Yogi Berra said it best. “It’s déjà vu all over again.” That is what should come to everyone’s mind upon reviewing the third measurement focus and basis of accounting proposal from the Governmental Accounting Standards Board’s (GASB) recent Invitation to Comment (ITC), Financial Reporting Model Improvements – Governmental Funds. As was noted in the previous blog post You Are Doing WHAT to the Governmental Funds?? – Part 2, the Short-Term Approach, each proposal is moving further and further away from the current financial resource measurement focus and the modified accrual basis of accounting currently used in the governmental funds. Well, this is an all-out retreat!! In fact, it is also being referred to as the total financial resources approach.
So, why the relevance of “It’s déjà vu all over again.”? It is because when reading the description of the long-term approach described in the ITC, it is like reading GASB Statement No. 11, Measurement Focus and Basis of Accounting – Governmental Fund Operating Statements. For those of you that don’t recall (or, for those who have blocked that terrible memory!), GASB Statement No. 11 was the GASB’s first attempt at significantly redefining what governmental funds should report, thus effectively scrapping the current financial resource measurement focus used by the governmental funds. So, why have many of you NOT heard of GASB Statement No. 11? It is because it is the first (and still only statement) whose implementation was indefinitely deferred, in this case by GASB Statement No. 17, Measurement Focus and Basis of Accounting – Governmental Fund Operating Statements: Amendment of the Effective Dates of GASB Statement No. 11 and Related Statements. Whew! Then…it was essentially superseded by GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments. So, yes, you are reading this correctly. The long-term approach is another stab at many of the concepts in GASB Statement No. 11. Didn’t they learn the first time??
The Long-Term Approach Philosophy
In this third installment of the horror series that is the ITC, inflows or outflows of resources in governmental funds would be recognized at the time they happen, regardless of when the cash has been received or disbursed. The only exceptions would be outflows that are not assets and are specifically related to future periods and inflows that are not liabilities and specifically related to future periods. (HINT: The requirements of GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and GASB Statement No. 65, Items Previously Reported as Assets and Liabilities.)
So, how is this different from a true economic resource measurement focus? Primarily, it would be because capital assets and long-term liabilities would not be reported on the balance sheet. Otherwise, the differences are relatively minor. AND, the governmental fund financial statements would simply be one-step removed from how the government-wide financial statements are reported now. What benefit is there from essentially reporting the same information in the governmental activities and the governmental funds? Why create a new type of inconsistency (i.e., treating capital assets and long-term liabilities differently than basically any other assets and liabilities), especially when inconsistencies were bemoaned in the preamble to the ITC?
Give it to me again – what would be reported where?
At this stage in the game, it is going to be much more expedient to simply detail what will not be reported where. It makes the reading easier and the differences starker. In the case of assets and liabilities, get a load of this:
Assets NOT Reported
- Capital assets
Liabilities NOT Reported
- Principal portion of long-term capital-related debt
When we turn to outflows of resources (think expenditures…) and inflows of resources (think revenues), they are also much more in line with what we would think of as the accrual perspective (not much “modification” here!), yet there are some subtle differences.
Outflows of Resources NOT Reported
- Prepayments
- Inventory purchases
- Lending activities
- Repayments of principal related to operating long-term debt, as well as tax or revenue anticipation notes
- Depreciation
One item to note here – principal repayments for capital-related long-term debt would be reported as an outflow of resources because the associated liability is not reported on the balance sheet. (That would be an easy one to explain to users, correct??)
Inflows of Resources NOT Reported
- Repayments of principal from any borrower
- Resources received in the current year from borrowing related to long-term operating debt, as well as tax or revenue anticipation notes
Again, it should be noted that current year proceeds related to capital-related long-term debt would be reported as a resource inflow, one of the very few consistencies with current practice (with the exception that currently there is not a distinction made about the reason behind the indebtedness).
There has got to be more pain to this….
Of course! As was revealed in the previous blog post, the short-term approach necessitated the need for a statement of cash flows. So, it should be no surprise that such would still be the case with the long-term approach. In addition to additional costs related to the preparation of another statement, fund balance as we know it would be essentially gone. Sure, the same classifications would be used (i.e., nonspendable, restricted, committed, assigned and unassigned). But, it is much closer to an economic equity than a financial equity. How can you really have a financial equity that includes long-term liabilities such as compensated absences and post-employment obligations? Here is the answer – you can’t.
So, WHAT could be gained from all of this? I personally have yet to see. There is absolutely no denying the fact that the resource statements in particular (think operating statements) would definitely have to be significantly modified. And, the modifications necessary would exponentially increase with each iteration from the near-term to the long-term approaches. If there is concern NOW that governmental entity financial statements are not user-friendly or intuitive, then these approaches seem designed to make them even more so.
If that is the goal, then they have succeeded.
