The User's Perspective
A Guide to Better Understanding GASB StatementsEach of the more than 60 final Statements of Governmental Accounting Standards issued by the GASB since its establishment in 1984 is designed to provide taxpayers, legislators, municipal bond analysts, and others with information that is useful to their decision-making process regarding governmental entities when those standards are applied by governments in practice. This article will provide a road map that may help you better understandg the structure of a GASB Statement by explaining the key elements that make up a Statement and describing what you can hope to learn by reading one.
The Summary section is the first section of a GASB Statement and precedes even the title page and table of contents. The summary discusses the document’s scope and key features and lays out what the document does in a way that is designed to be accessible to both technical readers, such as preparers and auditors, and users of governmental financial statements.
The Summary concludes with a section called “How the Changes in This Statement Improve Financial Reporting.” This section describes the manner in which the Statement’s provisions will make the information in government financial reports more valuable to your decision making and to assessing government accountability.
What you can learn: The Summary provides a quick overview of the Statement, what it requires, and how it will benefit the users of financial reports.
The Introduction section is the first part of the official body of the Statement. This section briefly presents the primary objectives of the document and a synopsis of fundamental background information, including the relevant authoritative literature. The numbering of a Statement’s paragraphs (starting with paragraph 1) begins with the Introduction.
What you can learn: If the Summary gives the reader a quick sense of the “what,” the Introduction helps to give you a sense of the “why.”
Standards of Governmental Accounting and Financial Reporting
The “Standards section” is the heart of the document and includes the authoritative accounting and financial reporting requirements for state and local governmental entities (including school districts, public universities, public utilities, and ports and airports). All requirements regarding recognition (what assets, liabilities, deferrals, inflows, and outflows to report in the financial statements, and when to report them), measurement (how to determine the amount reported), and disclosure can be found in this section.
The first paragraphs of the Standards section cover the “scope and applicability” of the requirements. These elements set the boundaries of the standards and identify the entities the standards apply to. GASB standards apply to all state and local governments unless otherwise noted. The scope and applicability paragraphs also specify which existing standards, if any, are superseded or amended by the Statement.
The Standards section then proceeds to lay out the specific requirements of the Statement. This text ultimately is incorporated into the codified standards that comprise generally accepted accounting principles (GAAP). When an auditor audits a government’s financial statements, the auditor is looking to see that the government has prepared the financial statements, including note disclosures, in conformity with GAAP.
The Standards are generally organized by major topic. For instance, Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, had two major sections—one on how fund balance should be reported and a second with revisions to the definitions of types of governmental funds. Each major section then had subsections, including one for each of the five new categories of fund balance—nonspendable, restricted, committed, assigned, and unassigned.
Authoritative versus Nonauthoritative
It is important to understand that only certain portions of a Statement are considered authoritative—meaning, that governments are required to comply with them. All of the authoritative text is included within the Standards section, the Glossary, and the Codification Instructions. Although the Codification instructions are authoritative, the instructions that are used to incorporate the standards into the Codification do not include any additional requirements. All other parts of the Statement, though valuable and informative, are nonauthoritative—they may illustrate or explain the requirements in the Standards section, but do not contain additional requirements.
What you can learn: The Standards section tells readers what issue or issues the GASB is addressing, which entities the requirements apply to, what existing standards are superseded or amended, and what the specific requirements are (arranged by topic).
While GASB standards apply to all state and local governments unless otherwise noted, is important to observe that not all governments may be engaged in the transactions addressed by the Statements. GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, for example, sets forth requirements for state and local governments that use derivatives to accomplish such goals as risk mitigation or locking in an interest rate. If a government is not involved in any arrangements that employ derivative instruments, the requirements contained in Statement 53 would not be implemented by that government. Likewise, business-type entities—such as utilities and many public universities—do no report governmental funds, and therefore would not implement Statement 54.
Effective Date and Transition
The effective date of a final Statement, which appears after the Standards section, is generally expressed in terms of the financial statements for a period beginning or ending after a certain date, usually either June 15 or December 15. For instance, Statement No. 59, Financial Instruments Omnibus, was effective for periods beginning after June 15, 2010—in other words, fiscal years ending June 30, 2011, and later. The effective date refers to periods rather than years in order not to preclude quarterly reporting, which is common among some special-purpose governments such as public hospitals.
While the effective date is the deadline for implementation of the Statement, the Board almost always encourages governments not to wait until the deadline with the phrase, “Earlier application is encouraged.”
The effective date and transition section also typically addresses practical repercussions of implementing new standards. For example, a government may need to adjust the beginning amounts of net assets or fund balance for the period in which it is implementing a new Statement. Governments presenting financial statements for two years (comparative financial statements) may need to restate the financial statements for the earlier year when it implements the Statement for the current year (if practical, it is essentially implementing the Statement for two years simultaneously).
