The User's Perspective

May 2008

Bevy of New Projects on Tap for GASB

            The GASB’s technical plan is a document that lays out the projects that the Board members will be deliberating and the staff will be researching over the next couple of years. It is reviewed three times a year by the Board members, who take into account feedback received from the Governmental Accounting Standards Advisory Council (GASAC) and constituents in general before the final agenda decisions are reached by the GASB chairman.

            A typical GASB project begins in a list of potential projects suggested by constituents, GASAC members, Board members, or staff. The project moves to the research agenda when sufficient resources are available and it is deemed to be a high enough priority to command the use of those resources. After research is completed, if standards setting is needed and it is deemed a high enough priority, then the project will move to the current agenda—the list of projects that are being actively discussed by the Board.

            In a normal year, one or two new projects may be added to the research agenda and a similar number may move from the research agenda to the current agenda. But the April 2008 meeting of the GASB marked an unusual juncture at which a relatively large number of research projects had been completed and were ready to be considered for the current agenda, thereby potentially freeing up research resources for new projects on the research agenda. Following discussion at the meeting, GASB Chairman Bob Attmore announced that three major projects and three practice issues were being added to the current agenda, and three projects were being added to the research agenda. This article briefly describes the new projects and considers their potential impact on the information presented in state and local government financial reports.

Current Agenda Projects

            Three projects added to the current agenda are considered major projects; that is, they are likely to result in significant changes to current accounting and financial reporting standards. The three new major projects are Postemployment Benefit Accounting and Financial Reporting, Public/Private Partnerships, and Reporting Unit Presentations/Statement 14 Reexamination. The other three projects address practice issues—they are more narrowly scoped technical projects or projects intended to provide guidance on existing standards. They are the AICPA Omnibus, ARC Adjustments, and Derivative Instruments Implementation Guide projects. (Clicking on the project titles below will take you to the relevant project page on the GASB website, where you will find more information about the project’s background and research findings, issues that will be addressed, timetable, and results of Board discussions.)

Postemployment benefit accounting and financial reporting 

            The GASB’s standards for public employee pension reporting have been in effect for approximately a decade, long enough for the GASB to evaluate whether they have (1) resulted in accurate reporting of the costs and obligations associated with pension benefits, and (2) provided decision-useful information to the users of financial information about governments. The GASB staff conducted extensive research to support that evaluation. In this project, the Board will consider whether the standards need to be amended to improve their effectiveness. Because the standards for retiree health insurance and other postemployment benefits (OPEB) take the same basic approach as the pension standards, the Board also will consider OPEB within the project’s scope.

            Likely impact on financial reports: The impact depends upon the extent of changes the Board makes, if any, to the existing standards.

Staff contacts:            Karl Johnson,

                                 Michelle Czerkawski,

Public/private partnerships 

            Recent years have been marked by greater attention to arrangements referred to as “public/private partnerships” or P3’s. Although this term has been applied to a wide variety of transactions (from contracting out of social service programs to complete privatization of public assets), this project was initially prompted by increasing interest in arrangements through which a government enters a long-term contract (perhaps 50 to 100 years) with a private company to operate and maintain (and sometimes to build) a major public facility or piece of infrastructure, such as a sewage treatment plant or a toll road. This project will consider whether existing standards provide sufficient guidance on how to account for P3 transactions, or if new standards need to be developed.

            Likely impact on financial reports: One key issue to be resolved is who reports the asset when long-term arrangements are entered into. Should it continue to appear on the government’s statement of net assets, or should the company report it? Another issue relates to up-front payments made by the company to the government. Should these payments be recognized as revenue right away, or should they be recognized in increments over the period of the agreement?

Staff contacts:            Greg Driscoll,

Reporting unit presentations and Statement 14 reexamination 

            This project has two distinct but related parts. The first part reexamines GASB Statement No. 14, The Financial Reporting Entity, which governs what parts of a government appear in its financial statements. Most notably, it established the criteria for determining if legally separate entities—component units—should be included in a government’s reporting entity, as well as how to report joint ventures, jointly governed organizations, and other arrangements. These standards have been in place for about 15 years.

            The other part of the project will consider whether to establish generally accepted accounting principles (GAAP) for parts of a government that are less than a complete legal entity, such as individual departments or funds. This type of reporting already occurs, but in fact there are no standards for doing so; governments and their auditors do their best to apply the standards for entire governments to these individual parts. Consequently, there are plenty of unresolved questions, such as how to allocate specific capital assets or long-term debts.

            Likely impact on financial reports: The impact of the reexamination depends upon the extent of changes the Board makes, if any, to Statement 14. Establishing standards for reporting by departments and other reporting units should greatly improve comparability and make such financial reports more reliable.

Staff contacts:            Wes Galloway,

                                  Ken Schermann,

Codification of accounting and financial reporting guidance (including the GAAP hierarchy) that is included in current and recently modified statements on auditing standards 

            That mouthful of a project title is more simply referred to as the AICPA Omnibus project. Over time, accounting and financial reporting standards that financial statement preparers are intended to implement have arisen outside of the literature of the GASB and its predecessors, most notably in the auditing standards promulgated by the American Institute of Certified Public Accountants (AICPA). The standards address issues such as:

  • Subsequent events—how to report things that take place after the end of the fiscal year for which financial statements are prepared, but before the statements are issued
  • Related party transactions—if the substance of a transaction with a related party differs significantly from its legal form, different accounting may apply
  • Going concern—how to determine if it is appropriate to assume that a government will continue to operate and is not in danger of going out of business.

