The Governmental Accounting Standards Board has appointed a new task force to help GASB deal with going concern uncertainties and severe financial stress disclosures.
The project will consider improvements to GASB's existing guidance on going concern considerations to address diversity in practice and clarify the circumstances under which disclosure is appropriate, develope a definition of severe financial stress and criteria for identifying when governments should disclose their exposure to severe financial stress, and what information about a government's exposure to severe financial stress is necessary to disclose.
Members of the task force include users and preparers of financial statements as well as auditors:
Users
- Lisa Washburn, Managing Director, Municipal Market Analytics, Inc.
- Shripad Joshi, Senior Director & Accounting Officer, Corporate and Government Ratings, S&P Global
- Stephen Spencer, Managing Director, Houlihan Lokey
- Sharon Edmundson, Director, North Carolina Department of State Treasurer
- Amanda Beck, Assistant Professor of Accounting, Georgia State University
- Mary Murphy, Senior Director, The Pew Charitable Trusts
- Angus Maciver, Legislative Auditor, Montana Legislative Audit Division.
Preparers
- Kristine Brock, Assistant City Administrator/Chief Financial Officer, City of Franklin, Tennessee
- Linda Short, Deputy Director of Finance, City of Fort Lauderdale, Florida
- Chad Greenwell, Associate Controller, University of Michigan
- Mark Merry, Assistant Director, Florida Department of Financial Services
- Kathy Ketchum, Manager, Accounting and Assistant Controller, Sacramento Municipal Utility District
- Elizabeth Hill, Deputy Comptroller, Nassau County, New York.
Auditors
- Jodi Dobson, Partner, Baker Tilly US, LLP
- Tim Lyons, Partner, Mauldin & Jenkins, LLP
- Chris Pembrook, Partner, Crawford & Associates, P.C.
- Robert Hinkle, Deputy Auditor of State, State of Ohio.
GASB noted on its project page that the concept of going concern uncertainties wasn't specifically developed for state and local governments, but GASB research indicated that, although current guidance provides that financial statement preparers have a responsibility to evaluate a government's ability to continue as a going concern, such evaluations often pose challenges to preparers and auditors and has resulted in diversity in practice when applying that guidance. Even when state and local governments are in or have been experiencing severe financial stress, few dissolve or cease operations. Some state laws prohibit governments from filing for bankruptcy and some states do not allow dissolution of governments without a merger or consolidation arrangement with another government to avoid interruption of services provided for affected citizens. Even when a government seeks Chapter 9 bankruptcy protection, it generally continues to exist as the same legal entity.
Still, users need information well in advance of the point at which dissolution is a practical consideration, but existing GASB standards don't contain guidance for an earlier disclosure that would be more beneficial to users, such as a process by which a government evaluates its exposure to severe financial stress and, under certain circumstances, discloses information about that exposure.
"Governments facing severe financial stress is a significant concern of governments themselves, as evidenced by the many states that take a proactive approach to monitoring their local governments' financial health and addressing those experiencing severe financial stress," said GASB.
While the number of state and local governments with going concern uncertainties is small, there is evidence that the population of governments experiencing severe financial stress is noticeably larger than the population of governments with going concern uncertainties. Nearly half (47%) of respondents to a GASB survey of users have evaluated government financial statements that contained a going concern note disclosure. They generally found the disclosures to be valuable and indicated that the information in the note was used to assess a government's financial condition, operating results and ability to meet its ongoing commitments; make municipal bonds investment decisions and credit rating assessments; and develop legislative or oversight responses. Respondents also noted that the information disclosed helped them understand the reasons for the going concern uncertainty and the likelihood that management's plans to remediate the concerns were realistic.
The survey asked users what information should be disclosed in the notes if a government is in severe financial stress. All four types of information listed in the answer received substantial support (multiple choices were allowed):
- Management's plan to remediate the severe financial stress (89%);
- Explanation of how the severe financial stress was identified (81%);
- Environmental factors leading to the severe financial stress determination (75%); and
- Specific financial ratios that indicate severe financial stress (72%).
