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Conceptual Framework: Recognition and Measurement Attributes—Project Plan

Project Objective: This project has two primary objectives. The first objective is to develop recognition criteria for whether information should be reported in state and local governmental financial statements and when that information should be reported. The second objective is to consider the measurement attribute or measurement attributes (for example, historical cost or fair value) that conceptually should be used in governmental financial statements. This project ultimately will lead to a Concepts Statement.

Background: The Board frequently must decide whether an item of information should be recognized in the financial statements, when such an item should be recognized, and at what amount it should be recognized. In the past, the Board has relied on the conceptual framework of other standards setters and analogous examples from practice or previous standards to make such decisions. This method of making decisions tends to lead to certain inconsistencies in financial reporting standards and could result in too much reliance being placed on accounting concepts that were not developed for a governmental environment.

Thus, the project on recognition and measurement attributes is needed to provide the GASB with conceptual guidance as to when elements of financial statements should be reported in particular financial statements and at what amount. This will entail developing recognition criteria and will include a discussion of when elements of financial statements are recognized using different measurement focuses. For the GASB to make consistent financial reporting decisions, it is necessary to have (1) definitions of the elements of financial statements, (2) a basis for determining when elements of financial statements should be recognized in the financial statements, and (3) a basis for determining which measurement attribute (for example, historical prices or fair values) is appropriate for reporting the elements. The GASB recently issued a Concepts Statement on the definitions for the elements of financial statements, and a conceptual framework project on recognition and measurement attributes is necessary to complete the conceptual basis for reporting items in traditional financial statements.

Accounting and Reporting Issues:

1. What messages are financial statements conceptually attempting to convey? (In other words, what is the story that the financial statements attempt to communicate, or what questions should be answered by reading different financial statements? For example, the statement of cash flows answers the question, "What happened to cash during the year?")

2. What is the relationship among objectives of financial reporting (user needs), financial statements, measurement focuses, and measurement attributes at the conceptual level?

3. How does when an element is recognized affect the meaning that is to be conveyed by a particular financial statement?

4. What are the fundamental recognition criteria necessary to report an element in a financial statement?

5. What measurement attribute(s) best conveys the message(s) intended for financial statements? What is the role of historical cost and fair value information in conveying these messages?

6. Should the application of fair value be different for the statement of net assets and the statement of activities? How does fair value relate to the cost of service model of the statement of activities?

Project History: The importance of this conceptual project was confirmed by GASAC. At its July 2005 meeting, GASAC discussed the importance of recognition issues in the development of the GASB’s conceptual framework. It was ranked sixth out of 23 current agenda, research, and potential agenda projects by Council members during their discussion of GASB agenda priorities. The potential companion project, measurement attributes which was on the research agenda since December 2003, was ranked fourth by the GASAC members. Considering this feedback, the GASB formally added a conceptual framework project on recognition to the research agenda in August 2005. A combined recognition and measurement attribute concepts project was added to the current agenda in December 2005.

Work Plan:

Conceptual Framework: Recognition and Measurement Attributes—Recent Developments

Minutes of Meeting, May 21-23, 2008

The Board evaluated draft materials, including draft financial statements, for use in conducting research on the current financial resources measurement focus with users and preparers of financial statements. The Board would like to consider other options for current financial resources models and directed the staff to develop financial statements using the following models for further consideration for inclusion in the research materials:

• Cash basis

• Current financial resources measurement focus using a payment cycle criterion for assets and liabilities

• Current resources measurement focus using a payment cycle criterion for assets and liabilities and include nonfinancial assets (inventories and prepaids)

• Current financial resources measurement focus using an operating cycle criterion for assets and liabilities

• Current resources measurement focus using an operating cycle criterion for assets and liabilities and include nonfinancial assets (inventories and prepaids)

• Economic resources measurement focus.

A further refined draft of the materials will be discussed at the June teleconference.

Minutes of Meeting, April 15-17, 2008

The Board’s discussion focused on identifying specific messages conveyed by financial statements prepared on the current financial resources measurement focus (CFR financial statements) and determining the items that would need to be reported in order to convey the specific messages. The Board tentatively agreed that CFR financial statements should convey information about the amount available for spending. This amount is (1) a residual of the amount of resources in spendable form at year-end and remaining obligations associated with spending of the period being reported on and (2) the amount that was available for spending in the period being reported on and that was left unspent at year-end. The Board discussed, in a general manner, other items that may be reported in CFR financial statements and what messages would be conveyed by reporting such items; however, the Board did not reach any tentative conclusions in this area. The Board believes that additional information about how information in CFR financial statements is used is needed before the Board makes further decisions. Consequently, additional research with users and preparers of financial statements will be conducted to identify specifically what information is sought from CFR financial statements, distinguishing it from information obtained from government-wide financial statements overall and from disaggregations that are provided by fund financial statements without regard to the measurement focus used.

