The User's Perspective

December 2013

Reexamining the Blueprint for Financial Reports

This past summer, the Board voted unanimously to add a reexamination of the financial reporting model—the blueprint that lays out the structure and content of a state or local government’s financial report—to the pre-agenda research portion of its technical plan. This article provides a brief overview of the GASB’s thinking behind this decision, describes what the Board is hoping to learn through its research, and looks at potential implications for users of financial statements.

Looking Back at Statement 34

Developing a new model for annual governmental financial reporting was one of the key tasks facing the GASB when it was established nearly 30 years ago. In 1999, after 15 years of research, deliberation, and due process, the Board issued Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and established the current blueprint for state and local government financial reporting—the basic financial statements, notes to the financial statements, and required supplementary information.

Statement 34 brought about important advances in general purpose external financial reporting, including making it possible for users of financial reports to more fully assess the overall financial health of a government. Among other important changes, Statement 34 introduced management’s discussion and analysis, government-wide financial statements, and major fund reporting. Users finally had access to:
  • A comprehensive, big-picture view of a government’s financial health
  • Information that would allow them to assess how much it costs each year for governments to provide services
  • A narrative summary that makes it easier to understand what the financial statements have to say about a government’s finances
  • The most significant individual funds on the face of the financial statements
  • A comparison of actual financial results with the original budget adopted by a government.

What the Board Hopes to Learn

GASB pronouncements are meant to stand the test of time. They should be effective in all stages of the economic cycle and relevant in a dynamic government environment. When the Board issues standards, it expects to reexamine them periodically in the future, and modify them if necessary, to ensure that they remain effective. The Board considers the effectiveness of its standards in practice in light of changes in the government environment, taking into consideration newly emerged transactions, financial innovations, and the impact of standards issued subsequently. Once a major GASB pronouncement has been in place and fully implemented for at least five years, it normally is subjected to a rigorous review process that assesses its effectiveness.

Now that Statement 34 and related pronouncements have been fully implemented for some time, the Board has decided to engage in research that will inform an assessment of its effectiveness, ascertain whether it is meeting its objectives, and identify opportunities to improve upon it, if any. Has Statement 34 enhanced the understandability and usefulness of the general purpose external financial report? What parts work best and which are least valuable? How is the information in the financial report being used? Have any problems arisen that affect a government’s ability to comply with the standards? What areas, if any, need to be improved?

The pre-agenda research is evaluating the standards that compose the “financial reporting model”—not only Statement 34, but also:
  • Statement No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities
  • Statement No. 37, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus
  • Statement No. 41, Budgetary Comparison Schedules—Perspective Differences
  • Statement No. 46, Net Assets Restricted by Enabling Legislation
  • Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.

What the Research Will Involve

The pre-agenda research plan agreed upon by the Board includes examination of the following major provisions of the reporting model:
  • Management’s discussion and analysis
  • Government-wide financial statements
  • Fund financial statements (including the type of information contained and presentation of major funds).
  • Infrastructure reporting
  • Budgetary presentations
  • Note disclosures
  • Required supplementary information
In addition, cost/benefit considerations associated with the reporting model will be evaluated.

The first phase of the research is exploratory, looking at the financial report from a bird’s-eye view. What issues related to these accounting and financial reporting standards, if any, have the preparers, auditors, and users of financial reports identified in practice? This research, which serves to identify topics that should be studied more extensively, has involved a thorough review of the relevant literature, an archival study of the annual financial reports of a broad number and variety of types of governmental entities, and a series of staff-research roundtables. The GASB staff conducted 11 research roundtables in Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City, San Francisco, and Washington, DC. Three of the roundtables focused specifically on business-type entities, such as public colleges and universities, hospitals, airports, utilities, and mass transit.

Over the course of the research roundtables, members of the GASB project team listened to the views of more than 150 highly knowledgeable preparers, auditors, and users. Each roundtable session included various types of representatives from each of these three groups:
  • Finance officers and accountants from a variety of types of governments, including states, counties, cities, utilities, school districts, universities, tribal governments, and so on
  • Government auditors and private auditing firms, ranging from the Big Four to small local firms
  • Municipal bond analysts from rating agencies, bond insurers, mutual funds, and underwriters, as well as legislative staff, taxpayer and research groups, and other types of users.
Research roundtable discussions allow for interactions to occur—and, consequently, viewpoints to emerge—that may not have been expressed if sought from the participants separately.  

Once the results of the research roundtables, literature review, and archival analysis have been compiled, synthesized, and analyzed, a detailed research plan will be developed involving broad-based surveys and in-depth interviews. The topics to be explored in the surveys and interviews will be based on what was found in the initial exploratory research. Research activities are scheduled to continue through spring of 2015.

Implications for Users

After considering all of the research findings in mid-2015, the Board will decide whether to add a project to its current agenda to deliberate over potential changes to the financial reporting model. If that happens, what are the implications for users? Will the world be turned on its head again when we are just getting accustomed to the present financial report’s contents?

First of all, if changes are proposed, the intention will be to better address the information needs that users have identified and to improve the relationship between the benefits of the information and the costs of providing it.

Moreover, any changes that occur are not happening tomorrow. Or next year. Or the year after that. The research is expected to extend through the middle of 2015. It will likely be at least a year beyond that before any proposed changes are exposed for public comment. If there are significant changes in the offing, it is likely that more than one round of public comments will be sought. At any rate, you will have considerable opportunity to weigh in on possible changes and let the GASB know if they will benefit you.

Which brings up an important point: For the GASB’s efforts to be successful, it will need to have broad input from all types of users. When the notices about surveys land in your email inbox, please take the time to respond. Agree to be interviewed. Any proposed changes to the standards will be based on what the GASB hears in response to its research efforts. The more you tell the GASB during the research about your preferences for information—what you need, how you use it, where and when you need to obtain it—the better the chances that proposed improvements will meet your needs. And then be sure to comment on those proposals. As always, you can contact the GASB at any time to let us know if there is something we should be looking at.

We look forward to hearing from you.

Further Reading