GASB’s New Essentiality Criterion

GASB’s New Essentiality Criterion

by Khaled Abdel Ghany, CPA, PhD | Dec 21, 2021

pa-cpa-journal-gasb-s-new-essentiality-criterionThis past June, the Governmental Accounting Standards Board (GASB) issued the revised exposure draft, Communication Methods in General Purpose External Financial Reports that Contain Basic Financial Statements: Notes to Financial Statements, to set forth concepts on the notes to financial statements. For information to be included in the notes of financial statements, the revised exposure draft proposes that it has to pass three tests of essentiality. A single test was proposed in the original exposure draft. The proposed essentiality criterion represents a significantly higher threshold for information to make it into the financial statement notes of states and local governments.

This column looks at the essentiality criterion and its development, from GASB Concept Statement No. 3, to the original exposure draft, and now the revised exposure draft.


GASB Concept Statement No. 3 explains essentiality and states that the notes to financial statements must have a clear and demonstrable relationship to information in the financial statements to which they pertain and are essential to a user’s understanding of those financial statements. Conceptually, this means that it is so important as to be indispensable to a user with a reasonable understanding of government and public finance activities and of the fundamentals of governmental financial reporting and with a willingness to study the information with reasonable diligence. Professional judgment may be necessary when deciding whether an item of information is essential to a user’s understanding.

Additionally, the notes may include management’s objective explanation of recognized amounts and related known facts, contingencies, certain risks that affect financial statements, subsequent events, measurement methods, accounting policies, and other information essential to understanding the financial statements and to assessing compliance with finance-related legal or contractual requirements.

On the other hand, Financial Accounting Standards Board (FASB) Concept Statement No. 8 focuses on the relevance and incremental explanatory element of notes to the financial statements. The FASB states that the primary purpose of notes is to supplement or further explain information by providing financial information relevant to existing and potential investors, lenders, and other creditors. Consequently, notes provide types of relevant information not provided on the face of the financial statements. The resulting disclosures can be categorized as information about financial statement line items, the reporting entity, and past events or current conditions and circumstances that have not been recognized that can affect an entity’s cash flows.

The FASB also stated that notes provide general information about the nature of an entity, its activities, any special restrictions or privileges, and its advantages and disadvantages relative to other entities.

The essentiality concept presented in GASB Concept Statement No. 3 is, to a great extent, connected to and supported by the FASB requirements for information to be included in the notes to financial statements. According to the FASB, to include information in the notes, it must be relevant and provide explanation of the line items in the financial statements. This explanation seems to make the information essential, as described by the GASB, for users to gain an understanding of the financial statements.

Essentiality Exposure Drafts

GASB’s original exposure draft on essentiality (February 2020) proposed one test for disclosing items in the notes, including concepts related to information that is essential. The term essential was proposed to convey the degree of importance that information contained in financial statement notes should possess. Essential information, it was proposed, would be distinguished by evidence that the information is being used in analyses for making decisions or assessing accountability or would modify analyses or assessments if available.

GASB’s revised exposure draft (June 2021) states that notes to financial statements are essential to users in making economic, social, or political decisions or assessing accountability. “Essential,” as used in this concept statement, conveys the degree of importance information contained in the notes should possess. Information that is essential to users in making those decisions or assessments have the following characteristics:

  • The information is used in analyses for making decisions or assessing accountability, or would modify those analyses if it were available.
  • The information has, or would have, a meaningful effect on users’ analyses for making decisions or assessing accountability.
  • A breadth or depth of users would incorporate the information in their analyses for making decisions or assessing accountability.

The revised exposure draft additionally stated that notes to financial statements may be narrative or quantitative with appropriate explanations, and may include measures other than dollars. The types of information in the notes to financial statements include the following:

  • Descriptions of the accounting and finance-related policies underlying amounts recognized
  • More detail about, or explanations of, amounts recognized
  • Information related to financial position or inflows and outflows of resources that does not meet the criteria for recognition
  • Other finance-related information associated with the accountability of the government


The first essentiality criterion, presented by GASB Concept Statement No. 3, seemingly is sufficient, meaningful, and easy to understand, apply, and follow. Information should be presented in the notes to the financial statements if it is essential for users to understand the line items presented. This essentiality concept is, to a great extent, connected to FASB’s information requirements for the notes: present in the notes if it is relevant to the financial statements and provides incremental explanation and interpretation.

The original GASB exposure draft requires testing the information for being essential if users will use it in decision-making processes. This essentiality test does not seem to provide more than an incremental difference compared with the essentiality concept presented in GASB Concept Statement No. 3. Information in the notes provides explanation and understanding of the financial statements; therefore, users will incorporate these notes into the decision-making process.

GASB’s revised exposure draft increases the threshold for information to be presented in the notes by requiring three separate tests. These tests, however, are not easy to quantify for valid and reliable conclusions. There is a lot of subjectivity in applying these tests, making GASB board members’ task of coming up with reliable and agreed-upon information to be presented in the notes nearly impossible. In addition, the three tests are similar to the one test proposed by the original exposure draft: information is deemed essential if users will incorporate it into the decision-making process.

Governments and government accountants do not need new definitions or conceptual frameworks for the essentiality criterion. They had been expecting the GASB to address issues related to the length and complexity of the note disclosures presented in governments’ annual financial reports, not its issuing of two exposure drafts that attempt to redefine the concept of essentiality. The long pages and complexity of the financial statement notes have negative effects on the usefulness and the informational value of these notes. Notes to financial statements have become too long and too complicated for the average user to understand and incorporate into the decision-making process. Government accountants are expecting GASB to look into these issues and reduce some of the financial statement notes that are unnecessary and not useful. These exposure drafts do not do that. In short, they’re not essential.

Khaled Abdel Ghany, CPA, PhD, is an executive accounting adviser at DC Government. He can be reached at

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