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Online Issues > January 2000 > Government Reporting Faces an Overhaul
Government Reporting BY EDWARD M. KLASNY AND JAMES M. WILLIAMS
THE MODEL OVERVIEW The new model calls for financial statements integrated with governmentwide reporting and enhanced fund reporting. It also requires management’s discussion and analysis (MD&A) and seeks to clarify a number of previously troublesome GAAP issues. MD&A Statement no. 34 calls for a government entity’s financial management to present MD&A as required supplementary information (RSI) before the basic financial statements. In response to users’ need for a summary of a government’s operations and financial position, GASB broadened the number of subjects that MD&A must address to include
GOVERNMENTWIDE REPORTING The model’s most dramatic change is to the handling of governmentwide reporting, bringing together government activities, business-type activities and discretely presented component units. Each is to be reported with a flow-of-economic-resources measurement focus and the accrual basis of accounting. This is a major step because until now government followed only the modified-accrual basis. The change is important to potential lenders and taxpayers because of the need to capitalize and depreciate general capital assets. (The capital-asset reporting requirement, discussed later, involves general infrastructure assets.) The statement of activities is to be presented in a “net cost” reporting format. The approach is based on a format developed by the AICPA state and local government accounting committee and published by the AICPA in 1981 as Accounting and Financial Reporting by State and Local Governments—An Experiment. INFRASTRUCTURE ASSETS Reporting on infrastructure assets (long-lived capital assets such as roads and bridges) has been a contentious issue for many government preparers. Some say the value of the information doesn’t justify the cost, complexity and effort involved to collect it. GASB, however, concluded after extensive due process that infrastructure reporting is vital to demonstrating accountability for all government assets and the cost of its services. The board is delaying implementing infrastructure-asset reporting and for now is even allowing estimated costs for infrastructure assets acquired before the effective dates of the model, but Statement no. 34 requires prospective reporting of major general infrastructure assets acquired after the model is implemented. However, as you’ll see in the implementation section, there are exceptions for smaller governments. The model provides practical guidance on establishing estimated costs and reporting general infrastructure assets. If historical cost information isn’t available, governments are expected to report estimated historical cost for major general infrastructure assets acquired in fiscal years ending after June 30, 1980. GASB provides ways to estimate historical cost and to calculate accumulated depreciation and depreciation at transition. GASB won’t require governments electing the “modified approach” to report depreciation on eligible infrastructure assets if they meet two requirements:
The governments must perform condition assessments every three years, and the results of the three most recent ones must show the assets are being preserved at about the established condition level. The model requires the RSI to include the results of these assessments; in addition, it requires annual information about the estimated amount needed to maintain the established condition level and the amounts actually expensed for the past five years. The “modified approach” will likely appeal to governments that use such an approach to manage certain general infrastructure asset networks, such as managing a state highway department highway system. GASB also is exploring a project to determine whether a preservation-maintenance approach can be based on condition standards. FUND REPORTING The elements of fund reporting have not changed much. Separate statements are required for each fund category (governmental, proprietary and fiduciary). However, major funds, as defined in the standard, are reported in separate columns, with nonmajor funds of that category reported in another column, labeled “other.” Reporting fund types (such as special revenue and capital projects) is no longer required for governmental funds in the basic financial statements. For fund reporting, fund categories will continue to apply their current-measurement focus and basis of accounting (that is, the flow-of-current-financial-resources measurement focus and the modified-accrual basis of accounting for governmental funds). The model establishes two new fund types—permanent funds (governmental) and private-purpose trust funds (fiduciary). Governments must present a summary reconciliation to the governmentwide financial statements at the bottom of fund financial statements or in a separate schedule, which will be extensive for government funds because of the difference in the measurement focus and basis of accounting. ENTERPRISE, FIDUCIARY AND INTERNAL SERVICE FUND CHANGES Because past practices were
inconsistent, GASB has made the conditions under which a
government uses enterprise and fiduciary funds more
