Closing the Gaps in GAAP

GASB’s implementation guides play an integral role in governmental accounting.

by Craig D. Shoulders and Robert J. Freeman

EXECUTIVE SUMMARY

GASB regularly issues implementation guides, which are staff “question and answer” (Q&A) documents that are intended to reflect the GASB staff’s understanding of the board’s intent when it adopted the related statements. Implementation guides have a relatively low level of authority in the government GAAP hierarchy in SAS no. 69, but they have become increasingly vital to CPAs who must apply GASB standards in preparing and auditing the financial statements of state and local governments. Individual professionals have a responsibility to comply with higher-level authoritative guidance, in accordance with the GAAP hierarchy, if they determine that a conflict exists between an implementation guide and more authoritative guidance in GASB statements of standards or interpretations. Since 2003, GASB has issued a Comprehensive Implementation Guide each year with questions relating to existing standards added, deleted or modified as the staff and the board deem necessary. This means financial statement preparers and auditors must stay abreast of the guide’s ever-changing content. Craig D. Shoulders, Ph.D., is a professor of accounting at the University of North Carolina at Pembroke. Robert J. Freeman, CPA, Ph.D., is the distinguished professor of accounting at Texas Tech University. Their e-mail addresses are craig.shoulders@uncp.edu and robert.freeman@ttu.edu, respectively.

standard setter’s job is far from complete when it issues a new accounting statement. Sure, the drafters may have a clear understanding of the official language, but it’s almost impossible to conceive of every practical effect the new rule will have on how financial statement preparers do their jobs. That’s where GASB’s implementation guides come into play.

The Governmental Accounting Standards Board (GASB) issues the guides, which are staff “question and answer” (Q&A) documents. They are intended to reflect the GASB staff’s understanding of the board’s intent when it adopted the related statements. In recent years, the board issued the guidance more contemporaneously with the adoption of new standards to provide immediate answers to the rank-and-file who must apply the new rule.

Implementation guide projects are announced publicly, and the draft is exposed to the board and an advisory committee. However, implementation guides do not receive the public exposure and input required in adopting statements, interpretations and technical bulletins. Although an implementation guide will not be issued if a majority of the board members object to its issuance, the guides are not adopted by the board but are issued under the authority of the GASB director of research and technical activities.

Implementation guides have a relatively low level of authority in the government GAAP hierarchy (only “other accounting literature” is lower), but they have become increasingly vital to CPAs who must apply GASB standards in preparing and auditing the financial statements of state and local governments. This article discusses the growing importance of the guides, provides an update of the most recent Comprehensive Implementation Guide, and points out the responsibility of preparers to carefully evaluate and apply the latest guidance it contains.

EXPANDED ROLE
Two recent developments have made the guides critical to understanding and properly implementing government GAAP. First, the guides’ breadth of coverage has become increasingly more comprehensive. Second, the advent of the “comprehensive” implementation guide means that:

New questions (and thus new guidance) can be added periodically without the need for a substantial enough body of questions to justify a separate guide.

Old questions can be deleted or their answers can be modified.

The guidance in guides on a specific statement can be incorporated directly into the revisions of the comprehensive guide.

BREADTH OF COVERAGE
In GASB’s earlier years (the board was founded in 1984), individual implementation guides were issued covering only a specific standard or closely related standards on a specific topic (for example, deposits and investments, cash flows, risk financing, reporting entity, pensions and investments). The individual guides were issued only if there were substantial questions regarding the application of the specific standard, typically were not developed and issued until some time after adoption of a statement, and were relatively infrequent.

Implementation guides originally were intended to be static documents. Once issued, they were not revised. GASB issued six static guides between 1991 and 1998. These six guides (the latest on GASB Statement no. 31) contained questions relating to a total of eight statements. Thus, of the first 31 GASB statements, eight were addressed in static individual implementation guides.

Since 2000, GASB has issued five individual guides that contain questions related to at least 10 of the 18 statements issued since that time. This is in large part because GASB Statement no. 34 is a far-reaching document. The statement, titled Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, was described by then-GASB Chairman Tom L. Allen as “the most significant change in the history of governmental accounting.” Statement no. 34 has been amended by several other documents, and two of the five implementation guides were Statement no. 34-related guides.

