Two AICPA technical panels – the State and Local Government Expert Panel and the Private Companies Practice Section Technical Issues Committee – have disagreed with a Governmental Accounting Standards Board (GASB) proposal intended to better predict governments’ fiscal sustainability. The two AICPA panels do not believe that the five proposed required components of information intended to assist users meet GASB’s definition of “required supplementary information.” Furthermore, TIC believes the proposal would be burdensome to smaller governments.
The GASB’s overarching view is that current annual financial reports do not provide adequate information to users regarding the financial stress facing some governmental entities due to deteriorating financial conditions. As a result, the GASB proposed five components of forward-looking information that would be presented as required supplementary information (RSI) in governmental financial reports to assist users in assessing fiscal sustainability. However, two members of the GASB stated an Alternative View that disagreed that the five proposed components of information meet the definition of RSI.
The AICPA panels strongly encouraged the GASB to categorize the proposed components of information intended to assess a state or local governmental entity’s fiscal sustainability as supplementary information (SI) rather than as RSI, as the GASB proposed in its Economic Condition Reporting: Financial Projections Preliminary Views document.
The AICPA State and Local Government Expert Panel told GASB at a March 29, 2012 public hearing in Los Angeles and in its March 16, 2012 comment letter that the proposed components do not meet the definition of RSI in GASB’s literature (i.e., information that is essential for placing the basic financial statements and notes in an operational or economic context). Instead, the AICPA recommended the GASB encourage the inclusion of the information as SI that state or local governments would voluntarily provide as accompanying information to the financial statements. Additionally, the AICPA recommended that the Board provide criteria for when such SI would be voluntarily included. The AICPA provided other detailed comments to the GASB including specific feedback on the proposed components and a recommendation that the GASB consider limiting the scope of a future standard to general-purpose governments.
Testifying for the AICPA at the GASB hearing were Jim Lanzarotta, chairman of the State and Local Government Expert Panel and a partner at Moss Adams, LLP in Eugene, Ore., Bruce Bleakman, a member of the expert panel and a principal at REDW LLC in Albuquerque, New Mexico, and Mary Foelster, director of the AICPA’s Governmental Audit Quality Center.
In a separate March 29, 2012 comment letter to the GASB, the Private Companies Practice Section Technical Issues Committee also disagreed with the Board’s proposal to present financial projections as RSI. TIC said that presenting projections will be burdensome to smaller governments and could result in unintended consequences. For example, governments that do not have sufficient internal personnel with the required expertise to prepare the projections will have to incur the added cost of hiring outside help to fill the gap. TIC also questioned whether the projections will be a valid predictor of sustainability, whether financial statement users will understand the presentations, and whether a one-size-fits-all approach will be appropriate for all entities. Among other recommendations, TIC encouraged the GASB to subject the stated criteria for the projections to extensive testing with financial statement users of all types and sizes.