The Governmental Accounting Standards Board released an updated standard Tuesday to improve some of the main components of the financial reporting model for state and local governments.
“It’s been in the works for probably close to 10 years and was our reexamination of Statement 34, which was the largest change in government financial reporting that probably ever has been,” GASB chair Joel Black told Accounting Today during a
GASB Statement 103 provides targeted improvements to the financial reporting model designed to enhance the effectiveness of governmental financial reports in providing information essential for decision making and assessing a government’s accountability, and address certain application issues.
GASB decided not to make sweeping changes in the older standard. Instead, the targeted improvements in Statement 103 establish or modify existing accounting and financial reporting requirements related to management’s discussion and analysis; unusual or infrequent items (previously known as extraordinary and special items); presentation of the proprietary fund statement of revenues, expenses, and changes in fund net position; major component unit information, and budgetary comparison information.
One of the biggest changes involves looking at the measurement focus and basis of accounting for governmental funds, such as general funds and special revenue funds, where the rules can be vague. “They don’t always necessarily make sense together, but you have to know how to report them under GAAP in the governmental funds,” said Black. “We were hoping, as part of this project, to create a consistent, underlying way to account for the transactions that run through governmental funds, to make it easier for people to understand how to account for things within the governmental funds, as opposed to just having to know this long set of rules.”The new standard may help make government financial statements more accessible to regular citizens. They may be able to spot examples of overspending on expensive, wasteful projects.
“It will improve consistency and improve, in particular, the MD&A section of the report that we specifically within this project acknowledge is written more for the less sophisticated reader,” said Black. “That’s how we direct management to prepare the MD&A, so that it’s hopefully a little less technical. If you have more analysis and description of why, then taxpayers should be able to see major activities and financial condition statements and analysis of the government in an improved MD&A.”
The other big change pertains to proprietary business types of funds on the income statement — their statement of revenues, expenses, changes in net position — where GASB better defined what should be classified as operating and nonoperating revenues and expenses.
“That statement added a new category of nonoperating revenues and expenses called subsidies within that statement, and a new subtotal that would take operating income or loss plus noncapital subsidies to get another indicator of how that fund is operating,” said Black. “We think there will be more consistency from government to government about what’s in operating versus what’s in nonoperating with the change. A couple of other tweaks are in Statement 103, but those are the two big ones.”
GASB periodically reexamines its older standards to find out whether the standards are accomplishing their intended purpose and if the informational benefits to financial statement users justify the cost to governments in complying with the standards. GASB research found that Statement 34 continues to be highly effective but did identify certain opportunities for improvement.
The requirements in Statement 103 improve financial reporting in several ways. While the overall requirements don’t substantially change management’s discussion and analysis, the modifications are meant to improve the analysis included in this section and provide details about the items that should be discussed as currently known facts, decisions, or conditions expected to have a significant financial effect in the subsequent period.
With respect to unusual or infrequent items, the new Statement simplifies GASB literature by eliminating the separate presentation of extraordinary and special items. Under the requirement of Statement 103, applicable items will either be identified as unusual or infrequent, or both.
The changes to the presentation of the proprietary fund statement of revenues, expenses and changes in fund net position aim to improve consistency around the classification of items in those statements by better defining what should be included in operating revenues and expenses and nonoperating revenues and expenses including, for example, the addition of subsidies received or provided as a new category of nonoperating revenues and expenses.
Statement 103 is designed to improve the consistency of the reporting of major component unit information and budgetary comparison information by specifying required placement of that information. GASB Concepts Statements, issued after Statement 103, provide guidance that was used to determine where to report this information in a government financial report. GASB research found that optionality of placement could lead to inconsistency in practice in the reporting of that information.
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