            This project would bring these and other standards into the GASB’s own literature.

            Likely impact on financial reports: Minimal. The primary benefit would go to financial statement preparers by consolidating the body of standards that they are required to apply. A possible resulting benefit to financial statement users could be an increase in the appropriate application of these standards by state and local governments, which should improve the comparability and reliability of the information in financial reports.

Staff contacts:            Ken Schermann,

                                  Wes Galloway,

Calculation of annual pension or OPEB cost when the ARC adjustment is known 

            A key component of the actuarial calculations performed for pension, health insurance, and other postemployment benefits (OPEB) is the determination of how much should be contributed each year—the annual required contribution (ARC)—in order to ensure that sufficient assets are available when benefits are paid in the future. To the extent that a government makes a contribution greater or less than the ARC, it has an impact on future calculations. For example, if a government contributes less than the ARC, then future actuarial calculations will include an amount to compensate for the shortfall. For accounting purposes, the portion of the ARC calculation related to past over- and underpayments already has been recognized in the financial statements and an adjustment needs to be made to future ARCs to avoid double-counting this amount. The current standards assume that this amount is not known and therefore prescribe a method of estimation that governments are required to use. However, it has come to the GASB’s attention that some actuaries do track that portion of the ARC separately. This project would allow governments to base the ARC adjustment on the actual amounts when the actuary knows what they are.

            Likely impact on financial reports: It is believed that the ARC adjustment estimated under the current standards could deviate over time from calculations based on the actual impacts of past over- and under-contributions, thereby leading to an over- or understatement of the pension or OPEB liability that is reported in the government-wide statement of net assets.

Staff contacts:            Michelle Czerkawski,

                                  Karl Johnson,

Implementation Guide: Derivative Instruments 

            The GASB’s new Statement on accounting and financial reporting for derivatives is due to be issued in June. As with most major standards, the GASB will publish an implementation guide intended to assist governments with applying the new standards. Implementation guides come in question-and-answer format and sometimes offer additional illustrations. The questions are collected as standards are being developed, through comments made by constituents in response to draft standards issued for public comment, and based on technical inquiries that the GASB staff receives on a regular basis.

            Likely impact on financial reports: Implementation guides should increase the likelihood that the standards will be applied appropriately by governments, which improves the chances that the resulting financial report information will be the decision-useful information that was intended.

Staff contacts:            Randy Finden,

                                  Emily Shafron,

Research Agenda Projects

            As previous research projects are completed and become current agenda projects that the Board is deliberating, research resources can be redirected to projects from the GASB’s list of potential projects. Three projects were added to the GASB’s research agenda in April—Codification of FASB Pronouncements, Fair Value Measurements, and Investment Omnibus.

Codification of Pre-November 30, 1989, FASB Pronouncements 

            For the first five years of the GASB’s existence, FASB standards on a specific issue were considered to be authoritative for governments unless new GASB standards were published addressing the issue. When the GASB’s jurisdiction over state and local governments was affirmed in 1989, it was agreed that FASB standards issued prior to November 30, 1989, would be applicable to governments unless they conflicted with or contradicted GASB standards. Identifying these FASB standards, which sometimes could be just a few provisions within a broader pronouncement, can be difficult for some governments, especially if the standards have been amended since 1989 (only the original version, not the amended one, would be applicable). As the FASB is preparing to codify all of its literature, locating those original pronouncements could become more difficult. This project is intended to determine what FASB standards apply to governments and do not conflict with or contradict GASB standards, and then whether those standards should be incorporated as is into the GASB’s literature or if the standards first need to be adapted for governments.

            Likely impact on financial reports: Making it easier for financial statement preparers to identify and apply relevant FASB standards should lead to improvement in the appropriate application of the standards. This should be generally beneficial to users of government financial statements.

Staff contacts:                        Andy Richards,

                                              Michelle Czerkawski,

Investment Omnibus 

            This project brings together a variety of investment-related issues. The first issue involves “2a7-like” investment pools. These are pools that qualify in all respects to be considered money market funds by the Securities and Exchange Commission (SEC), except they are not required to actually file with the SEC. Questions have arisen as to whether pools actually are meeting the requirements, which is important because if not, they would no longer be able to report their investments at amortized cost instead of fair value. The project also would address (1) whether participating in a deposit placement service shields a government’s deposits from custodial credit risk, (2) measurement of the value of unallocated insurance contracts, (3) whether current disclosures for interest rate risk for mutual funds should be limited to bond mutual funds, and (4) how to report realized gains and losses on investments.

            Likely impact on financial reports: Clarification of the provisions of these standards should result in more consistent application by governments. Users should benefit from the reporting of more comparable information.

Staff contacts:                        Randy Finden,

                                              Lisa Parker,

Fair Value Measurement 

            The use of fair value in government financial statements and the procedures for measuring it remain a work in progress. Fair value can be considered the amount that would be paid for something if it were sold in an open and actively-traded market between two willing and unrelated parties. At present, investments are generally reported by governments at their fair value as of the financial statement date. This project is intended to further the appropriate use of fair value reporting by considering alternative methods of measuring it and information that should be disclosed about it.

            Likely impact on financial reports: This project could result in more comparable reporting of the value of assets included in a government’s balance sheet statements. It also could lead to the disclosure in the notes of better information about how the fair value reported in the financial statements is determined, better equipping financial statement users to assess the potential for future changes in those fair value amounts and their resulting impact on a government’s financial health.

Staff contacts:                        Randy Finden,

                                              Lisa Parker,

Further Reading