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 to address certain application issues, based upon the results of the pre-agenda research on the financial reporting model.

Status:
Exposure Draft Redeliberations

• Background
• Accounting and Financial Reporting Issues
• Project History
• Current Developments
• Work Plan
• Recent Minutes
• Minutes Archive
• Tentative Board Decisions to Date
• Task Force  
• Project staff:
  • Roberta Reese
  • Lisa Parker
  • Scott Reeser
  • Jordyn Jackson
  • Bharvi Patel
  • Danielle Pollock
  • Carson Morrow
  • Bailee Steinle

 

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 will 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. After additional extensive deliberations and due process, recognition and presentation of governmental funds was removed from the scope of the project.

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.

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.

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, such as presentation of special and extraordinary items and major component unit information.

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
• Deliberations on new issues for Preliminary Views began: December 2016
• Public hearings and user forums held: April–May 2017
• Task force meeting held: September 2017
• Redeliberations began: October 2017
• Preliminary Views approved: September 2018
• Comment period: September 2018–February 2019
• Deliberations on new issues for Exposure Draft began: October 2018
• Public hearings and user forums held: March 2019
• Redeliberations began: June 2019
• Exposure Draft approved: June 2020
• Comment period: July 2020–February 2021
• Public hearings and user forums held: March and April 2021
• Redeliberations began: May 2021

Current Developments: The Board continued to discuss the reporting of unusual or infrequent items and decided to remove governmental fund financial statements from the scope of the project.

Work Plan :
 

Board Meetings	Topics to Be Considered
September 2023	Redeliberate issues related to effective date and transition.
October/November 2023	Discuss first draft of a final standards section; cost-benefit considerations; scope of authority.
December 2023	Review comprehensive illustrations.
March 2024	Discuss preballot draft of a final Statement.
April 2024	Discuss ballot draft of a final Statement and consider for approval.

FINANCIAL REPORTING MODEL—RECENT MINUTES

Minutes of Meetings, August 9–10, 2023

The Board reviewed its tentative decisions related to the presentation of governmental fund financial statements in light of its recent tentative decision to remove issues related to reporting of governmental funds from the scope of this project. The Board confirmed that the removal of issues related to reporting of governmental funds from the scope of this project includes removing issues related to the presentation of governmental fund financial statements.

Next, the Board continued redeliberations on the proposals in the Exposure Draft, Financial Reporting Model Improvements, related to unusual or infrequent items with an evaluation of the issues related to modifying the existing guidance for unusual nature and infrequency of occurrence to be less restrictive. The Board confirmed its previous decision to carry forward the proposal in the Exposure Draft on unusual or infrequent items to a final Statement, but the Board tentatively decided to carry it forward without any additional modifications.

Minutes of Meetings, June 27–29, 2023

The Board tentatively decided to remove issues related to the reporting of governmental funds from the scope of this project and the guidance from a final Statement.

Minutes of Meetings, May 16–17, 2023

The Board discussed alternatives for a specific standardized structure with headings that would categorize groups of similar items in the reconciliation between the information presented in the governmental fund financial statements and the information presented in the governmental activities column in the government-wide financial statements. The board tentatively decided not to require a specific standardized structure and, instead, retain the current reconciliation guidance in Statement 34.

Minutes of Meetings, April 4–6, 2023

The Board continued deliberations associated with certain proposals in the Exposure Draft, Financial Reporting Model Improvements. Specifically, the Board considered long-term financings issued for short-term purposes and additional research conducted regarding reconciliations between governmental fund financial statements and governmental activities in the government-wide financial statements as well as unusual and infrequent items.

Next, the Board discussed potential paths forward to address the exception for short-term purposes, including (1) replacing short-term purposes with short-term transactions, eliminating the need to describe short-term purposes; (2) retaining the phrase short-term purpose but taking a conceptual approach and not describing short-term purposes in a final Statement; (3) replacing short-term purpose in its entirety with other than a long-term purpose, which shifts the focus to describing a long-term purpose instead of a short-term purpose; and (4) retaining and developing a description of a short-term purpose. The Board did not reach a tentative decision on a path forward and directed the staff to compile a summary of prior Board deliberations on the exception to applying the short-term financial resources measurement focus and accrual basis of accounting for long-term financings issued for short-term purposes to supplement further deliberations at a future meeting.

Next, the Board continued with a discussion of potential improvements to the reconciliation of the net change in total governmental fund balances to the change in total governmental activities net position and the reconciliation of total governmental fund balances to total governmental activities net position with consideration of the additional research conducted. The Board tentatively decided to require a specific standardized structure that would include headings for groups of similar items for these reconciliations in a final Statement. The Board also tentatively decided not to require a specific standardized terminology for the reconciling items to be included in these reconciliations. In addition, the Board tentatively decided to retain the method of communication currently required for these reconciliations.

