Economic Condition Reporting: Financial Projections
Project Description: The objective of this project is to consider whether guidance or guidelines should be provided for additional information about economic condition, particularly financial projections, as part of general purpose external financial reporting (GPEFR). This project also will include consideration of the information users identified as necessary to assess the risks associated with a government’s intergovernmental financial dependencies.
On Hold Pending Resolution of GASB Scope
Added to Research Agenda: April 2004
Added to Current Agenda: December 2009
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Economic Condition Reporting—Project Plan
Background: The current project represents phase three of a long-term project. Phase one involved the background research, including a literature review. The second phase (which resulted in the issuance of GASB Statement No. 44, Economic Condition Reporting: The Statistical Section in May 2004) focused on the existing reporting of economic condition information as presented in the statistical section.
The third and current phase of this project examines the usefulness of indicators of economic condition and its related components, including fiscal sustainability, which might be a part of GPEFR. The results of the research for this phase of the project are summarized in a July 2009 report titled Results of Research on Economic Condition Reporting: Fiscal Sustainability. This phase of the project will incorporate this research, determine and clarify fiscal sustainability’s relationship to economic condition, (including financial position, fiscal capacity, and service capacity), and explore the possibility of providing guidance or suggesting guidelines for the reporting of fiscal sustainability information.
Prior to this project, the Board has not yet considered a working definition of fiscal sustainability, nor the information users need to assess fiscal sustainability in the state and local government environment. This project will not only accomplish both of these tasks but also will create context for better understanding fiscal sustainability in relation to economic condition.
Relevant literature, the research of other standards setters and governments, and the views of various types of users of governmental financial information all highlight the fact that economic condition and similar concepts of financial health are not limited to where a governmental entity currently stands. GASB research also indicates that users are interested in understanding a governmental entity’s past economic condition—and thus how the governmental entity arrived at its current status—with an eye toward assessing a governmental entity’s future viability or fiscal sustainability. In other words, based on existing information, users seek to assess a governmental entity’s ongoing ability to raise revenue, to deliver services, to issue debt, to meet obligations and commitments—the capacity to sustain or improve its financial status. A considerable amount of research has been conducted to identify users’ information needs with regard to the assessment of a government’s economic condition.
A literature review conducted in the first phase of this project produced several major findings. First, it confirmed the notion that users employ a wide range of terms when describing the financial health of a government, including financial condition, financial position, fiscal condition, and fiscal capacity. These terms are often used interchangeably, and individual terms have diverse meanings to different people. Regardless of the terminology used, however, the review of the literature suggests that there is substantial agreement on the key areas of concern that should be addressed when one is assessing the financial health of a government.
Despite variation in the way information from financial reports is used, there was substantial consensus that assessing the financial health of a government requires trend information regarding: (1) fund balances, equity, or net assets, (2) revenues and expense/expenditures, as well as surpluses and deficits, (3) changes in revenue bases, (4) spending pressures and expenditure needs, (5) outstanding debts, debt service, and postemployment benefits, and (6) liquidity. There was less widespread, though still notable, agreement on several other types of information, including: (1) short-term debt, (2) credit ratings, (3) number of employees, (4) condition of the physical plant, (5) output and outcome measures, and (6) management issues such as the quality of financial reporting, planning and budget processes, and accounting practices.
Panel discussions conducted during the second phase of the research project with users experienced with, and knowledgeable about, the assessment of a government’s financial health provided additional insights regarding users’ economic condition information needs. In general, the user panelists agreed that an annual financial report (AFR) containing the financial reporting model established in Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, provided a considerable amount of the information needed to assess economic condition. The panelists generally agreed that the AFR contains most, if not all, of the information needed to assess financial position, not enough information about fiscal capacity, and little information about service capacity. The panelists considered information in the statistical section to be particularly useful for assessing fiscal capacity. However, these users identified other necessary information not currently found in the AFR, such as more detailed revenue and expense trends, comparative and benchmarking information, financial ratios, explanations, and a variety of demographic and economic indicators as necessary for assessing fiscal and service capacity.
