GASB proposes standard for gov't risk disclosures

The Governmental Accounting Standards Board released a proposal Thursday to require state and local governments to disclose information about certain risks they face that could affect the level of services they’re able to offer or their ability to meet obligations as they come due.

While governments are required to disclose information about their exposure to some risks, important information about some other risks that occur at the state and local level isn’t routinely disclosed because it’s not explicitly required. The proposed standard would give financial statement users an early warning that state and local governments are susceptible to the financial effects of those risks.

The exposure draft, Certain Risk Disclosures, would require governments to disclose essential information about risks related to a government’s current vulnerabilities due to certain concentrations, and certain constraints common in the governmental environment.

Courtesy of GASB

The proposed statement defines a concentration as a lack of sufficient diversity related to an aspect of a significant revenue source or expense, such as a small number of companies that represent a majority of employment in a government’s jurisdiction, or a government that relies on one revenue source for most of its revenue. It defines a constraint as a limitation imposed on a government by an external party or by formal action of the government’s highest level of decision-making authority — such as a voter-approved property tax cap or a state-imposed debt limit. Concentrations and constraints can limit a state or local government’s ability to acquire resources or control spending.

The proposal would require state and local governments to disclose information about a concentration or constraint if all of the following criteria are met:

• It is known prior to issuing the financial statements;
• An associated event either has occurred or is more likely than not to occur or begin to occur within 12 months of the financial statement date or shortly thereafter; and,
• It is at least reasonably possible that within three years of the financial statement date the event will cause a substantial effect on the government’s ability to either continue to provide services at the level provided in the current reporting period, or to meet its obligations as they come due.

If a government finds that those criteria have been met, it would need to disclose information within the notes to its financial statements in enough detail to enable statement users to understand the general nature of the circumstances disclosed and their potential effect on the government’s ability to provide services or meet its obligations.
GASB is asking its stakeholders to review the proposal and offer their feedback by Sept. 30, 2022, either in writing or through an electronic input form. More information about commenting can be found in the exposure draft document.