In my previous post, Invitation to Comment – or Invitation to Disaster?? The Long Slog to a New Financial Reporting Model Begins!, I provided a fascinating overview of the Governmental Accounting Standards Board’s (GASB) new financial reporting model project. As was noted, the actual Invitation to Comment (ITC), Financial Reporting Model Improvements – Governmental Funds is a first step in the long due process of developing a new GAAP standard. As is the case here, an ITC usually provides an opportunity for the GASB to solicit feedback on various proposal considerations. A significant aspect of the reporting model project is the reconsideration of the unique measurement focus used in the governmental funds (current financial resources). The ITC details three new measurement focus approaches to consider – the near-term approach, the short-term approach, and the long-term approach. This post, focusing on the near-term approach, is the first in a series that will provide (hopefully) a clearer insight into the plotting that is occurring in Norwalk.
Why all the angst against the current financial resource measurement focus?
Before delving in to the details of the near-term approach, it may be helpful to briefly revisit the concerns that some preparers and users have with the current measurement focus used in the governmental funds. In short, it was stated in the preamble to the ITC that this measurement focus does not have a “cohesive, conceptual foundation” and that it is a “collection of accounting conventions intended primarily to present a shorter time perspective of the activities reported.” Well, exactly. What is GAAP overall other than a collection of conventions to get to an end? It is not a natural science like physics or chemistry. Of course, there are sound theoretical underpinnings, but there is really no way to avoid every potential inconsistency that can crop up in the complex financial world of today. Think derivatives. There are times when trying to have your cake and eat it too is justifiable.
Most governmental entities adopt their budgets on some basis similar to the cash basis – pure cash, cash plus encumbrances, modified accrual, etc. I believe most would agree that the current financial resource measurement focus is a perspective that is relatively consistent with the budgetary approach that most governments use. This is why the current focus has evolved to what it is today as the GAAP basis of financial reporting for the governmental funds. As should become evident as the details of the three proposed approaches unfold, the “fixes” to the apparently glaring inconsistencies in current practice that trouble so many create their own new set of challenges and inconsistencies. However, pure and simple, each one is a significant change to the measurement focus and ultimately the basis of accounting for the governmental funds, effectively killing the current financial resource measurement focus and the modified accrual basis of accounting. To varying degrees, the governmental funds would lose many of their current characteristics.
The Near-Term Approach Philosophy
Admittedly, of the three proposed approaches, the near-term approach is the one that is more consistent with the current financial resource measurement focus. It would be much less destructive to governmental fund equity as we currently know it. Furthermore, the terminology used for the operating statement elements (i.e., revenues, expenditures specifically) is consistent with GASB Concepts Statement No. 4, Elements of Financial Statements. While definitely subject to change and thus not reflective of a final plan, revenues are referred to as “inflows of near-term financial resources” and expenditures as “outflows of near-term financial resources”. (Currently, the “other financing sources” and “other financing uses” terminology would remain unchanged, as would the types of transactions included therein.)
In general, inflows of resources that are accounted for under this approach are those acquired during the current period, or within an availability period (referred to as the “near term” in the ITC) that remains in the 60-90 day range. If the project moves in this direction, a specific availability period may be addressed further at a later point. Outflows of resources would be recognized when resources are used (spent) during the period, or shortly after the period end for goods and services acquired before the period end. Assets that would be reported are those that are in the form of cash or convertible to cash within the “near term”. Liabilities that would be reported are those payable at the end of the reporting period and will be liquidated shortly thereafter. While much of this sounds like the current financial resources measurement focus, there are some surprising differences, especially related to the assets and liabilities. Comparatively, the operating statement escapes relatively unscathed.
So, specifically, what would be reported where?
The ITC does give direct examples of the assets, liabilities, inflows of resources, and outflows of resources that would be reported in the governmental funds under this approach. A summary is below, with some italicized commentary yours truly has included:
- Cash and investments
- Accounts receivable
- Property taxes receivable
- Current portion of long-term receivables
Note – Long-term receivables are currently reported as a financial asset in the governmental funds, although reflected as a nonspendable component of fund balance. Under the near-term approach, the receivables would not be on the balance sheet until a delayed payment comes due.
Assets NOT Reported
- Prepaid items
- Long-term receivables that are not due currently
- Tangible and intangible assets
This is the only asset type within this list that is also not reported as a governmental fund asset under the current GAAP.
- Accounts payable
- Accrued payroll
- Interest payable due shortly following the period end
This would be a significant departure from current GAAP where both debt service principal and interest are reported when due, thus not as governmental fund liabilities.
- Compensated absences payable due shortly following the period end
Another significant departure from current GAAP where compensated absences in total are only reported as long-term liabilities in the government-wide financial statements. (How would this be calculated??)
- Unpaid balances that are due and payable on long-term debt, tax anticipation notes and revenue anticipation notes
Tax and revenue anticipation notes are currently reported as governmental fund liabilities, regardless of their maturity. Under the near-term approach, they apparently would only be reported as governmental fund liabilities if they were due and payable in the “near term” as of the period end. The fund reporting of unpaid balances on other long-term debt under current GAAP is the same.
- Net pension and other postemployment benefit (OPEB) payments due shortly after the period end
This assumes that such benefits are to be paid directly from a governmental fund.
Liabilities NOT Reported
- Any of the liabilities listed about that are NOT due and payable currently but in the long-term.
- Asset retirement obligations not normally due shortly after the end of the reporting period.
I would assume that if there were any such obligations due in the short-term following the end of the reporting period, they would be reported as fund liabilities, but the ITC did not specifically give it as an example.
Inflows and Outflows of Resources
If there is good news, it would be that the operating statement elements remain surprisingly unchanged. The inflows of resources would basically follow the same recognition criteria currently in place for property taxes and other governmental fund resources, including the incurrence of long-term debt. (Ironically, it appears as if a governmental fund enters into a capital lease, then in the year of inception, we would still have the infamous “phantom entry” – as I call it – by debiting an “expenditure” and crediting “other financing sources” for the present value of the minimum lease payments. No true inflow occurs, thus it seems to fly in the face of the stated intent in the ITC of “financial resources in this approach are resources expected to be converted into cash”. However, I am not going there….at least right now.)
Likewise, outflows of resources appear to be basically the same as current GAAP with one notable exception – interest on indebtedness is subject to accrual directly in the governmental fund as opposed to simply being reported when due.
Anything in it for me?
One can definitely argue that the near-term approach is closer to the current modified accrual basis than the other two approaches presented in the ITC. That is not saying much. In the end, this is not modified accrual as currently defined. Indeed, if any one of the approaches being proposed is ultimately the path chosen, there would be no more current financial resource measurement focus nor modified accrual basis of accounting as we know it.
Fund balance as is currently calculated would not significantly change. Thus, it would continue to represent the financial resources of the fund that are available for spending of some type. It does appear as if the nonspendable component would all but be unnecessary given the elimination of inventory, prepaids and long-term receivables as fund assets, but that is just an observation.
Finally, and fortunately, it is assumed that a cash flow statement would not be needed for this approach (News Alert! – the expanded use of a cash flow statement is being considered in a new model overall, but you can only take so much at one time – we have plenty of time to discuss that!!).
So, what is in it for you? Sorry, that is something you will have to decide. Something you like? Something you dislike? Wonder what they are thinking?? Yes, have fun with all that.
In the meantime, this saga will continue….