Project Pages

Financial Reporting Model—Reexamination of Statements 34, 35, 37, 41, and 46 and Interpretation 6

Project Description: The objective of this project is to make improvements to the financial reporting model, including Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and other reporting model-related pronouncements (Statements No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities, No. 37, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus, No. 41, Budgetary Comparison Schedules—Perspective Differences, and No. 46, Net Assets Restricted by Enabling Legislation, and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements). The objective of these improvements would be to enhance the effectiveness of the model in providing information that is essential for decision-making and enhance the ability to assess a government’s accounting and to address certain application issues, based upon the results of the pre-agenda research on the financial reporting model.

Status:
Exposure Draft Redeliberations

 

FINANCIAL REPORTING MODEL—PROJECT PLAN


Background: Statement 34 was the culmination of 15 years of research, deliberation, and due process. In Statement 34, the GASB established the present blueprint for state and local government financial reporting—the format and measurement focus of the basic financial statements, certain related notes to the financial statements, and required supplementary information including management’s discussion and analysis (MD&A). Among its many features, Statement 34 introduced government-wide financial statements containing accrual information—which notably included the reporting of infrastructure, other capital assets, and long-term liabilities—for activities previously reported only on a modified accrual basis in the governmental funds. Statement 34 also required a narrative MD&A to precede the financial statements, added the presentation of the original budget to the budgetary comparison schedule, introduced major fund reporting in the governmental and enterprise funds, and added note disclosures related to capital asset and long-term liability activity during the reporting period.

Statement 34 was first effective for periods beginning after June 15, 2001. Most provisions of the Statement became effective in three phases, beginning with the largest governments. Up to an additional 4 years were allowed for Phase 1 (annual revenues of $100 million or more) and Phase 2 ($10 million to $100 million) governments to retroactively report existing infrastructure assets. Phase 3 governments (below $10 million) were allowed to report general infrastructure prospectively.

The financial reporting model has a pervasive influence over the effectiveness of financial reporting by state and local governments and the ability of that reporting to achieve the objectives of financial reporting. As a result, the GASB decided that it was important, as part of its commitment to maintaining the effectiveness of its standards, to reexamine the current financial reporting model now that it has been in place for a sufficient time. The pre-agenda research showed that most of the components of the financial reporting model are effective; however, the research identified several areas for potential improvements.

In conjunction with this project, the efforts to develop recognition concepts for information presented in governmental funds will be continued. The Board’s conceptual framework project on recognition was put on hold pending reexamination of the financial reporting model. Feedback to the Preliminary Views issued in June 2011 included recommendations that recognition concepts for governmental funds should be developed in conjunction with a reexamination of the financial reporting model.

Accounting and Financial Reporting Issues: The project is considering the following issues:

Management’s Discussion and Analysis (MD&A)—Explore options for enhancing the financial statement analysis component, consider the elimination of requirements that are boilerplate and no longer necessary for understanding the financial reporting model, and clarify guidance for presenting currently known facts, decisions, or conditions that are expected to have a significant effect on financial position or results of operations.

Governmental Fund Financial Statements—Explore a conceptually consistent measurement focus and basis of accounting and develop a presentation format for governmental fund financial statements consistent with the measurement focus and basis of accounting. In conjunction with this project, the conceptual framework project on recognition of element of financial statements was recommenced.

Proprietary Fund and Business-Type Activity Financial Statements—Evaluate operating indicator alternatives in conjunction with evaluating the guidance for the separate presentation of operating and nonoperating revenues and expenses.

Budgetary Comparisons—Explore the appropriate method of communication (either as basic financial statements or required supplementary information) for budgetary comparison information and consider whether and, if so, which budget variances should be required to be presented.

Other Issues—As appropriate and in conjunction with other topics, explore options that would permit more timely financial reporting or that would reduce complexity overall, such as presentation of special and extraordinary items and major component unit information.

