Well, it was inevitable. While we all are still reeling from the fun that has been GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments that was issued in June 1999, another chapter in the never-ending saga has begun. Yes, the Governmental Accounting Standards Board (GASB) recently added a new financial reporting model project to their official agenda. Now, the good news is that this type of project takes time – lots of time. The project that culminated in GASB Statement No. 34 was a 15-year process. The first implementers of GASB Statement No. 34 did so 15 years ago. So, one would hope that this is the beginning of another 15 year adventure and, at the end, most of us will be retired. Well, no such luck this time. While we do have time to possibly retire, the potential release of a new reporting model standard is currently slated for November 2021, with implementation certainly several years after that. However, we are not looking at a 15-year process.
There is no way that this project can be adequately addressed in a single blog post. Indeed, we are just beginning to see the first potential pieces, with much, much more to come. So, this blog post is going to focus on two main topics. First, it will address the significance of an Invitation to Comment issuance and its overall role in the GASB’s due process. Second, the elements of the project will be briefly described. And last, but certainly not least, there will be an overview of the Invitation to Comment that was issued in December 2016. Future blog posts (oh, there is something to live for!) will be used to further describe what is being considered within this first Invitation to Comment and later on, the other proposals of the financial reporting project as they are released. You need to step back from the ledge now.
Let the fun begin!
What is an Invitation to Comment and why should I care?
In December 2016, the GASB issued an Invitation to Comment entitled Financial Reporting Model Improvements – Governmental Funds. It is the first step in rolling out proposals for the GASB to consider as the new reporting model project develops. It is a critical first peek of either how much you would potentially like the new guidance being considered or how quickly you want to consider retiring.
Especially in major projects such as this, the GASB may issue up to three different documents at various stages of the process – an Invitation to Comment, a Preliminary Views (PV), and an Exposure Draft (ED). Technically, an Invitation to Comment is a GASB staff document that is typically used, as in this case, to solicit feedback on various proposals being considered in the early stages of the project evaluation. The Board does not have a consensus view as of yet and preparer and user respondents provide invaluable feedback at that this stage that helps the GASB and its staff narrow their focus and better define the potential trajectory of the evolving guidance.
As the project becomes better defined and the Board has reached a broad consensus on the ultimate path of the guidance, they will issue a Preliminary Views document. Unlike an Invitation to Comment, a PV does not generally identify various paths being considered, but rather provides a very rough blueprint of where the Board foresees the guidance moving toward a proposed standard. There are numerous circumstances where the potential guidance in a PV is substantially changed before an ED is issued; at other times, the PV is simply tweaked before an ED is issued. For this project, the tentative timeline for the issuance of a PV is July 2018.
Finally, an ED is the final proposed guidance from the GASB, although it is certainly subject to change before adoption of a final standard. However, modifications at this point are usually minor and rarely have represented an “about face”. Currently, the Board anticipates issuing an ED in April 2020, with a final standard being issued in November 2021. It is very important to note that at all stages, public hearings are held and comments solicited on the ITC, the PV, and ultimately the ED.
What is the overall reporting model project expected to address?
Let me be the first to break the news now. Whether it is good news or bad news is in the eye of the beholder. This project is not an overhaul of the current financial reporting model, no matter how hopeful some of you may be. Instead, it is “intended to consider improvements to only selected aspects of the existing model”, to quote the summary at the beginning of the Invitation to Comment. In addition to what this Invitation to Comment is designed to address, future due process documents that will be issued will address the following elements of the reporting model:
- Management’s discussion and analysis
- Government-wide statement of activities
- Debt service fund presentations
- Permanent funds
- Proprietary funds
- Extraordinary and special items
- Budgetary comparisons
Now, this may appear at the surface to be nothing short of an overhaul. However, in many cases, only “tweaking” will be proposed in some of these areas while in others, significant changes could ensue. The path taken after the feedback from this Invitation to Comment will mold how potential modifications will be addressed for the above-mentioned elements of the reporting model.
What is this Invitation to Comment addressing?
In short, a lot. This is why there will be future blog posts that address the elements of this document in more detail (but in pieces so that you can digest slowly and seek medical help as needed). The focus in this publication is on the governmental funds and the measurement focus and basis of accounting that is currently used (i.e., the current financial resource measurement focus and the modified accrual basis of accounting). To that end, the Invitation to Comment is broadly addressing the following:
- Potential recognition approaches (yes, a change to what we currently do)
- The format of the governmental fund statement of resource flows (in English, the operating statement)
- Related terminology
- The reconciliation to the government-wide statements
- The possibility of a governmental fund statement of cash flows with certain recognition approaches (yes, you read that right!)
It is no secret that the current approach to reporting the governmental funds has always had both its fervent supporters (Save the Funds!) and its critics (“It does not have a conceptual foundation!”). In truth, there are no right or wrong answers. Supporters have long argued that this current approach more closely mirrors day-to-day budgetary management. The governmental funds have a short-term focus and a financial perspective because that is how fund inflows and outflows are managed. However, the opposing view just as easily argues that some users may not truly realize that a longer-term perspective is needed for many decisions and while currently reported elsewhere (i.e., the government-wide financial statements), that may not be readily apparent.
In addition, there are admittedly many inconsistencies in some of the information reported, especially with the assets and liabilities. A true current financial resource measurement focus would only report “liquid” assets and short-term liabilities that are immediate draws on those resources. However, long-term receivables, inventory, and prepaid items are considered financial assets and there are times when true longer-term liabilities (e.g., tax, grant, and revenue anticipation notes) are reported as short-term liabilities. Thus, many would argue that the short-term financial focus is too narrow and the inconsistencies too numerous for there not to be room for significant “improvement”, however one defines “improvement”.
Thus, this Invitation to Comment provides a multitude of approaches that are being considered as the project evolves to its next phase, which is Board consensus on a path to pursue. First, and of dire importance, three potential recognition approaches are being presented:
- A near-term financial resources focus that is probably the closest to the current recognition approach used in the governmental funds in the existing reporting model
- A short-term financial resource focus which would continue some elements of focus that is currently used in the governmental funds, but departs much more so than the near-term approach
- A long-term financial resource focus which is only steps away from actually being more like an economic resource perspective than a financial perspective
With each of the above, there would be unique ramifications to the reconciliations required between the governmental funds and the governmental activities, as well as to the manner in which the financial statements would present this information.
Next, as if the above was not enough, the Invitation to Comment also offers up for consideration the addition of a statement of cash flows if either the short-term or long-term financial resource focus were adopted. Finally, two alternatives to the format and the information included therein are identified for the governmental fund operating statement. One is simply retention of the current format of revenues, expenditures, and other financing sources and uses. The other format would represent a focus on current and long-term activity and would report inflows and outflows related to capital assets and long-term indebtedness apart from inflows and outflows of other activities within the governmental fund.
The deadline for written comments for the Invitation to Comment is March 31, 2017, admittedly sooner than all my blogs on it will be completed. However, public hearings and user forums are
being held in various locales across the country during the months of April and May. However, one would need to provide written notice to the GASB of their intent to participate in any of the events by March 31 as well.
To be continued….
Future blog posts will provide deeper insight into the proposals being “run up the flagpole” in this Invitation to Comment. By staying tuned to the evolution of these proposals, one will have a much better perspective of the ramifications of these various approaches as the direction of the reporting model project becomes clearer. (This is not a shameless plug for readership, but a general suggestion.) I promise that I will try to make the medicine as painless as possible!