Minutes of Meeting, March 4-6, 2008

The Board’s discussion focused on the specific meaning of the term current financial resources for the purpose of explaining with greater specificity the messages conveyed by financial statements prepared using the current financial resources measurement focus. The Board evaluated whether the overall message of current financial resources financial statements is associated with providing information about service capacity in the short term or providing information about liquidity and solvency, and tentatively concluded that the principal overall message relates to liquidity and solvency. The Board considered whether items that generally are consumed in lieu of future spending, such as inventory and prepaid items, are considered current financial resources, and tentatively agreed that those items are current financial resources. The Board also considered whether the period of time that is considered to be current is a typical payment cycle or an operating cycle, or another cycle, but did not reach a tentative conclusion.

Minutes of Meeting, January 22-24, 2008

The Board’s discussion focused on the messages conveyed in financial statements prepared using the current financial resources measurement focus. Through the discussion, the Board noted that some of the messages conveyed by financial statements are communicated through the classification and presentation of the elements in addition to the messages communicated due to the measurement focus employed. Although no decision was intended to be reached, the Board’s discussion included some of the options for how current financial resources may be defined. These options included notions of liquidity, marketability of financial resources, and working capital. The Board tentatively concluded that financial statements prepared using the current financial resources measurement focus (CFR financial statements) convey the following messages at a minimum:

• What were the current financial resources and claims against current financial resources of the entity at the reporting date?

• What was the balance of current financial resources at the reporting date that is available for spending in future periods?

• What were the amounts and sources of inflows and outflows of current financial resources during the reporting period?

The Board then discussed how budgetary information and the current financial resources measurement focus are related. The Board acknowledged that information in budgetary-basis schedules and statements will be compared with and reconciled to information in CFR financial statements, and that these comparisons and reconciliations provide information that is useful for understanding a government’s methods of budgeting and comparing it to methods used by other governments. However, the Board tentatively concluded that budgeting principles (which vary widely in practice) should not influence recognition and measurement concepts for CFR financial statements.

The Board noted that enhancement of the ability to assess interperiod equity is a consideration in determining when items meet definitions of elements of financial statements prepared using the economic resources measurement focus in Concepts Statement No. 4, Elements of Financial Statements, and considered whether the notion of interperiod equity also would assist in developing recognition and measurement concepts for CFR financial statements. The Board also noted that economic resources-based financial statements will be able to provide a greater ability to assess interperiod equity’; however, CFR financial statements are not devoid of information that may be helpful in assessing interperiod equity. In addition, the Board tentatively agreed that recognition and measurement concepts for CFR financial statements may be influenced by the notion that some transactions inherently may be associated with a specific period.

Minutes of Meeting, December 11-13, 2007

The Board began its deliberations on the conceptual framework—recognition and measurement project by considering several overarching issues. First, the Board considered the scope of the financial statements for which recognition and measurement concepts are to be established. The Board recognized that projects currently on the technical agenda and contemplated for addition to the technical agenda could result in financial statements that may not be historically based. However, the Board tentatively concluded that, this conceptual framework project would be limited to recognition and measurement concepts for historically based financial statements—a statement of financial position and a statement of resource flows. The Board evaluated whether other terms best described this group of financial statements and tentatively decided not to use the term basic financial statements, because it often refers to that set of statements that is required for a GAAP presentation which is established through accounting standards and is subject to change, and not to use the term traditional financial statements, because it is nonspecific and does not have a generally agreed-to meaning.

Second, the Board considered whether or not a financial statement (and its related articulating financial statement) should employ a single measurement focus. The Board tentatively concluded that from a conceptual standpoint, only a single consistent measurement focus is appropriate because it presents a clearer message and provides better accountability.

Third, the Board discussed which measurement focuses would be considered part of this project and tentatively decided that only economic resources, current financial resources, and cash measurement focuses would be evaluated. The Board did not at this time explore specific definitions for these measurement focuses.

Finally, the Board started a discussion of the objectives of financial statements, messages conveyed by different measurement focuses and financial statements, and users’ needs for information in financial statements. The Board did not limit the discussion solely to information associated with specific measurement focuses, but it also explored issues of presenting information in an aggregated form for the entire entity contrasted with information presented for individual funds as well as of presenting information on an entity’s budgetary basis of accounting. The Board reached no tentative decisions in this area, and it directed the staff to focus on identifying potential objectives of financial statements prepared on the current financial resources measurement focus as well as exploring existing research that may identify what information users of financial statements extract from current governmental fund financial statements and how it may be used to assess accountability and inform decision making.

Conceptual Framework: Recognition and Measurement Attributes—Major Tentative Decisions to Date

• This project will be limited to recognition and measurement concepts for historically-based financial statements—a statement of financial position and a statement of resource flows.

• A financial statement (and its related articulating financial statement) should employ a single measurement focus.

• The economic resources, current financial resources, and cash measurement focuses would be evaluated in this project.

• Financial statements prepared using the current financial resources measurement focus (CFR financial statements) should convey at a minimum: (1) what were the current financial resources and claims against current financial resources of the entity at the reporting date, (2) what was the balance of current financial resources at the reporting date that is available for spending, and (3) what were the amounts and sources of inflows and outflows of current financial resources during the reporting period.

• Budgeting principles (which vary widely in practice) should not influence recognition and measurement principles for CFR financial statements.

• Although economic resources-based financial statements are able to provide a greater ability to assess interperiod equity, CFR financial statements are not devoid of information that may be helpful in assessing interperiod equity.