Project History:
  • Pre-agenda research approved: August 2013
  • Research results reported to the Board: July 2015
  • Added to current technical agenda: September 2015
  • Task force established? Yes
  • Deliberations began: October 2015
  • Task force meeting held: June 2016
  • Invitation to Comment cleared: December 2016
  • Comment period: January–March 2017
  • Deliberations on new issues for Preliminary Views began: December 2016
  • Public hearings and user forums held: April–May 2017
  • Task force meeting held: September 2017
  • Redeliberations began: October 2017
  • Preliminary Views approved: September 2018
  • Comment period: September 2018–February 2019
  • Deliberations on new issues for Exposure Draft began: October 2018
  • Public hearings and user forums held: March 2019
  • Redeliberations began: June 2019
  • Exposure Draft approved: June 2020
  • Comment period: July 2020–February 2021
  • Public hearings and user forums held: March and April 2021
  • Redeliberations began: May 2021
Current Developments: In July and August 2021, the Board considered alternatives to a short-term approach for governmental funds and major characteristics of the short-term approach.  

Work Plan:
 
Board Meetings Topics to Be Considered
December 2021: Review example transactions and flow chart for recognition in governmental fund financial statements.
January 2022: Redeliberate presentation of governmental fund financial statements including terminology.
March 2022: Redeliberate issues related to management’s discussion and analysis.
April 2022: Redeliberate issues related to unusual and infrequent items.
May/June 2022: Redeliberate issues related to presentation of proprietary fund financial statements.
July 2022: Redeliberate issues related to presentation of budgetary comparison information
August 2022: Redeliberate issues related to presentation of major component unit information.
October 2022: Redeliberate issued related to effective date and transition.
November 2022: Review comprehensive illustrations.
January 2023: Discuss first draft of a final standards section.
February 2023: Discuss preballot draft of a final Statement.
April 2023: Discuss ballot draft of a final Statement and consider for approval.

FINANCIAL REPORTING MODEL—RECENT MINUTES


Minutes of Meetings, November 2–4, 2021

The Board continued redeliberations of the Conceptual Framework—Recognition and the Financial Reporting Model projects by discussing the name of the measurement focus and basis of accounting for governmental fund financial statements. The Board discussed whether any modifications should be made to the name short-term financial resources measurement focus as proposed in the Exposure Drafts, Recognition of Elements of Financial Statements (Concepts ED), and Financial Reporting Model Improvements (Financial Reporting ED), and tentatively decided that the name of the measurement focus should be retained.
 
The Board then discussed whether any changes should be made to the use of accrual to describe the basis of accounting proposed in the EDs and tentatively decided that the basis of accounting for governmental fund financial statements should be identified as the modified accrual basis of accounting.
 
The Board then discussed whether any modifications should be made to the description of the economic resources measurement focus (as proposed in paragraphs 7 and 8 of the Concepts ED). The Board tentatively decided that the proposed description of the economic resources measurement focus should be retained.
 
The Board next discussed whether to modify the language proposed in the Concepts ED related to the hierarchy of recognition. The Board tentatively decided that the proposed language related to the hierarchy of recognition should be retained. The Board also discussed whether the Basis for Conclusions should discuss recognition of note disclosures in relation to the hierarchy of recognition, in response to stakeholder comments. The Board tentatively decided that the Basis for Conclusions should not discuss the recognition of note disclosures in the hierarchy of recognition.

The Board discussed the proposed exception for long-term financing issued for short-term purposes. The Board discussed whether a short-term purpose should be described as “a government obtaining and consuming a financial asset or service within one year or providing financial resources to a service recipient without restricting the use of the resources to the acquisition of nonfinancial assets.” The Board directed the project staff to further develop the description of a short-term purpose for discussion at a future meeting.
 
The Board then considered certain transactions in financial statements presented applying the short-term financial resources measurement focus and modified accrual basis of accounting. The Board first discussed whether any changes should be made to the accounting for escheat property in governmental funds and tentatively decided that the Codification Instructions of a final Statement should reflect that (1) a liability should be recognized for all amounts expected to be paid to claimants, including the percentage that is paid to claimants beyond one year from receipt, and (2) the recognition of an asset for escheat property from a long-term transaction should be associated with a liability for the effect on fund balance to be neutral.
 
The Board then discussed the accounting for irrevocable split-interest agreements in governmental funds. The Board first considered whether the guidance for recognition of irrevocable split-interest agreements in governmental funds should be removed and tentatively decided that it should not be removed. Next, the Board discussed whether the governmental funds guidance for recognition of irrevocable split-interest agreements in which the government is the intermediary and that arise from long-term transactions should require that (1) assets be recognized for financial assets received, such as cash and investments; (2) deferred inflows of resources be recognized for the government’s beneficial interest; and (3) a liability be recognized for the third party’s beneficial interest. The Board tentatively decided that those changes to the existing guidance should be reflected in the Codification Instructions of a final Statement.
 
