The Governmental Accounting Standards Board’s (GASB) Financial Reporting Model Improvements exposure draft, issued in June 2020, proposed new requirements for key components of the Comprehensive Annual Financial Report (CAFR). The new model eliminates the modified accrual basis of accounting used by government funds and replaces it with what is called the short-term financial resources measurement focus and accrual basis. GASB also proposed changing the title of government funds financial statements to “Short-Term Financial Resources Balance Sheet” and “Short-Term Financial Resource Flows,” eliminating duplication and repetition in the current management discussion and analysis (MD&A) by limiting the presentation to five sections, and renaming the revenues and the expenditures in the government funds to inflows of resources and outflows of resources, respectively. The proposed financial reporting model additionally requires budgetary comparison information to be presented as required supplementary information (RSI) only, eliminating the option to report this information as part of the basic financial statements.
This column discusses the proposed financial reporting model and provides an assessment of the validity of the expected changes.
Renamed Revenues and Expenditures
The GASB proposal replaces revenues and other financing sources with the term “inflows of resources” and expenditures and other financing uses with the term “outflows of resources.” Inflows and outflows of resources that arise from short-term transactions are recognized when they occur. The inflows and outflows that arise from long-term transactions are recognized when they are due, except for long-term debt issued for short-term purposes.
The GASB believes the use of inflows and outflows of resources is needed to distinguish those elements in the governmental fund financial statements from those in the governmentwide financial statements. With the change to inflows of resources, the GASB also decided that it would amend Statement No. 54 to change the title of governmental special revenue funds to special resources funds.
In my opinion, most government accountants believe the terms revenues and expenditures are not causing any confusion or misunderstanding between what should be reported in the government fund financial statements and governmentwide financial statements. The distinction between revenues and other financing sources and expenditures and other financial uses was the provision of detailed and incremental information that is actually not provided by using the terms inflows of resources or outflows of resources. Additionally, changing the widely understood terms is not going to add much usefulness to governmental fund financial statements.
New Accounting Basis
The GASB proposed changing the titles of the governmental funds financial statements to Short-Term Financial Resources Balance Sheet (replacing Balance Sheet) and Short-Term Financial Resource Flows (replacing Statement of Revenues, Expenditures, and Changes in Fund Balance). The new financial statements will not use the modified accrual basis of accounting; instead, they will use the short-term financial resources measurement focus and accrual basis of accounting. The short-term financial resources measurement focus incorporates inflows of short-term financial resources and outflows of short-term financial resources as well as all short-term financial assets, deferred outflows of resources, liabilities, and deferred inflows of resources, and reports fund balance. When applying an accrual basis of accounting, elements of financial statements arising from short-term transactions and other events are recognized as they occur, and elements of financial statements arising from long-term transactions or other events are recognized when payments are due. The captions used in the governmental fund financial statements would be assets, deferred outflows of resources, liabilities, deferred inflows of resources, fund balances, inflows of resources from current activities, outflows of resources from current activities, and net flows from noncurrent activities.
The GASB proposal also eliminates the distinction between extraordinary items and special items in the statement of short-term financial resource flows. Governments will use a single new category called unusual or infrequent items, which should be presented individually as the last presented flows of resources prior to the net change in fund balance.
The modified accrual basis of accounting, which is currently used by government funds, allows these funds to recognize long-term account receivables and does not allow the recognition of long-term liabilities. The proposed basis of accounting is fixing a major deficiency of the modified accrual basis of accounting.
Management’s Discussion and Analysis
The new financial reporting model continues to require the presentation of an MD&A before the basic financial statements and as an RSI. The objective of the MD&A is to provide an unbiased and easily readable analysis of the government’s financial activities based on known facts, decisions, or conditions, and to present comparisons between the current and prior year, with a focus on the current year to assist users with understanding why results changed. The MD&A should avoid any unnecessary repetition. Therefore, the GASB requires the presentation to be limited to the following sections:
• Introduction – Presents overview of basic financial statements, relationships among the statements, and differences in types of information
• Financial summary – Presents condensed comparative financial information from the governmentwide financial statements
• Detailed analysis – An assessment of whether a government’s financial position/fund position has improved or deteriorated over the year
• Significant capital asset and long-term debt activity – Presents information on right-to-use assets, capital assets, additions and disposals, leases, public-private partnership (P3) agreements, and subscription-based information technology agreements (SBITAs), credit rating changes, and relevant economic factors
• Currently known facts, decisions, or conditions – Influences expected to have a significant effect on financial position or cause differences from current period results, such as economic or demographic trends, subsequent year’s budget, and actions taken by government after year-end regarding capital assets, long-term debts, leases, P3, or SBITAs.
The proposed MD&A would fix some of the negative issues related to the current model, including long pages of insignificant information that could cause confusion. The proposed MD&A will present to-the-point and well-organized information that allows the users to easily compare CAFRs among governments and make well-informed investment, social, and political decisions.
GASB Statement No. 34 allowed governments to elect to report budgetary comparison information in a budgetary comparison statement as part of the basic financial statements or as part of the RSI. The new proposal requires the reporting of budgetary comparison as part of the RSI only. Furthermore, GASB 34 encouraged, but did not require, reporting the variance analysis between the final budget and the actual amounts; the variance reporting between the original and final budget was also optional. Under the new proposal, the government is required to present separate columns for the variances between original and final budget amounts and final budget amounts and actual budget results. An analysis of significant variations between original and final budget amounts and final budget amounts and actual budget results is required to be presented in notes to RSI. The GASB proposal to report the budgetary comparison as RSI only puts this comparison in a place that fits its nature and components. The budgetary comparison is not a financial statement that follows certain accounting rules and standards; presenting this comparison as part of the basic financial statements under the current financial reporting model was a major deficiency. The GASB also concluded that the budgetary comparison information is essential for placing the basic financial statements and notes to basic financial statements into context and, therefore, should be reported as RSI.
The new financial reporting model proposed two effective dates based on a government’s total revenues in the first fiscal year beginning after June 15, 2022. If total revenues are $75 million or more, the effective date would be for fiscal years beginning after June 15, 2024. If total revenues are less than $75 million, the effective date would be for fiscal years beginning after June 15, 2025. I believe the level of complexity and the significance of the changes proposed in the new financial reporting model would require massive efforts, time, and costs from state and local governments to implement these changes effectively. Therefore, a three-level implementation, like that used with GASB 34’s 1999 rollout, would be appropriate to provide sufficient time for small and midsize governments to grasp the new requirements and implement them correctly.
Eliminating the modified accrual basis of accounting for government funds would fix a major deficiency found in the current financial reporting model. This deficiency was shown in a government fund balance sheet where the recognition of long-term accounts receivable is allowed while the recognition of long-term liabilities is not allowed. Moreover, the proposed MD&A will present well-organized information that allows users to easily compare CAFRs among governments. GASB’s proposal to report the budgetary comparison as RSI, and not as part of the basic financial statement, puts the budgetary comparison information in the place that fits its nature and components. Additionally, changing well-known and widely understandable terms, such as revenues and expenditures, is not going to add much value to the informational content of the government fund financial statements. Also, the GASB should reconsider the proposed two effective dates and replace them with three effective dates based on the total revenues thresholds as presented in GASB Statement No. 34.
Khaled Abdel Ghany, CPA, PhD, is an executive accounting advisor at D.C. Government. He can be reached at email@example.com.