The enhancement of the statistical section by Statement No. 44, Economic Condition Reporting: The Statistical Section, is expected to have improved the usefulness of the AFR in providing information that GASB research has shown is valuable for assessing economic condition, particularly fiscal capacity. For instance, the inclusion of government-wide information has given the users more comprehensive trends in revenues, expenses, financial position, and outstanding debt. Furthermore, the addition of trend information presented in schedules such as principal revenue payers and debt limitations should make them more meaningful to users. The improved statistical section is expected to be an enhanced resource for the purposes it currently serves. However, with the important exception of providing trend data for information contained in the government-wide statements and narrative explanations, it does not address the additional information needs that user participants in GASB research identified. This is primarily because the scope of the revisions to the statistical section was limited to existing reporting.
Accounting and Financial Reporting Issues: This project examines the usefulness of indicators of economic condition and its related components, including fiscal sustainability, which might be a part of general purpose external financial reporting. This phase of the project will incorporate research on fiscal sustainability and determine and clarify fiscal sustainability's relationship to economic condition, including fiscal capacity, and service capacity, and financial position.
The project also will:
- Develop a definition for fiscal sustainability
- Consider whether additional guidance or guidelines should be provided based on the recently completed research
- Determine the preferable methods of communicating any additional information, if applicable.
Another major issue the Board will consider is whether or not governments should project fiscal information into the future and, if so, should the Board consider providing guidance on the assumptions used to execute those projections (for example, current policy, reasonable assumptions, or specific alternative scenarios). A related issue is determining the general length of time for reporting forward projected information.
The project also will address how reporting fiscal sustainability information will impact different types of governmental entities, and whether there should be different reporting requirements, recommendations, or guidelines for different types of governmental entities.
Finally, the issue of the reliability of information being reported will be addressed as it relates to information on fiscal sustainability.
- Pre-agenda research approved: April 2004
- Added to current technical agenda: December 2009
- Task force established? Yes
- Deliberations began: June 2010
- Preliminary Views approved: November 2011
- Comment period: December 2011–March 2012
- Field test conducted: December 2011– March 2012
- Public hearings held: March–April 2012
- User outreach sessions held: April–May 2012
- Redeliberations began: July 2012
- Additional user research conducted: November–December 2012
- Project placed on hold: January 2013
Current Developments: The project is still on hold.
|Board Meetings||Topics to be considered|
Board deliberations on the project have been placed on hold.
Economic Condition Reporting—Recent Minutes
Minutes of Archive
Note: Based on the schedule in the current technical plan, the Board plans to consider all of the due process feedback received as it redeliberates the various proposals included in the Preliminary Views before determining the future direction of the project.
The Board tentatively agreed that:
- Component 1 (projections of total and major individual cash inflows), Component 2 (projections of total and major individual cash outflows), and Component 3 (projections of total and major individual financial obligations) are necessary to assist users in assessing a governmental entity’s fiscal sustainability.
- Cash inflows should be projected by major individual source.
- The projections of cash inflows and cash outflows (Components 1 and 2) need to include both beginning and ending cash and cash equivalent balances for the all projection periods.
- Clarification is needed as to what a financial obligation is, and what total financial obligations are included within Component 3.
- Projections of annual debt service payments (Component 4) would be included within the projections of cash outflows (Component 2) and, therefore, should be removed as an individual component of fiscal sustainability information.
- Cash outflows related to debt service payments should always be considered “major cash outflows” and therefore individually projected.
- The assumptions used in the projections of cash outflows related to debt service payments include the minimum debt service requirements disclosed in the notes to the financial statements, plus the debt service on debt obligations that have been authorized, not yet issued, but are expected to be issued within the projection period and that this assumption should be disclosed.
- Financial projections should be (1) based on current policy, (2) informed by historical information, and (3) adjusted for known events and conditions that affect the projection periods.
- Current policy includes policy changes that have been formally adopted but will not be effective until future periods.
- In the absence of current policies effective through the entire projection period, the assumptions used for making financial projections may be based on historical trend information adjusted for known future events or conditions.