The Board then discussed whether the guidance for recognition of irrevocable split-interest agreements in which a third party is the intermediary, arising from short-term transactions, should require that assets and a related deferred inflow of short-term financial resources be recognized for the government’s beneficial interest. The Board tentatively decided that this guidance should be reflected in the Codification Instructions of a final Statement.
 
The Board then discussed whether the guidance for recognition of irrevocable split-interest agreements in which a third party is the intermediary, arising from long-term transactions, should require that an asset and inflow of short-term financial resources be recognized when payments are due. The Board tentatively decided that this guidance should be reflected in the Codification Instructions of a final Statement.
 
The next issue the Board discussed was whether the proposed guidance that investments should be reported as assets in the short-term method should be modified to exclude land (and capital assets) held as an investment. The Board tentatively decided that this guidance should not be modified in a final Statement.

The Board then discussed whether the guidance for reporting nonspendable fund balance proposed in the Reporting Model ED should be modified to include the description that nonspendable fund balance should be reported for amounts that are not in spendable form. The Board tentatively decided that this guidance should be provided in a final Statement.
 
Lastly, the Board discussed whether the proposed guidance that all investments should be reported as assets in the short-term method should be modified to exclude investments not reported at fair value. The Board tentatively decided that this guidance should not be modified in a final Statement.

Minutes of Meetings, September 21–23, 2021
 
The Board continued deliberations on the short-term financial resources measurement focus and accrual basis of accounting (short-term method) to be used in presenting governmental fund financial statements.

The Board first discussed examples of transactions highlighting the similarities and differences between a near-term and a one-year recognition period and tentatively decided that the recognition period of the short-term method should continue to be one year.

Next, the Board discussed stakeholder feedback received pursuant to the Exposure Drafts, Recognition of Elements of Financial Statements, and Financial Reporting Model Improvements, related to the following five features of the short-term method:
  1. Description of financial assets and financial liabilities
  2. Payments made or received in advance of the due date
  3. Deferred outflows of resources and deferred inflows of resources
  4. Items arising from interfund events
  5. Allowance for doubtful accounts and receivables not paid by their due date.
The Board tentatively decided to retain the language for financial liabilities proposed in the Exposure Drafts.

Subsequently, the Board discussed whether the proposed description of financial assets should be modified to accommodate the corpus of permanent funds and tentatively decided to retain the language proposed in the Exposure Drafts.

The Board then discussed whether the proposed description of financial assets should be modified for items consumable in lieu of cash that arise from long-term transactions. The Board tentatively decided to retain the language proposed in the Exposure Drafts for financial assets and to modify the language for the application of the short-term method to indicate that assets recognized include inventories and certain prepaid items.

The Board then discussed whether the proposed description of financial assets should be modified to include examples and tentatively decided to retain the language proposed in the Exposure Draft.

The Board considered whether the proposed guidance regarding payments made or received in advance of the due date should be modified to identify the specific elements to be recognized and tentatively decided to retain the language proposed in the Exposure Draft.
The Board then considered whether to carry forward to the final Statement the proposal that applicability to the period for outflows of resources and inflows of resources in the short-term method be determined using the concept of interperiod equity. The Board tentatively decided to retain that proposed guidance and to modify the guidance for the application of the short-term method to deferred outflows of resources and deferred inflows of resources to clarify that recognition of those elements is limited to those instances identified in GASB Statements.

The Board then discussed stakeholder feedback related to items arising from interfund events and tentatively decided that the proposal to recognize interfund events as short-term transactions should be carried forward to the final Statement.

The Board then discussed stakeholder feedback related to recognition of an allowance for doubtful accounts and to receivables not paid by their due date and tentatively decided that no additional recognition guidance is appropriate. However, the Board may consider whether amounts of receivables not paid by their due date should be classified as nonspendable fund balance at a subsequent meeting.

The Board then transitioned to discuss stakeholder feedback related to the following three additional features of the short-term method:
  1. Recognition of a liability for long-term debt issued for short-term purposes
  2. Continued classification of a transaction or other event as short term or long term (as determined upon inception) when there are changes in the existing binding arrangement’s terms or conditions
  3. Recognition of inflows or outflows of short-term financial resources for on-behalf payments for fringe benefits and salaries and direct vendor financings (for example, leases). 
The Board tentatively decided to broaden the exception for long-term debt issued for short-term purposes to include instances when a government is required to make payments that extend beyond one year from the inception of the transaction to finance a fixed amount for a short-term purpose. The Board then tentatively decided to broaden the examples provided for this exception to include wage settlements and accounts payable with similar extended payment terms. The Board considered whether short-term purpose should be defined as obtaining a good or service within the short-term time frame established by the short-term method (one year) but indicated that it would like to consider additional alternatives at a subsequent meeting.

