The Governmental Accounting Standards Board is getting ready to roll out new rules and proposals for state and local governments, including improvements to the financial reporting model, classification of capital assets, and measurement of infrastructure assets.
GASB chair Joel Black visited the Accounting Today offices and discussed some of those upcoming changes. GASB recently approved Statement 103, Financial Reporting Model Improvements, providing targeted improvements to the blueprint for government financial reports, and plans to release it next week.
"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," said Black. "It created government-wide statements, MD&A and major funds, and put infrastructure on the Statement of Net Position for the first time. In researching that, we found that by and large it was working really well, but we had areas for targeted improvement."
The biggest one involved 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."
After working for years on the
"We really had two options," said Black. "One was this conceptually consistent way to account for governmental funds that was very close to cash basis. Nobody really liked that as a solution because the information that comes out of that isn't as good as the information that comes out of the current reporting model. And so we were left with the second option. That started out as a conceptually consistent way to account for governmental funds, but as we tried to get the information that comes out of it to be more what we wanted it to be, which was pretty similar to what the current model produces, we kept having to add a number of exceptions and complexities. When the board stepped back and said, 'Are we just changing one set of rules for another set of rules? Did we meet our objective?' the board decided we didn't, so we took it out."
The major changes in governmental fund accounting that GASB talked about were ultimately taken out of the project. Instead of a far-reaching overhaul, GASB decided to make targeted but significant improvements. One of the most prominent is in the management discussion and analysis section.
"We didn't really change what's required to be in there, but better described what's required to be in there — what we always hoped would be in there — to get better results from the preparation of MD&A, in particular, to get more analysis in the management discussion and analysis," said Black. "We specifically say it's not just what changed and how much did it change, but rather why did it change? We've added more language there. There's a section of MD&A about currently known facts and decisions that might affect the government's financial condition that we weren't getting much out of, so there's much more description of that section."
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 wanted to avoid upending the rules for governmental fund accounting completely, especially as it nears its 40th anniversary in mid-June. "We are excited to commemorate the work that's gone into 40 years of standard-setting from past board members and team members and all the stakeholders contributing to a full set of GAAP that we think works really well," said Black. "It took 40 years to create, but we're also taking the time to look at and think about how it's setting us up for the future, and making sure that we are prepared for the next 40 years of setting standards and dealing with maintaining GAAP and advancing it for what the future might look like."
Financial Data Transparency Act
GASB is looking ahead and anticipating possible changes required by the Financial Data Transparency Act, which was signed into law at the end of 2022 as part of a larger national defense authorization package. The FDTA will require state and local governments to file some level of electronic financial reports and is in the rule-making process at the SEC. GASB's role hasn't yet been determined, but the GASB staff is in the process of developing a government financial reporting taxonomy that could be used by state and local governments on a voluntary basis and, potentially, by the SEC in determining how the FDTA should be implemented. GASB is working on developing a taxonomy, similar to the one that its sister standard-setter, the Financial Accounting Standards Board, has for organizing the standards around GAAP financial reporting and tagging the data.
"This is part of setting ourselves up for the next 40-plus years of GAAP, being sure we're paying attention to how technology is changing financial statement preparation, auditing and the consumption of that financial information by users of financial statements," said Black. "Right now, what we're mainly working on is a financial statement taxonomy. That would be about that consumption piece. What we're creating right now would be, for lack of a better term, something like a data standard. It won't be a GASB statement but some kind of data standard that, from our perspective, would be voluntary. It would be a standard that talks about this future of financial reporting, that not only are the numbers on a page, but they're structured in a way that when a machine reads it, it not only sees the number but it understands what the number is, understands what year it relates to, how it was prepared, what it means, what it is."
The taxonomy will include rules to underlie any piece of information in a state or local government's financial statements to allow more consistent aggregation or disaggregation of items of information. GASB plans to develop the taxonomy in-house and offer it for technology providers to use. Like
"We will be developing a taxonomy that an XBRL language tool could use, but it could also be other types of tech tools like a scraping tool that might use some kind of programmed or artificial intelligence to use the rule and apply it the same way without necessarily having to be an expert language kind of tool," said Black. "Our idea is to be more technology solution agnostic in development in this rule."
GASB hired a taxonomy specialist earlier this year, but Black views the effort as a long-term project. Black noted that it took FASB over a decade to roll out a taxonomy of its standards. The FASB taxonomy was originally
Classification of capital assets
Another major project is nearing completion, when GASB plans to issue final guidance on the disclosure and classification of certain capital assets to ensure they're classified in the way that provides the most relevant information, including disclosed capital assets held for sale. The board hasn't voted yet, but the schedule calls for GASB to vote in July on it becoming a new standard. If approved, it would be called Statement 104.