The integral role that implementation guides now play in setting and applying GAAP is demonstrated in the timing of the development and publication of the most recent individual implementation guides. The first several individual implementation guides were issued after—typically well after—the related statement’s effective date in response to issues that arose during the initial implementation process. In contrast, recent guides have often been drafted during the later stages of adopting the related statement and are published before the effective dates of the new rule. Likewise, questions on new statements that are not the subjects of new individual implementation guides typically are added to the comprehensive guide soon after the statement is issued.

COMPREHENSIVE IMPLEMENTATION GUIDES
Beginning in 2003, GASB has issued a Comprehensive Implementation Guide each year. The first comprehensive guide included both the still effective guidance of the individual (specific topic) implementation guides and additional questions not included previously. Since the Comprehensive Implementation Guide is not a static document, but is revised annually, most new standards eventually result in changes to the guide’s questions and answers. Questions on standards that are unrelated to one of the statements covered by individual implementation guides are added to the final chapter of the latest edition of the comprehensive guide. Again, questions relating to existing standards can be added, deleted or modified as deemed necessary by GASB staff with each revision.

Virtually every standard issued after GASB Statement no. 31 is the subject of (1) at least a limited number of staff questions and answers in either the Comprehensive Implementation Guide or (2) a new individual guide developed for that specific standard. This is true of every standard issued after GASB Statement no. 34 except the most recent two—GASB Statement no. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, and Statement no. 49, Accounting and Financial Reporting for Pollution and Remediation Liabilities. Questions on those statements likely will be included in the next revision.

Another consequence of publishing an annual update is that the guidance is not static; it can change even if no new standards are issued. Changes to the comprehensive guide have included:

Incorporation of new questions related to new standards (including addition of the questions from new individual guides).

Deletion or modification of questions in prior guides as a result of new standards.

Addition of new questions related to existing guides on specific statements even though no new standard amending the statement covered by the guide has been issued.

Deletion of questions or modifications of previous questions and responses in the previous Comprehensive Implementation Guide even though no new standard has been issued related to the question.

Practitioners, however, still need the individual guides until they have been included in the comprehensive guide.

ANNUAL UPDATES
Given the increasing importance of implementation guides and the annual changes in the Comprehensive Implementation Guide, financial statement preparers must stay abreast of the ever-changing content. The Exhibit provides a detailed analysis of selected guidance provided in the new questions included in its most recent (2006) update.