The Board then discussed stakeholder feedback related to the classification of a transaction or other event as short term or long term when there are changes in the existing binding arrangement’s terms or conditions. The Board tentatively decided to modify the proposed guidance to instead require reclassification of the transaction or other event if amendments are made to the terms or conditions of the original binding arrangement that warrant such a change from short term to long term or vice versa prior to the fiscal year-end based on the concepts for the short-term method. The Board tentatively decided not to allow reclassification for such amendments that are made subsequent to the fiscal year-end but prior to the issuance of the financial statements. The Board tentatively decided to retain the proposal to require reclassification of a transaction or other event as either short term or long term when a new binding arrangement is entered into.

Regarding the recognition of inflows and outflows of short-term financial resources for on-behalf payments for fringe benefits, salaries, and direct vendor financings, the Board tentatively decided to carry forward the proposed requirement related to on-behalf payments for fringe benefits and salaries but to modify the proposed requirement related to direct vendor financings. The proposed requirement related to direct vendor financings would be modified to instead require recognition of assets or outflows of short-term financial resources, as applicable, for all direct vendor financings and inflows of short-term financial resources for direct vendor financings, with the exception of direct vendor financings for short-term purposes, which the Board tentatively determined should be reported as fund liabilities.

Minutes of Meetings, August 10–12, 2021

The Board continued redeliberations on the short-term financial resources measurement focus and accrual basis of accounting (short-term method) to be used in presenting governmental fund financial statements. The Board first discussed whether the recognition terms for the short-term method should be (1) the terms of the binding arrangement (or estimated payments if there is no binding arrangement or the binding arrangement does not include specific payment terms) as proposed in the Exposure Drafts, Recognition of Elements of Financial Statements, and Financial Reporting Model Improvements, or (2) the terms that are normal for governments. The Board tentatively decided to retain the terms proposed in the Exposure Drafts.
 
The Board then discussed whether the recognition method for long-term transactions and events used in the short-term method should be based on (1) the inception date of the transaction as proposed in the Exposure Drafts or (2) the balance sheet date. The Board tentatively decided that the recognition method for such transactions should be based on the inception date of the transaction (that is, transactions and other events for which the period from inception to conclusion is greater than the recognition period should be recognized when payments are due).
 
Lastly, the Board discussed whether the recognition period for the short-term method should be one year as proposed in the Exposure Drafts or a shorter “near-term” period. The Board tentatively decided that the recognition term should be one year.

Minutes of Meetings, June 30–July 2, 2021

The Board continued deliberations by discussing approaches to governmental fund financial statements suggested by stakeholders other than a conceptually based short-term approach.

First, the Board discussed stakeholder feedback recommending that governmental fund financial statements be excluded from the basic financial statements. The Board tentatively decided that the governmental fund financial statements should continue to be presented as part of the basic financial statements.

The Board then discussed stakeholder feedback recommending that governmental fund financial statements be presented applying a government’s budgetary basis of accounting. The Board tentatively decided that governmental fund financial statements should not be presented applying a government’s budgetary basis of accounting.

Next, the Board discussed stakeholder feedback recommending that governmental fund financial statements be presented applying the economic resources measurement focus and accrual basis of accounting. The Board tentatively decided that a short-term perspective should be retained in governmental fund financial statements, rather than the economic resources measurement focus.

Lastly, the Board discussed stakeholder feedback recommending retaining and modifying the current financial resources measurement focus and modified accrual basis of accounting rather than establishing a conceptual basis for recognition in governmental fund financial statements. The Board tentatively decided that the current financial resources measurement focus and modified accrual basis of accounting should not be retained and modified.

Minutes of Meetings, May 20–21, 2021

The Board reviewed and discussed feedback from comment letters, public hearings, and user forums related to the Exposure Drafts, Financial Reporting Model Improvements, and Recognition of Elements of Financial Statements. The Board agreed to redeliberate overarching topics related to recognition in governmental funds before addressing coordination and timing with the Revenue and Expense Recognition project. No tentative Board decisions were made regarding the substantive issues of either Exposure Draft.