"This one is providing more granular detail in the note disclosure related to capital assets for things like capital assets held for sale for some of these new types of right-to-use assets that were created by recent standards like the lease standard, [GASB Statement No.] 87, and the public-private partnership standard, 94, and the subscription-based IT arrangements, 96," said Black. "All of those created potentially right-to-use assets that are treated like capital assets in our literature. But users think about those kinds of right-to-use assets, and assets held for sale, maybe differently than more traditional owned tangible capital assets. While the base of the financials won't change as a result of this, the note disclosure will provide more detail to break out those types of capital assets from the more traditional ones."
That could help watchdog groups and investors understand better what the assets of the government constitute, whether they're owned or just leased for some period of time, similar to the way FASB's leases standard helps investors make better sense of corporate balance sheets.
"These are those assets that are right-to-use assets created under that standard would be broken out separately in the note disclosure, whereas now they're just kind of built into capital assets, unless the government chose to break them out in the note disclosure, which they could have done," said Black. "But if they didn't, this would require them to."
Infrastructure assets
GASB is also scheduled to issue a proposal in October on infrastructure assets such as highways and sewer systems that will look at how they should be recognized and measured in financial statements as well as other issues. In some ways, the new statement could be used to track spending under the bipartisan Infrastructure and Investment Jobs Act that Congress passed in 2021.
"It is about accounting for those types of investments that a government would make, and hopefully giving better information about their current infrastructure so that they can make good decisions about where infrastructure investment is needed," said Black. "What we heard from users of government financial reports — in particular those in the investment community, but it could extend to others too — is two main things. More traditional capital assets are largely working OK, but for these long-lived assets — roads, bridges, sewer systems — the value shown on the financial statements didn't always necessarily reflect the condition of those types of assets. And then they wanted more information about what they would call a deferred maintenance liability."
The tentative board decisions so far say that for the value on the financial statements, GASB would allow state and local governments to maintain what the current requirements are, giving them the ability to record those infrastructure assets at cost and depreciate them over their expected useful life of providing service to the citizens. They also could continue to use a modified approach where they could avoid depreciation if they do condition assessments every few years and assess the condition of their infrastructure assets against a predetermined condition level, and report information about that in the financial statements so the assets would not have to be depreciated because they're being maintained at a certain level. But given the ongoing level of deterioration in much of the nation's infrastructure, GASB may also propose a way to account for that.
"We're going to keep those two ways of accounting for infrastructure," said Black. "But we are looking to propose that the depreciation aspect for governments, which for most governments is using historical cost and depreciation, improving depreciation to require a periodic review of the estimated useful life, because our research showed that some governments set that initial estimated useful life for roads or whatever, and just forget it. They just apply it blindly to all roads. They're not continuously updating that estimated useful life to make sure that as you're depreciating that infrastructure asset, the value is more conditioned to how long you think you're going to use it and actually spread the cost of that out over the appropriate period. So we're proposing to do that."
GASB is also proposing to componentize the requirement to capitalize infrastructure. "If a significant part of an infrastructure asset has a significantly different estimated useful life than the rest of it, capitalize those and depreciate them separately," said Black.
For example, road surfaces that get replaced approximately every five years would be capitalized differently than the base of the roads, which could last for decades.
Other changes could be coming in accounting for deferred maintenance liability.
"The board has said deferred maintenance as a 'liability' does not meet our conceptual definition of what a 'liability' is, so we're not going to require that," said Black. "Even more broadly, that term is pretty subjective in order to assess what maintenance you have been deferring against what condition and have that be consistently applied. So instead of requiring anything for deferred maintenance, what we're going to propose, and tentatively decided to propose, is to provide more information about what the government is spending currently on maintaining its infrastructure assets. Because that number currently is just buried in expenses, no user can really get out how much the government is spending to maintain its infrastructure. We would propose that the note disclosure and/or required supplementary information would break that number out for the year, compare it maybe against what was budgeted by the government that it expected to spend to maintain that infrastructure that year, and maybe a 10-year historical trend of those numbers. That would give a user some information about what the government is actually spending based on where it is and how much infrastructure it has. Does that seem like a lot? Does that seem like not very much? Can they ask more questions? We're trying to give them some information, but information that's maybe a little more appropriate for historical financial statements, and a little more consistently applied."
That could give citizens better insights into the cost of repairing the crumbling infrastructure seen across the country.
"As governments invested a lot over the years in these roads and bridges, especially in sections of the country that are older, some of that infrastructure is really old," said Black. "What is its value on the financial statements? How's that reflected? How is the user supposed to know this bridge, this sewer system, the pipes that are under the ground that nobody can see are old and falling apart? Or new and in good shape? How much have they been maintained? I think that certainly is where the users are coming from and trying to say, we need more information."
That could help with accounting for the impact of climate change and how it's affecting and damaging bridges and other pieces of infrastructure.
"What we found was that we have an impaired capital asset standard that works pretty well and applies to infrastructure, so it would probably already address things like that pretty well," said Black. "But to the extent it's impairing a better number already, then it's getting better by default, too. As climate change happens, and that affects useful lives, and you're continuously evaluating that instead of just using the same policy you used 10 years ago, to spread the cost of your roads or bridges over, then I think it should reflect changing conditions and environment to the extent that's changing the useful lives of these assets."
