The pace of issuance and implementation of new Governmental Accounting Standards Board statements continues to accelerate. Not only will financial reporting by state and local governments be impacted by the new GASB statements, but some new potential financial reporting requirements are also being issued by the federal government. There are three significant financial reporting matters that state and local governments will be addressing in the near future:
Subscription-based information technology agreements
Now that lease accounting implementation is over, we get to nearly repeat the process. GASB Statement No. 96, Subscription-Based Information Technology Arrangements, is very similar to GASB Statement 87 on leases. Generally, you will be recording a liability for your right to use the technology with a corresponding right to use the asset.
The framework for recording these costs closely follows your asset acquisition cycle:
- As you are evaluating which technology to implement, you must expense the costs you incur up until the technology is selected.
- Once you make a choice and begin implementing the software, you record the asset and liability.
- Once you achieve a stable operations environment, you again expense costs unless they extend the useful life of the technology or improve its utility.
Some common examples of such subscription arrangements may include:
- ERP accounting systems;
- Public safely scheduling software;
- Procure to pay management software;
- Point of sale software; and
- Various pieces of education software.
This standard will need to be implemented during 2023. Don't wait until the last minute. Go through your technology payments to identify those that might indicate such a description. Gather those contracts and evaluate whether they can be capitalized. Next, accumulate your agreements and analysis and share them with your auditor so there are no surprises at year-end.
National Defense Authorization Act
The recently passed National Defense Authorization Act will have a far-reaching impact on your government's external financial reporting. Included in the NDAA is the Financial Data Transparency Act.
The FDTA includes a section requiring local governments to adhere to new financial data standards that are to be issued by the Securities and Exchange Commission. The SEC must develop common identifiers for the information reported. The preparers then must take this new data taxonomy and, to the greatest extent possible, make the data fully searchable and machine readable. This will likely render your current chart of accounts obsolete and require you to update your financial reporting systems to ensure that they are capable of generating FDTA compliant data.
The SEC will need to publish rules for public comment, which will allow the preparer community to voice concerns over the implementation cost. While implementation is not required until the four-year marker, you should begin to prepare now for eventual implementation.
A few key implementation points:
- Consider cleaning up your chart of accounts. Simplify your chart of accounts as much as possible to facilitate this transaction.
- Update the mapping of general ledger accounts to your financial statement line items.
- Consider simplifying your fund structure reported externally. Just because you have separate internal accounting does not mean you have to report them all externally. Again, simpler may be better and more efficient.
Risks and uncertainties
Governments are exposed to a wide variety of risks, including but not limited to financial, operational and reputational. Some of these risks are currently disclosed in the financial statement notes, some are discussed in the annual budget and/or capital budget, and others are disclosed in a bond offering document. A recently issued exposure draft will potentially expand note disclosures to describe these risks and uncertainties.
Governments will need to disclose additional information about vulnerabilities due to certain concentrations or constraints common in the governmental environment. These concentrations and constraints may make it difficult for the entity to acquire resources or control its spending.
A concentration risk is created by a lack of sufficient diversity related to a significant revenue or expense. Examples include principal employers of industries, labor issues associated with collective bargaining, and supply chain issues affecting infrastructure spending.
Constraints limit the government's ability to control its own revenues or expenses. Examples here include tax rate caps, statutory spending limits, statutory debt limits and mandated spending (such as EPA-required cleanup costs).
Such risks must be disclosed if they are likely to occur within the next 12 months, or may reasonably occur within 36 months.
While the NDAA and risk and uncertainties project have not yet been adopted, you should watch their evolution closely and plan well in advance of their ultimate implementation dates because of their far-reaching implications for your financial management processes.
