From the President’s Desk

June/July 2014

Earlier this year, PwC published an article1 that posed a provocative question: Are there opportunities to increase the comparability of standards set by the Governmental Accounting Standards Board and the Financial Accounting Standards Board for accounting issues that are not unique to government?

Using different accounting models for similar activities, PwC suggested, results in disparate levels of financial statement transparency and a lack of comparability, particularly between government-operated businesses such as public hospitals and universities and their private-sector counterparts.

More recently, representatives of the National Association of College and University Business Officers (NACUBO) asked GASB Chairman David Vaudt whether GASB and FASB standards covering universities could be converged. Members of the Healthcare Financial Management Association (HFMA) have raised similar issues with Chairman Vaudt regarding accounting guidance for hospitals.

Each group suggested that taking steps to make standards more comparable would increase transparency and comparability and promote simplification, particularly for those who invest in municipal securities.

In thinking about this issue, two important questions come to mind:
  • Would the use of converged accounting standards for some similar businesses, regardless of public or private ownership, benefit stakeholders by making the related accounting and financial reporting more transparent, more comparable, and less complex?
  • Should the GASB and the FASB undertake a program to examine differences in their respective accounting standards for similar organizations with different ownership structures (public and private universities, public and private hospitals, etc.) and work, where appropriate, to make those standards more comparable?

The Jurisdiction Debate: A Brief History

The issue of who should set standards for government-related business activities is not new. When the GASB was created in 1984, appropriate jurisdiction was a major issue. Some believed that the GASB should address only those accounting issues specific to government – and not their related-business activities.

But state governments, which have the authority to establish accounting standards for themselves and the municipalities in their jurisdiction, disagreed. They argued that all state and local government agencies and operations should be reported on a consistent basis under GASB standards. As a result, the original jurisdiction agreement of 1984 called for the GASB to establish standards for all activities, including business activities, undertaken by state and local governments.

The issue was raised again in 1989, during the GASB’s five year review, in a special report produced by a group of government accounting experts, public officials, Financial Accounting Foundation Trustees and former Trustees. (As you know the FAF is the oversight organization for both the GASB and the FASB.)

The report suggested that the GASB should retain its standard-setting authority for all government-related business activities, except for those involving hospitals; gas, water, and electric utilities; and colleges and universities (other than two-year colleges with the ability to tax.) Those responsibilities would be delegated to the FASB. State governments argued that the standard-setting authority should continue to be based on ownership to provide consistent reporting. Following a thorough discussion, the decision was made to retain the GASB’s original mandate.

Working Together

The discussion has continued less formally, on and off, over the years. During that time, the FASB and the GASB have developed a tradition of working together in areas where their interests are aligned. The GASB, for example, has looked to a number of FASB standards for guidance—including cash flows and combinations (mergers and acquisitions)—and continues to do so with its current projects on leases and fair value.

In the lease accounting area, the existing FASB and GASB guidance is nearly identical. Because the FASB has an active lease accounting project underway, it makes sense for the GASB to look at its existing lease accounting standard to consider whether changes would be appropriate. And that’s exactly what the Board is doing.

Last summer, as the GASB was preparing to begin deliberations on its lease accounting project, the FASB project staff met informally with GASB members to brief them on the FASB leasing proposals. Since then, the GASB and FASB project teams have been meeting periodically to discuss project issues and tentative decisions made by the respective Boards. In addition, the GASB practice fellow who leads the leases project team sits in on FASB redeliberations to keep up-to-date on any new developments. The GASB is scheduled to release its initial lease proposal later this year, while the FASB expects to issue a final lease standard sometime in 2015.

With respect to fair value measurement, some in the financial services community believe that, to the extent possible, fair value measurement rules should work the same way regardless of whether the FASB or GASB standard applies.

Initially, the FASB and GASB had identical definitions of the term. Then, after the FASB revised its definition of fair value in 2006, the GASB added a project to its agenda to consider modifications that would realign its definition with the FASB’s definition. The Exposure Draft that was issued for public comment by the GASB in May of this year proposes just that, even though the application of fair value to various assets and liabilities would differ in some respects.

More broadly, a member of the FASB staff is assigned to monitor each current project on the GASB’s technical agenda, observe Board meetings, and serve as a liaison. The reverse is true for each project on the FASB’s current agenda. Relevant information is summarized and shared at the staff level. Regular meetings of senior staff across the FAF, FASB, and GASB keep everyone up to speed on key project and organizational developments.

Each week, FASB Chairman Russ Golden and GASB Chairman Vaudt meet with me to talk about what is coming up for the Boards and the related implications. Looking ahead from a strategic planning perspective, we are currently working to identify ways we might further leverage the Boards’ work and related research on current and future projects.

Some Differences Remain

While the FASB and GASB collaborate in areas where their interests are aligned, that does not mean that they always will arrive at the same result. The Boards operate in different environments – for-profit businesses and governments differ in a number of fundamental ways. For example, businesses earn revenue through willing exchanges, while governments receive revenue through the involuntary payment of taxes.

These and other fundamental differences historically led the Boards to develop separate standards under separate conceptual frameworks.

One example involves accounting for debt security investments. The FASB allows for-profit companies to record unrealized gains and losses for these investments within the category of Other Comprehensive Income (OCI). The GASB does not have a similar concept. Consequently, the GASB requires unrealized gains and losses to be recorded through operations.

Beyond the environmental and conceptual differences, the needs of those who use the information reported by companies, on the one hand, and governments, on the other, are not completely parallel. Users of corporate and government financial statements both may use financial reports to make investment decisions. But users of government financial statements also may use the information to make decisions about where they should buy a home or whom they should elect to office.

On another front, the FASB and the GASB may base decisions on whether to try to move standards closer together on the amount of effort – and expense – that making such a change might require of financial statement preparers compared to the benefits that would accrue to financial statement users from more comparable standards.

Looking Ahead

Our collective mission at the FAF, the FASB, and the GASB is to promote and issue standards that result in decision-useful information for investors and other users of financial reports. Over the last few months, in meetings with stakeholder groups, I’ve asked the question about the need to increase the comparability of the standards set by the FASB and the GASB, whenever and wherever appropriate. What we’ve heard is that differences between FASB and GASB standards should be minimized, but that fundamental differences between the private and public sectors will, in some situations, require different accounting standards.

We will continue to think through these issues and informally ask for feedback when we meet with stakeholders. Our goal is to get a sense of how problematic—and widespread—these concerns are. If you have thoughts that you would like to share, please feel free to send me a note at I look forward to hearing from you.

1The Municipal Securities Market—Greater transparency and comparability of information would benefit stakeholders, February 2014

FAF President and Chief Executive Officer

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