Finally, the Board continued redeliberations on the proposals in the Exposure Draft related to unusual or infrequent items with consideration of the additional research conducted. The Board confirmed its previous tentative decision to retain and carry forward the proposal in the Exposure Draft to separately present unusual or infrequent items in a final Statement and tentatively decided to pursue modification of the existing guidance for unusual in nature and infrequency of occurrence to be less restrictive.

Minutes of Meetings, February 21–23, 2023

The Board continued redeliberations on the revised language regarding an exception to applying the short-term financial resources measurement focus and accrual basis of accounting for long-term financings issued for short-term purposes. The Board began by discussing examples of long-term financings and whether they should be classified as being for short-term or long-term purposes. Based on that discussion, the Board tentatively decided that the determination of whether a financing is for a short-term purpose or a long-term purpose should focus on legal restrictions of the long-term financing rather than actual use of the long-term financing.

Next, the Board discussed potential paths forward to address the exception for short-term purposes, including (1) replacing short-term purposes with short-term transactions, eliminating the need to describe short-term purposes; (2) retaining the phrase short-term purpose but taking a conceptual approach and not describing short-term purposes in a final Statement; (3) replacing short-term purpose in its entirety with other than a long-term purpose, which shifts the focus to describing a long-term purpose instead of a short-term purpose; and (4) retaining and developing a description of a short-term purpose. The Board did not reach a tentative decision on a path forward and directed the staff to compile a summary of prior Board deliberations on the exception to applying the short-term financial resources measurement focus and accrual basis of accounting for long-term financings issued for short-term purposes to supplement further deliberations at a future meeting.

Minutes of Meetings, January 30, 2023

The Board discussed the results of staff research with users of financial statements regarding governmental fund reconciliations and unusual and infrequent criteria as presented in a research memorandum. No formal deliberations took place, and no tentative Board decisions were reached.

Minutes of Meetings, January 10–11, 2023

The Board continued redeliberations by discussing feedback received on the proposals regarding communication of major component unit information in the Exposure Draft, Financial Reporting Model Improvements.

First, the Board discussed the communication method of major component unit information. The Board tentatively decided to carry forward to a final Statement the proposal in the Exposure Draft to present major component unit information in the basic financial statements with changes made to require separate presentation of information for each major component unit rather than to present the information in a separate column.

Next, the Board discussed other suggestions provided in the feedback received from the Exposure Draft related to major component unit information. This feedback recommended (1) clarifying or redefining the requirements related to determining a major component unit, (2) changing the terminology for which component units should be reported separately from major component units to significant component units, and (3) clarifying whether the proposals related to major component units relate to blended component units. The Board tentatively decided not to incorporate any of these suggestions raised by respondents related to budgetary comparison information in a final Statement.

Minutes of Meetings, November 16–18, 2022

The Board continued redeliberations by discussing feedback received on the proposals regarding budgetary comparison information in the Exposure Draft, Financial Reporting Model Improvements.

First, the Board discussed the communication method of budgetary comparison information. The Board tentatively decided to carry forward to a final Statement the proposal in the Exposure Draft to present budgetary comparison information as required supplementary information (RSI).

Next, the Board discussed the presentation of budgetary variances. The Board tentatively decided to carry forward to a final Statement the proposals in the Exposure Draft to require the presentation of variances between (1) the original budget and final budget amounts and (2) the final budget amount and actual results as part of the budgetary comparison schedule.

The Board then discussed the analysis of those budgetary variances. The Board tentatively decided to carry forward to a final Statement the proposals in the Exposure Draft to require that the notes to RSI include an analysis of significant variations between (1) the original budget and final budget amounts and (2) the final budget amounts and actual results.

Finally, the Board discussed other suggestions provided in the feedback received from the Exposure Draft related to budgetary comparison information. This feedback recommended including (1) additional examples of illustrations of reconciliations to GAAP basis amounts, (2) prior year actual amounts in the budgetary comparison schedules, (3) the presentation of budgetary information for all major funds in RSI, (4) additional guidance on how encumbrances rolled forward from the preceding years, (5) additional guidance on the level of detail required in budgetary comparison schedules, and (6) the disclosure of the next fiscal period’s budgets. The Board tentatively decided not to incorporate any of these suggestions raised by respondents related to budgetary comparison information in a final Statement.

Minutes Archive

FINANCIAL REPORTING MODEL—TENTATIVE BOARD DECISIONS TO DATE

The Board tentatively decided the following:

