscoll (

            More information: Intangible Assets project page


            Earlier this year the GASB issued a document presenting its Preliminary Views (PV) on how derivatives should be reported. The GASB has been analyzing the public comments on that document and is developing draft standards. A derivative is a unique and often complex financial arrangement that a government may enter into with another party, typically a private financial firm. The value of a derivative or the cash it provides to a government (or that it requires a government to pay) derives from what happens in relation to a separate transaction or agreement. A common example is an interest rate swap-a government may enter into that kind of derivative in conjunction with issuing variable rate debt, in order protect itself from higher debt service payments due to rising interest rates.

            The PV proposed that derivatives be reported at their fair value in the financial statements as assets or liabilities, depending on whether they represent resources (positive value) or claims on resources (negative value), respectively. In the case of derivatives, fair value generally is the price at which the derivative can be terminated. The annual change in the fair value of derivatives in some cases would be reported as an increase or decrease in investment income.

            However, if a derivative (like an interest rate swap) is intended to hedge a specific risk associated with an item that is not reported at fair value in the financial statements (such as debt, which is reported at historical or original cost) and the derivative is effectively hedging that risk, then the annual changes in the derivative's value would be deferred. In other words, the value changes would appear in the balance sheets as deferred credits (accumulated increases in fair value) or deferred charges (accumulated decreases in fair value), rather than being reported as gains or losses in the change statements. When the derivative ends, is terminated, or stops being effective, any accumulated changes, if any, would then generally run through the change statements.

            Impact on the financial report: Most derivatives are not currently reported in the financial statements, yet they represent potential resources a government could draw upon or claims against a government's resources. Putting them in the financial statements would more accurately reflect a government's financial health. Derivatives that are effective hedges would report both fair value and an offsetting deferral and therefore would have no bottom-line impact unless the derivative is terminated or becomes ineffective. The draft standards also would require more useful information in the notes, which would help the public better understand the nature of these largely unknown financial arrangements and their inherent risks.

            Expected issue date: March/April 2007.

            Contacts: Randy Finden (

            More information: Derivatives project page

Fund Balance Reporting and Governmental Fund Type Definitions

            The comment deadline for the October 2006 ITC is January 31, 2007. Based on the feedback it gathers, the GASB will begin to draft standards intended to improve the usefulness of fund balance information.

            Impact on the financial report: Users should receive more accurate fund balance information that is comparable from government to government. However, even if the present categories of fund balance are retained, historical trends before and after the new standards may not be consistent because of how fund balance is currently reported.

            Expected issue date: June 2007.

            Contacts: Ken Schermann (

                           Dean Mead (

            More information: Fund Balance Reporting project page

Further Reading