Minutes Archive

FINANCIAL REPORTING MODEL—TENTATIVE BOARD DECISIONS TO DATE


The Board tentatively decided the following:
  • Governmental funds should continue to be presented as part of the basic financial statements.
  • Governmental fund financial statements should not be presented applying a government’s budgetary
  • The economic resources measurement focus and accrual basis of accounting should not be applied to the governmental fund financial statements.
  • The current financial resources measurement focus and modified accrual basis of accounting should not be retained and modified.
  • The name of the measurement focus for governmental fund financial statements should be short-term financial resources measurement focus.
  • The name of the basis of accounting for governmental fund financial statements should be modified accrual basis of accounting.
  • The recognition terms for the short-term financial resources measurement focus and accrual basis of accounting for governmental funds (short-term method) should be the terms of the binding arrangement (or estimated payments if there is no binding arrangement or the binding arrangement does not include specific payment terms).
  • The recognition method for long-term transactions or events in the short-term method should be based on the inception date of the transaction.
  • The recognition period of the short-term method should be one year.
  • In the short-term method, financial assets include cash, assets that are available to be converted to cash, and assets that are consumable in lieu of cash. All liabilities are financial liabilities.
  • Assets recognized in governmental funds include certain prepaid items.
  • If payments are made or received prior to the due date, elements from long-term transactions and other events should be recognized when payments are made or received.
  • Applicability to the period for outflows of resources and inflows of resources in the short-term method should be determined using the concept of interperiod equity.
  • Interfund events should be recognized as short-term transactions.
  • Additional guidance for allowance for doubtful accounts and receivables not paid by their due date is not appropriate. Inflows of resources arising from short-term transactions are recognized when the underlying transaction occurs, and inflows of resources arising from long-term transactions are recognized when payments are due.
  • Liabilities should be recognized when a government is required to make payments that extend beyond one year from the inception of the transaction to finance a fixed amount for a short-term purpose. In the final Statement, examples of this exception should include not only tax anticipation notes and revenue anticipation notes with payment terms that extend beyond one year from inception of the transaction, but also wage settlements and accounts payable with similar extended payment terms.
  • A short-term purpose should tentatively be defined as obtaining a good or service within the short-term time frame established by the short-term method (one year), and the additional alternatives should be considered.
  • Reclassification of a transaction or other event should be made if amendments are made to the terms or conditions of the original binding arrangement that warrant such a change from short term to long term or vice versa prior to the fiscal year-end based on the concepts for the short-term method.
  • Reclassification of a transaction or other event as either short term or long term for amendments made subsequent to the fiscal year-end but prior to the issuance of the financial statements should not be allowed.
  • If a new binding arrangement is entered into, that transaction should be classified and reported.
  • Inflows of short-term financial resources and outflows of short-term financial resources should include on-behalf payments for fringe benefits and salaries.
  • With the exception of direct vendor financings for short-term purposes, which should be reported as fund liabilities, direct vendor financings should be recognized as assets or outflows of short-term financial resources and inflows of short-term financial resources.
  • A liability and an asset should be recognized in governmental funds related to escheat property from a long-term transaction for all amounts expected to be paid to claimants, including the percentage that is paid to claimants beyond one year of receipt.
  • Recognition guidance for irrevocable split-interest agreements in governmental funds should not be removed.
  • For irrevocable split-interest agreements in governmental funds in which the government is the intermediary and that arise from long-term transactions, (1) assets should be recognized for financial assets received, such as cash and investments; (2) deferred inflows of resources should be recognized for the government’s beneficial interest; and (3) a liability should be recognized for the third party’s beneficial interest.
  • For irrevocable split-interest agreements in governmental funds in which a third party is the intermediary and that arise from short-term transactions, assets and a related deferred inflow of short-term financial resources should be recognized for the government’s beneficial interest.
  • For irrevocable split-interest agreements in governmental funds in which a third party is the intermediary and that arise from long-term transactions, an asset and inflow of short-term financial resources should be recognized when payments are due.
  • Land (and capital assets) held as an investment should be reported as investments in governmental funds.
  • Investments not reported at fair value should be reported as investments in governmental funds.
  • Nonspendable fund balance should be reported for amounts that are not in spendable form.