• Nonauthoritative illustrations should be included in a final Statement.
• For management’s discussion and analysis (MD&A):
  • The length of MD&A should not be limited to a specific number of pages and MD&A should not present “Notes to MD&A Discussion” after notes to financial statements.
  • A requirement to discuss Environmental, Social, and Governance (ESG) risks or general, long-term financial priorities should not be included.  The Board confirmed that ESG risks are not in the scope of this project.
  • The users of MD&A should be the broad type of users discussed in paragraph 63 of Concepts Statement 1, Objectives of Financial Reporting.
  • The requirement to present a brief discussion of the basic financial statements, including the relationships of the statements to each other, and the significant differences in the information they provide, should continue to be required with additional clarification and structure.
  • The requirement and illustrations for the analysis of year-to-year changes should emphasize the level of thoroughness of the analysis and should include the relative magnitude of the reasons for changes.
  • The requirements should indicate that the analysis should be presented in a manner that avoids unnecessary duplication and allow for professional judgment when determining what information is unnecessarily duplicative.
  • The requirement to avoid duplication in the analysis in MD&A should not be expanded to reduce duplication of information that is included within the notes.
  • The requirement to present a brief discussion of the basic financial statements, including the relationships of the statements to each other, and the significant differences in the information they provide, should continue to be required with additional clarification.
  • The requirement to reference to the summary of significant accounting policies note should not be required.
  • The section titled Introduction should be amended to Overview of the Financial Statements and the section titled Significant Capital Asset and Long-Term Debt Activity should be amended to Significant Capital Asset and Long-Term Financing Activity.
  • The requirement to present the condensed current-year and prior-year financial information derived from the government-wide financial statements should distinguish between governmental activities and business-type activities.
  • The requirement to present an analysis of balances and transactions of nonmajor funds in the aggregate should not be required.
  • The requirement to include a description of significant capital assets and all long-term financing activity during the year should be included in the analysis.
  • A cross-reference of paragraphs 8c and 8d of the Exposure Draft should be included to emphasize that paragraph 8d is providing additional analysis of capital assets and long-term financing activity.
  • The discussion of significant variations between the original and final budget amounts and between the final budget amounts and actual results for the general fund should be presented as notes to budgetary comparison information, which is proposed to be presented as required supplementary information.
  • The requirement to present information about infrastructure assets accounted for using the modified approach should be removed.
  • The requirement to include a description of currently known facts, decisions, or conditions that are expected to have a significant effect on financial position or results of operations should include in the description examples, if applicable, of the following:
    • Trends in economic data, including population growth, customer base, and unemployment rates
    • Details of the subsequent year’s adopted or approved budget, including (1) the change in rates and bases (2) the changes in planned spending with reference to sources such as inflation, labor contracts with unions, adjustments, and whether new programs were added; and (3) expected changes in fund balance.
    • The intent of the subsequent year’s budget information should be included to highlight how the subsequent year’s budget will have a significant impact on the financial statements.
    • Information related to all actions the government has taken (regardless of when the actions are taken) related to postemployment benefit plans, capital improvement plans, and long-term debt.
• Unusual or infrequent items should be presented individually as the last presented flow(s) of resources prior to the net change in resource flows in the government-wide, governmental funds, and proprietary funds statements of resource flows.
• Unusual or infrequent items should include both inflows of resources and outflows of resources.
• Inflows of resources and outflows of resources related to unusual or infrequent items should be displayed separately on the government-wide, governmental funds, and proprietary funds statements of resource flows and should not be netted.
• Information regarding whether an unusual or infrequent item is within the control of management should be disclosed in the notes to financial statements.
• Examples of unusual or infrequent items should not be provided in a final Statement.
• Operating revenues and expenses should be defined as revenues and expenses other than nonoperating revenues and expenses. Nonoperating revenues and expenses should be described as (1) subsidies received and provided, (2) revenues and expenses related to financing, (3) resources from the disposal of capital assets and inventory, (4) investment income and expenses, and (5) contributions to permanent and term endowments.
• The exception to the guidance for classification of operating and nonoperating revenues and expenses should indicate that certain loan programs should classify interest revenue as operating revenue and interest expense as nonoperating expense.
• The definition of subsidies should be revised to (1) indicate that all transfers should be included, (2) clarify that subsidies can have a direct or indirect impact on user fees and charges, and (3) clarify that subsidies should be classified as noncapital subsidies unless limited to capital purposes.
• The statement of revenues, expenses, and changes in fund net position should distinguish between operating and nonoperating revenues and expenses, as well as separately report noncapital subsidies and provide a subtotal for operating income (loss) and noncapital subsidies.
• For governments engaged only in business-type activities or only in business-type and fiduciary activities, financial trend information in the statistical sections should distinguish between operating, noncapital subsidy, and other nonoperating revenues and expenses.
• Contributions to permanent and term endowments should be classified as nonoperating revenues.
• Budgetary comparison information should be presented as RSI.
• Variances between the original budget and final budget amounts and between the final budget amount and actual results should be presented as part of the budgetary comparison schedule.
• An analysis of significant variations between the original budget and final budget amounts and final budget amounts and actual results should be included in notes to RSI.
• Major component unit information should be separately presented in the reporting entity’s statements of net position and activities if it does not reduce the readability of the statements. If presenting information about each major component unit separately reduces the readability of the statements, combining statements of major component units should be included in the reporting entity’s basic financial statements after the fund financial statements.
• The guidance for issues related to the recognition in and presentation of governmental funds should be removed from the scope of this project and not be included in a final Statement.
• The unusual nature and infrequency of occurrence criteria in existing guidance should not be modified in this project.