Analysis of Guidance in Selected New Questions in the 2006 Comprehensive Implementation Guide Question Topic and Number Analysis Modified Approach—Treatment of Cost of New Bridge to Replace Old Bridge in Bridge Network (Question 7.17.5) A government should expense all preservation costs. Preservation costs include the: • Cost of construction of a new bridge adjacent to a similar old bridge being replaced • Cost of tearing down and removing the old bridge Capitalize any portion of the new bridge cost associated with increased capacity or efficiency. Classification of Liability for Closure and Postclosure Costs of a Municipal Solid Waste Landfill for Net Asset Calculation Purposes (Question 7.22.15) No portion of the liability for closure and postclosure costs may be deducted from Net Assets Invested in Capital Assets, Net of Related Debt. The liability • Reduces restricted net assets if funded with restricted assets • Otherwise, reduces unrestricted net assets Reporting of Correction of Errors in Previously Issued Financial Statements (Question 7.22.16) Report corrections of errors in previously issued financial statements as restatements of beginning net assets/fund equity. Net Assets Restricted by Enabling Legislation (Question 7.24.24) Question 7.24.24 states that a restricted tax(es) established by statutes of one government and shared with others • Should be disclosed as restricted by enabling legislation in the report of the taxing governments • Is externally restricted for the other governments with which the tax(es) are shared Restricted Net Assets From Bond Proceeds Required to Be Used for a Bond and Interest Reserve (Question 7.24.25) Any bond proceeds required by a bond indenture to be set aside as a bond and interest reserve are restricted assets. A corresponding amount of the bonds should be used to calculate restricted net assets, not deducted from invested in capital assets, net of related debt. Budgetary Comparison Required If Legally Adopted Annual Budget (Question 7.91.13) The legally adopted budget requirement applies to the General Fund (as well as to major Special Revenue Funds). If a budget is not legally adopted for the General Fund, a budgetary comparison is not required. The same is true for major Special Revenue Funds. Meaning of “Legally Adopted” (Question 7.91.14) A budget is considered to be “legally adopted” only if the budget is required for the government to create the legal authority to spend resources. Retroactive Reporting Resulting From Implementing the Requirement to Retroactively Report General Infrastructure (Question 7.104.17) Retroactive reporting of infrastructure must be presented as a prior period adjustment. Restatement of beginning net assets and affected note disclosures is required. Treatment as a current-year addition to capital assets is prohibited. Inclusion of Enterprise Fund General Obligation Bonds in Schedule of Ratios of General Bonded Debt (Question 9.25.4) All general obligation bonds are to be included in the schedule of general bonded debt. • Most are reported with the governmental activities debt. • This question describes general obligation bonds that should be reported as business-type activities debt—i.e., general obligation bonds that were issued to finance enterprise fund assets, are being accounted for in enterprise funds, and are being repaid with enterprise fund revenues. Compensated Absences Liability and Expenditure Recognition— Government Funds (Question Z.16.2) Governments may not recognize governmental fund compensated absences liabilities and expenditures when those benefits vest as a result of years of service. Maturity (becoming due and payable) of the compensated absence liability determines the timing of expenditure and liability recognition in governmental funds. Applicability of Post-Nov. 30, 1989 Amendments of FASB Standards (Question Z.20.1) Except for enterprise fund and business-type activities, governments should apply FASB and predecessor organization pronouncements • That were in effect on Nov. 30, 1989 • Without giving effect to amendments after Nov. 30, 1989. Insurance Recoveries (Question Z.42.11) Reporting of insurance recoveries is not affected by whether the recovery is from the government’s insurer or another party’s insurer. For additional questions and analyses, visit www.aicpa.org/download/pubs/jofa/june2007/implementationQs.pdf.

A CAVEAT
While the guidance in GASB’s various implementation guides is sound, well documented, and not apt to be questioned, individual professionals have a responsibility to comply with higher-level authoritative guidance if they determine that a conflict exists between an implementation guide and more authoritative guidance in GASB statements of standards or interpretations (see sidebar “The GAAP Hierarchy”). Although such conflicts are rare, professionals must be aware of that possibility given the volume and variety of questions addressed and the difficulty of determining and clarifying the board’s intent after the fact. If preparers or auditors do not understand or agree with the guidance in an implementation guide, they should communicate their concerns to GASB staff. In the meantime, they normally should follow the guidance.

The annual revisions of the Comprehensive Implementation Guide provide an opportunity for GASB staff to refine, revise or even eliminate previous guidance when new standards or further experience and information indicate such revisions are appropriate. GASB staff indicates changes in previous guidance at the end of each individual question using a notation that provides the history of the development of the question and response as well as in the “Finding List of Original Questions and Answers” contained in the guide’s appendix. Further, Appendix A of the guide provides more detailed information about the additions to, deletions from, and amendments to questions in the most recent previous Comprehensive Implementation Guide. Appendix A of the 2006 Comprehensive Implementation Guide contains five pages of summaries of changes.

As the Comprehensive Implementation Guide is updated, preparers and auditors should be particularly attentive to any significant changes in previous implementation guide responses. Awareness of these changes is needed to apply the standards properly in the current period and to recognize accounting changes that result from applying the new guidance in the current year after applying the original guidance in prior years.

CONCLUSION
GASB implementation guides provide an extremely valuable service to preparers and auditors, cover an ever-growing range of issues, and address application of the standards to practical problems encountered in practice. The Comprehensive Implementation Guide is a particularly useful resource but requires users to be alert to year-to-year changes. GASB attempts to identify these changes clearly. New individual implementation guides are essential to planning the application of new statements. It is important to remember that while implementation guides are less authoritative than most other portions of professional literature, they address topics not covered elsewhere. Finally, they should be used in an especially thoughtful and informed manner.