Project Pages

Financial Reporting Model—Reexamination of Statements 34, 35, 37, 41, and 46 and Interpretation 6

Research Description: The objective of this pre-agenda research is to reexamine the financial reporting model, including Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, as well as reporting model-related pronouncements including 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, and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements. The major provisions that will be reconsidered are those related to management’s discussion and analysis, government-wide financial statements, fund financial statements, capital asset reporting, budgetary comparisons, special purpose government reporting, and related notes to financial statements.

Status: Added to Research Agenda: August 2013

Financial Reporting Model—Reexamination—Project Plan

Background: Statement 34 establishes the basic financial reporting model. The GASB’s reexamination of existing standards typically takes place after a pronouncement has been in effect long enough to be fully evaluated. In practice, pronouncements are added to the potential reexamination projects list after they have been fully effective for 5 years and evaluations are generally initiated after 10 years. Statement 34’s requirements have been effective for more than 5 years, including the extended implementation period for retroactive infrastructure reporting (which was not fully effective for 5 years until the second quarter of 2012).

There is a growing body of research that the GASB can leverage in an evaluation of the effectiveness of Statement 34. Most recently, a Crain Memorial Research Grant awarded in 2011 funded research on practice experience with the infrastructure reporting requirements of Statement 34, particularly regarding the use of the alternative modified approach. Some of the findings of that research echo an academic study of the use of the modified approach by state governments, Puerto Rico, and the District of Columbia.1 Another academic study reviewed the factors that determine the infrastructure information needs of public sector managers and offers recommendations for improving the reporting of infrastructure.2

Another Crain Memorial Research Grant, awarded in 2012, is funding research regarding the value of information resulting from Statement 34 to municipal bond analysts—specifically, MD&A, the government-wide statements, and the budgetary comparison. A study published in 2012 concluded that financial ratios based on government-wide financial statements are statistically significant in the credit ratings of state governments.3 Another study found that accrual-based financial ratios using information from the government-wide financial statements have significant incremental value in addition to fund-based measures.4

Research on the financial reporting model is viewed by some constituents as necessary for the development and acceptance of recognition concepts, particularly those pursuant to the current financial resources measurement focus. The Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches, proposed that the current financial resources measurement focus be replaced with the near-term financial resources measurement focus. Some respondents to the Preliminary Views recommended that further work on those recognition concepts be performed in conjunction with a reexamination of the reporting model.

The potential topic on the financial reporting model was ranked first in 2014 in the GASAC’s annual prioritization.

Major Research Issues: Statement 34 established the present blueprint for state and local government financial reporting—the basic financial statements, notes to the financial statements, and required supplementary information including management’s discussion and analysis (MD&A). Among its many features, Statement 34 introduced government-wide financial statements containing accrual information, which notably included the reporting of capital assets, including infrastructure, for activities previously reported only on a modified accrual basis in the governmental funds. Statement 34 also required a narrative MD&A to precede the financial statements, improved upon the budgetary comparison schedule, introduced major fund reporting in the governmental and enterprise funds, and added note disclosures related to capital asset and long-term liability activity during the reporting period.

Government-Wide Financial Statements

The principal new feature introduced to the financial reporting model by Statement 34 were two accrual-based financial statements encompassing the entire financial reporting entity—the government-wide statement of net assets (now statement of net position) and statement of activities. The focus of a review of the government-wide financial statements will be to assess whether they have been effective in providing decision-useful information and supporting assessments of operational accountability. In general, this research will seek to assess effectiveness by identifying the importance of government-wide information to users, the purposes for which the information is used, and how these purposes differ from the uses of fund financial statements. Specific topics could include:
  • The relative usefulness of government-wide financial statements
  • The separation of governmental activities and business-type activities
  • Capital asset reporting, including general infrastructure assets
  • Net position categories
  • The net (expense) revenue format of the statement of activities
  • Program revenues and general revenues
  • The level of detail for reporting assets, liabilities, expenses, and revenues
  • Special and extraordinary items
  • Related disclosures, such as capital assets and long-term liabilities.
Governmental and Proprietary Fund Financial Statements

Statement 34 introduced major fund reporting for governmental and enterprise funds. Statement 34 also required reconciliations of the fund financial statements with the government-wide statements. Information from a government’s original adopted budget was added to the budgetary comparison. In the proprietary funds, the direct method was required for reporting cash flows. In general, an evaluation of the fund reporting requirements of Statement 34 will focus on the usefulness of fund information as it is required to be reported, perhaps in comparison with alternative methods of reporting funds. Specific topics could include:
  • The relative usefulness of major fund and fund-type reporting
  • Whether the quantitative and qualitative criteria for identifying major funds lead to reporting of the number and types of funds that users need to see
  • The value-added of including original budget information in the budgetary comparison
  • Reporting of budgetary comparisons as basic financial statements versus required supplementary information
  • Reconciliations of governmental funds to governmental activities, proprietary funds operating cash flows to operating income (loss), and budgetary basis to GAAP basis
  • The direct method of reporting proprietary fund cash flows.

1Vermeer, T.E., T.K. Patton, and A.K. Styles. 2011. Reporting of general infrastructure assets under GASB Statement No. 34. Accounting Horizons 25 (2): 381–407.
2Jones, S., D.A. Hensher, J. Rose, and R.G. Walker. 2012. Infrastructure asset reporting options: a stated preference experiment. Accounting Horizons 26 (3): 465–491.
3Johnson, C.L., S.N. Kioko, and W.B. Hildreth. 2012. Government-wide financial statements and credit risk. Public Budgeting & Finance 32 (1): 80–104.
4Pridgen, A.K. and W.M. Wilder. 2013. Relevance of GASB No. 34 to financial reporting by municipal governments. Accounting Horizons 27 (2): 175–204.

  • Pre-agenda research approved: August 2013
  • Research roundtables conducted: Fall 2013
  • Archival research conducted: Fall 2013
  • Literature review conducted: 2014
  • Surveys of preparers, auditors, users, and preparers using the modified approach: Spring–Fall 2014.
Current Developments: In January–March, approximately 150 in-depth interviews with a wide variety of preparers, auditors, and users of financial statements were conducted. The topics included in the interviews were the issues raised through the previous states of research including archival research, roundtables, and surveys.


Minutes of Meetings, July 21-23, 2015

The staff presented a capstone report on the five phases of the financial reporting model reexamination research. The research activities include a literature review, archival research, stakeholder roundtables, stakeholder surveys, and individual stakeholder interviews. The Board will consider whether a project should be added to the current technical agenda at the September meeting.