restrictive. For example, the model now says enterprise
funds may be used when a fee is charged to
external users for goods or services. In addition, an
enterprise fund is required if an activity is
financed with debt secured solely by a pledge of its net
revenues from fees, has laws or regulations requiring
that costs of providing services be recovered with fees
or has pricing policies that establish fees designed to
recover its costs. Also, “net assets” replaces
contributed capital and retained earning for enterprise
fund equity because of the change to the net assets
format. Governments report all internal service funds in total in a separate column in the proprietary fund financial statements. For governmentwide reporting, however, governments eliminate most internal service fund amounts to avoid “grossing-up” the financial statements; amounts that aren’t eliminated are generally reported as government activities. BUDGETARY REPORTING Budgetary comparison schedules showing the original budget, the final budget and actual amounts on the budgetary basis are required as RSI for the general fund and for each major special revenue fund that has a legally adopted annual budget. However, governments may elect to report these budgetary comparisons as a basic financial statement. IMPLEMENTATION GASB recognizes that implementing the model will be a challenge, so it has established phased implementation based on a government’s total annual revenues for the first fiscal year ending after June 15, 1999. For those with revenues of more than $100 million (called phase one governments), implementation begins after June 15, 2001; for $10 million to $100 million (phase two) governments, implementation begins after June 15, 2002; and for governments with less than $10 million of revenue (phase three), it begins after June 15, 2003. The retroactive reporting of major general infrastructure assets provision requires phase one and phase two governments to report such assets four years after the respective implementation dates. Phase three governments are encouraged, but not required, to report them retroactively. GASB made a significant effort to make implementation as easy as possible. The discussion in Appendix B, “Basis for Conclusion,” provides more detailed information of what is required and why. Appendix C, “Illustrations,” contains an example of MD&A and extensive financial statement displays. To further aid implementation, GASB is issuing two types of guides. Plain language guides, to be issued soon, will help users understand and analyze the new financial statements. A question-and-answer guide scheduled for this quarter will assist preparers in implementing the new basic financial statements. GASB recently approved other Statement no. 34 projects that will:
Preparers and auditors need to understand Statement no. 34’s requirements as soon as possible. Preparers should develop a plan for implementation that includes an early start for developing the accrual information they will need to report government activities in the governmentwide financial statements. The new model also raises significant audit issues, including infrastructure assets and materiality determinations, which the AICPA will address this year. Governments will need capital-asset records that support the opening balances at transition of capital assets and accumulated depreciation and enable the calculation of depreciation for governmentwide reporting of general government capital assets. Although retroactive reporting of general government infrastructure assets isn’t required until four years after the model’s implementation, governments need to understand that any debt related to such infrastructure will be included in the governmentwide statement of net assets upon implementation. Governments that do not report the depreciated value of infrastructure assets will report fewer net assets than a government that does, with some governments conceivably reporting more liabilities than assets. LOOKING TO THE FUTURE The new millennium will be an era of greater accountability, as governments strive to meet the continuing demands for services in a society of increasing technological complexity. And the new model will be the linchpin for meeting fresh challenges and more-relevant reporting requirements. |
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tate and local governments must
change their financial reporting. The focus is shifting
from straightforward stewardship reports that include
only accountability information to a more corporate-style
analysis of the long-term impact of financial management
decisions. The expected result: Reports will be based on
more-consistent information about an entity’s
financial condition and will have greater relevance. This
change is mandated by GASB Statement no. 34, Basic
Financial Statements—and Management’s
Discussion and Analysis—for State and Local
Governments, issued last June (for statement text
see JofA, Oct.99, page 112). GASB arrived at the
new model based on research that included the views of
national preparers and user groups, gathered at many
public hearings and focus groups. We review the
model’s key elements, the implementation guidance
and GASB expectations of how the change will affect state
and local governments and the financial community.