Going concern, severe financial distress and subsequent events
A "preliminary views" document for the infrastructure project is expected to come out in October. Two other proposals are scheduled to be issued for comment near the end of the year: going concern and severe financial stress disclosures (in December) and subsequent events (also in December).
"Both of these, the infrastructure project and the going concern and severe financial distress projects, are relatively recent additions to our agenda," said Black. "They're both in similar phases, in that they're both coming out for due process later this year with a preliminary views document, which means we still would have another round of due process after that. This is initially what the board's thinking about these two projects. Let's get some feedback on that, and then we'll go back and develop an actual draft standard and get feedback on that."
For the going concern project, GASB's research has shown the existing standard for governments wasn't being consistently applied because it was written more for the private sector. "Governments in some states legally can't go bankrupt or go out of business," said Black. "They can't cease to exist."
However, state and local governments can come under considerable financial stress and should issue disclosures when that's the case.
"We're trying to write a standard that works for governments," said Black. "In doing that and acknowledging that governments can sometimes go bankrupt or cease to exist, we created two concepts. One is going concern uncertainty, which is really similar to what you might think of as not continuing to exist as the same legal entity for 12 months after the financial statements. But a separate thing might be related, called severe financial stress. For both of these two concepts within this proposal, we will attempt to broadly define what going concern uncertainty is and what severe financial stress is. It will be a judgment call by the government preparer to evaluate their facts and circumstances, use this definition and determine whether they have a going concern uncertainty or whether they're in severe financial stress. We will give them some relevant factors to think about these types of things, but it won't be a checklist that if you meet three of these, you're in this. If they determine they are having going certain uncertainty or are in severe financial stress, there will be some disclosure requirements in the notes for them to alert a reader about either of those conditions."
That going concern uncertainty might apply, for example, if a town is losing so much population that its leaders have decided to have a neighboring city or town merge with or absorb it.
"If it's probable that it will happen within 12 months of the financial statement issuance, then that is the kind of thing that would be a going concern uncertainty," said Black. "Even if it's absorbed not necessarily because it was in financial stress, but just because taxpayers decided that this was a more efficient way to deal with providing government services, that would still be going concern uncertainty."
The subsequent events project is smaller than the going concern project, so GASB has decided to go straight to an exposure draft in December. Like the going concern project, GASB did some research and found that the literature also was not being consistently applied.
"In fact, we found some academic research that looked at items where we knew a subsequent event should have been disclosed, and the error rate of when it wasn't was close to 30% of the time it wasn't disclosed when it should have been disclosed," said Black. "This project tries to create more consistent application so we don't have error rates like that, and then subsequent events are actually disclosed when they're required, not necessarily to change what is a subsequent event, but better describe it, so that we can get better results from the standard."
Examples of the kinds of subsequent events that might be reported include subsequent debt issuance, subsequent government combinations and natural disasters.
Implementation guide
GASB also has a proposed implementation guide in the works that's scheduled to be released for public comment toward the end of this year and is likely to be finalized in 2025. The guide will include Q&As on a number of standard-setting topics.
"We periodically update our comprehensive Q&A set of implementation guidance," said Black. "We were doing that annually, but recently it's been more like every other year. When we have enough questions and we think it's important enough to put one out, we will put one out."
The guide will answer questions received about recent standards that are required to be implemented this year and next year, such as
Pension post-implementation review
GASB has not been receiving so many questions lately on its
"For the bigger standards, we evaluate that standard, say, five years or so after it's been effective to see if it is achieving what we wanted it to achieve," said Black. "Are the benefits being seen the way we expected them to? Were the costs in line with what we expected them to be? What are the costs/benefits? The pension PIR report is about to come out at the end of May. A chart in that report shows the technical inquiries, and you see it spike the year of implementation and maybe the next year it has come down and settled at a much lower level."
Technology advances
GASB is continuing to leverage technology to improve its communication with stakeholders, including the newly improved and now free
"We're seeing good traffic on the website," said Black. "What we hear more anecdotally is people are finding what they need easier. It's easier to navigate. They can find what they came to find better. We continue to get a lot of really good feedback on the GARS, the Government Accounting Research System, that was really significantly modified and improved in 2023."
GARS includes all of GASB's authoritative literature, organized into codifications of the original pronouncements, along with implementation guidance and Q&As. "GARS allows you to easily search within all of that guidance and find places in the guidance that can help you, whether it be a Q&A or the actual guidance related to a topic area that you're trying to find," said Black. "It is our actual literature. It's free to use, free to access. It's really easy to navigate. We always had GARS, but it was old. It was hard to navigate the search function. You had to pay to subscribe to use it, and even then it didn't work all that well. Now it's free for everybody. It's much more intuitive to navigate and search. The website is similar in that it gets much more intuitive to navigate and find what you're looking for there as well."
GASB has also been continuing its
"I think that that's a good way to meet people where they are a little bit differently," said Black, "We're just continuing to try those new avenues to reach our stakeholders."