What you can learn: This portion of the Statement lets the reader know when the requirements “go into effect” and they will begin to see the resulting information in financial reports. This section also marks the end of the authoritative part of the Statement, unless it contains a glossary (more on that below)
Appearing just after the Effective Dave and Transition section, the materiality box indicates that the provisions of the Statement do not need to be applied to immaterial items. An item is considered to be material, in this context, when it would change or influence the judgment of a reasonable person relying on the information.
What you can learn: It is probably impractical to expect that a government with millions or billions of dollars in annual revenues will prepare financial statements that are exact to the penny. The materiality box serves as a reminder that, as with all of GAAP, the Statement does have to be applied to amounts that are so relatively small that they would not make a difference to a financial report user.
The issuance of a final Statement requires the approval of a majority of the Board’s seven members. A record of Board voting, including the names of the members that voted to issue the final document, is placed in final Statements immediately following the materiality box.
What you can learn: This section provides a roster of the Board in place when the Statement was approved and identifies who voted in favor of the pronouncement.
If there are terms used in the Statement that people will need to understand in order to implement it, they may be defined within the text or as footnotes to the Standards section. If there are more than a few definitions, they may be included in a separate Glossary, which receives its own paragraph number (the next number after the final paragraph of the Effective Date and Transition). Terms defined in a Glossary appear in bold the first time they appear in the Standards section and are authoritative.
What you can learn: The glossary provides the reader with a one-stop resource for authoritative definitions of key terms as they are used in the Statement. It sometimes happens that terminology in accounting standards has a different meaning in the broader world. For this reason, the Glossary is preceded by the following: “This paragraph contains definitions of certain terms as they are used in this Statement. These terms may have different meanings in other contexts.”
Statements typically include four appendices in this order: Background, Basis for Conclusions and Dissent (if applicable), Illustrations, and Codification Instructions.
The Background section presents the project’s history and includes the results of research activities, consultation with the Governmental Accounting Standards Advisory Council (GASAC) and a task force, and the steps in due process.
What you can hope to learn: Statements do not appear out of thin air. They are typically the culmination of several years of research, Board deliberation, and public review and input. The Background section explains why guidance was needed and the events that ultimately led to the issuance of the Statement.
Basis for Conclusions and Dissent
This section is presented to explain why the Board made the choices it did in developing the Statement. The Basis for Conclusions distills the many months (or years) of discussion and gathering of public feedback into an account of why the Board accepted certain alternatives and decided against others and an overview of the more significant viewpoints communicated to the Board through public hearings, user forums, and written comments.
The “Basis” typically begins by laying out any pervasive issues that influenced the document’s overall direction, any significant alternatives that were considered, and the reasons the alternatives were not ultimately accepted. This portion of the document also addresses the reaction of those who testified in public hearings and other respondents to the due process documents in regard to the overall direction proposed by the Board.
The Basis then describes the Board’s considerations for each significant provision of the Statement in the order the provisions are presented in the Standards section. When discussing how respondents viewed or reacted to the provisions when they were exposed for public comment, the Basis identifies changes the Board made as a result and why it was persuaded to do so. If the Board does not change its earlier position after considering the constituent feedback, the Basis will explain why the Board chose not to.
Finally, if a Board member or members vote against the issuance of a final Statement, the reasons for their dissent are presented at the end of this section.
What you can learn: If you are reading a particular Statement for the first time, you might wonder if the Board had considered other possible approaches and why it settled on its final conclusion. The Basis explains the Board’s reasoning for reaching the conclusions that underlie the Statement’s requirements and discusses the alternatives the Board considered but did not adopt. Understanding the context for the requirements—what issues the Board was addressing, why the Board thought those issues required new or revised standards, and how the Board’s conclusions were arrived at—may help you understand what the Statement is intended to accomplish and what the resulting financial report information is meant to convey to you.
Illustrations may be presented to help financial report preparers with implementation of the Statement. The illustrations are nonauthoritative and are not intended to modify or limit the requirements of the Statement. Each government’s circumstances may be unique and result in a somewhat different application of the requirements. The illustrations are meant to capture the most common circumstances, but what some governments report may not be identical. If a government is faced with a choice between following the guidance in the Standards section or mimicking the illustrations, the Standards section wins out every time.
Illustrations can be particularly useful to demonstrate the Board’s intent when the accounting or disclosure requirements are complex and differ from previous practice. Though nonauthoritative, the illustrations can provide valuable guidance in applying the provisions of a general requirement to specific situations. It is important to note that illustrations are examples of the minimum requirements of the standards, and a government’s financial statements and notes may surpass the minimum requirements—such as by offering a greater level of detail for revenues and expenses.
What you can learn: When you hear about a new GASB requirement, perhaps you ask, “What is this going to look like? How will I know what to look for?” The illustrations should answer those questions for you.
The final appendix of a Statement, the Codification Instructions, shows how the guidance in the Statement will impact existing GAAP, including what guidance is amended and what requirements are superseded, if applicable.
What you can learn: The Codification Instructions explain the effect the Statement has on GAAP. If you are familiar with the present requirements for reporting a particular transaction or event, then the Codification Instructions will show you what existing provisions remain, and which have been changed or eliminated.