- The assumptions and financial projections would include current policy and known events and conditions that existed as of the date the annual financial report is available for issuance.
- Any law pertaining to the preparation of a budget, including a balanced budget requirement, is not relevant to the financial projections being proposed in this project and should therefore not be included in “current policy” as defined in the Preliminary Views. The notes should include a requirement to disclose that balanced budget laws were not taken into consideration in developing the financial projections.
- Authorized capital expenditures would be considered current policy.
- In those instances in which capital expenditures have been authorized before securing authorized or awarded funding, the notes should explain this gap between the projections of cash outflows and cash inflows.
- The first sentence in Chapter 4, paragraph 4, of the Preliminary Views, should be edited by removing “through established laws, regulations, and administrative rules” from the sentence and adding those items, as well as “executed contracts and grant agreements” to a second sentence as examples of current policy.
- Inflows and outflows should be projected on a cash basis of accounting; financial obligations should be projected on an accrual basis of accounting.
- A requirement to disclose the basis of accounting being used for the financial projections should be included.
- The identification and development of assumptions for making financial projections should be guided by a principles-based approach that requires assumptions to be based on relevant historical information, as well as events and conditions that have occurred and that affect the projection periods.
- Assumptions should be (1) consistent with each other (where appropriate) and (2) comprehensive by considering significant trends, events, and conditions.
- Disclosure of assumptions should be required.
- Additional illustrations that use other methods and assumptions should be included in any potential future due process document to convey to preparers that there is more than one acceptable approach to preparing financial projections.
- Annual financial projections should be made for five individual years beyond the reporting period for the purpose of external reporting.
- The basis of the assumptions used should be disclosed. For example, current policy, historical trends, or a known event or condition.
- Financial projections and related narrative discussions possess all six qualitative characteristics of financial information identified and described in Concepts Statement 1, although not in equal proportion.
- The scope of any guidance on economic condition reporting, specifically financial projections, would apply to all governmental entities with the exception of governments that are fiduciary in nature.
- Financial projections and related narrative discussions should be reported for the primary government, including both governmental activities and business-type activities with net subtotals (inflows less outflows) for the general fund, other governmental activities, total governmental activities, total business-type activities, and a net total for the entire primary government.
- A narrative discussion would be necessary in instances in which one or more activities are determined to significantly affect (positively or negatively) the fiscal sustainability of the primary government.
- The primary government should not report financial projections and related narrative discussions for its discretely presented component units.
- The following individual cash inflows, cash outflows, and financial obligations are major:
- Individual governmental and business-type activities cash inflows, cash outflows, and financial obligations that represent at least 10 percent of total cash inflows, total cash outflows, or total financial obligations, respectively, for all activities of that type in any of the projection periods reported
- Cash outflows for capital outlays
- Capital-related cash inflows from bond proceeds, capital grants, or other sources that are restricted or committed to capital outlays
- Cash outflows related to debt service
- Any other cash inflows, cash outflows, or financial obligations that a government believes is particularly important to users when making an assessment of the government’s fiscal sustainability.
- The following reference to the cautionary notice should be included on every page of the illustrations of financial projections and related narrative discussions: “The financial projections, related to narrative discussions, and accompanying notes should be considered in the context set forth in the cautionary notice on page X.”
- The third sentence in the first paragraph of the cautionary notice would state that “These financial projections are intended to assist users in assessing whether projected cash inflows will be sufficient to sustain public services and to meet financial obligations as they come due.”
- International Public Sector Accounting Standards Board
- Federal Accounting Standards Advisory Board
- International City/County Management Association
- Australian Intergenerational Report
- United Kingdom’s Long-term Public Finance Report
- Connecticut Municipal Fiscal Indicators
- Auditor General of Florida, Financial Condition Assessment Procedures
- Maricopa County (Arizona) Financial Condition Report
- NASBO’s Fiscal Survey of the States
- Portland (Oregon) Financial Condition Report
- Comptroller’s Report on the Financial Condition of New York State