GASB’s Financial Reporting Model Improvements – Exposure Draft

In September 2015, the Governmental Accounting Standards Board (GASB) added to its agenda to reexamine the financial reporting model used by governmental entities. The GASB wanted to review all the previous Statements and Interpretations issued that impact the current financial reporting model and identify improvements that could be made. The GASB began the project with an invitation to comment in December 2016 and then followed that with sharing Preliminary Views on Financial Reporting Model Improvements in September 2018. On June 30, 2020, the GASB’s Exposure Draft, Financial Reporting Model Improvements, was issued.  Comments on the exposure draft are due by Feb. 26, 2021.

The GASB’s objective with the proposed Statement is to improve the effectiveness of the financial reporting model in providing information that is essential for decision-making and assessing a government’s accountability and address certain application issues. A consistent theme throughout the Exposure Draft is that the changes will help with comparability and provide more useful information for decision-makers and users of the financial statements.

Management’s Discussion and Analysis

The Management Discussion and Analysis (MD&A) is considered required supplementary information and always precedes the basic financial statements. This will continue to be the case, but the proposed Statement notes that it is limiting the MD&A to five sections:

1. Introduction
2. Financial Summary
3. Detailed Analyses
4. Significant Capital Asset and Long-Term Debt Activity
5. Currently Known Facts, Decisions, or Conditions

The MD&A is currently set up to provide an easily readable analysis of the government’s financial activities, which includes comparison between the current year and prior year, with the focus on the current year. The MD&A currently gives users a quick way to understand why there were significant changes in financial position and results. The GASB wants to continue to provide an MD&A for this purpose but also wants the MD&A to avoid duplication of explanations and “boilerplate” discussions. Finally, the requirement of distinguishing between the primary government and its discretely presented component units in the MD&A is still in place as the primary government should be the focus of the MD&A.

Unusual or Infrequent Items

An emphasis is placed on transactions or events that are considered either unusual in nature or infrequent in occurrence. The proposal would require unusual or infrequent items to be presented in the government-wide, government fund, and proprietary statements of resource flows as the last flow of resources presented before the net change in resource flows.

New Measurement Focus and Basis of Accounting for Governmental Funds

Governmental fund financial statements are currently prepared with the current financial resources measurement focus and the modified accrual basis of accounting, while the proprietary funds financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. This proposed statement does not modify the proprietary funds measurement focus or basis of accounting, but it does modify the governmental fund financial statements to use a short-term measurement focus and the accrual basis of accounting. The new measurement focus and basis of accounting should provide information that is more comparable across governmental entities.

Balances, inflows of resources, and outflows of resources would be recognized based on whether the items arise from short-term or long-term transaction and events. If deemed a short-term transaction and event, then the balances, inflows of resources, and outflows of resources would be recognized as the transaction or event occurs. If deemed a long-term transaction and event, then the balances, inflows of resources, and outflows of resources would be recognized when payments are due. There is an exception provided in the proposed statement for long-term debt issued for short-term purposes, which would be recognized as a short-term transaction. Interfund balances and transfers are considered short-term events.

Presentation of Government Fund Financial Statements

The government fund financial statements will now include a balance sheet titled “Short-Term Financial Resources Balance Sheet” and a resource flows statement titled “Statement of Short-Term Financial Resource Flows”. The resource flows statement will be broken out between current activity and non-current activity. The inflows of resources and outflows of resources related to the purchase and disposal of capital assets and issuance and payment of long-term debt would be presented separately from the other activities.

Presentation of the Proprietary Fund Statement of Revenues, Expenses, and Changes in Fund Position

The proprietary fund statement of revenues, expenses, and changes in fund position will continue to separate operating revenues and expenses from nonoperating revenues and expenses. Operating revenues and expenses are defined as anything not considered nonoperating, and the specific nonoperating revenues and expenses are specifically detailed in the proposed statement. Nonoperating revenues and expenses are noted in the Exposure Draft to include:

• Subsidies received and provided
• Revenues and expenses related to financing
• Resources from the disposal of capital assets and inventory
• Investment income and expenses

The GASB noted that definitions of operating and nonoperating revenues and expenses were included in the hopes of better comparability across governmental entities.

The proprietary fund statement of revenues, expenses, and changes in fund position is now required to include a subtotal for operating income (loss) and noncapital subsidies, which is to be presented before the nonoperating revenues and expenses. Subsidies are defined as both:

• Resources received from another party or fund to keep the rates lower than otherwise would be necessary to support the level of goods and services to be provided
• Resources provided to another party or fund that results in higher rates than otherwise would be established for the level of goods and services to be provided

Budgetary Comparison Information – Required Supplementary Information

The proposed requirement to show budgetary comparison information as required supplementary information will likely have a significant impact to the financial statements of many government entities. The budgetary comparison information would include a comparison between final budget and actual amounts and original budget to final budget amounts. Significant variance explanations from final budget amounts to actual amounts and original budget amounts to final budgets amounts are to be presented as notes to the required supplementary information and not included in the MD&A. The GASB believes these variance explanations will help provide more useful information, which should help decision-makers make more informed decisions and better assess accountability.

Proposed Effective Dates

The effective date of this proposed statement is impacted by whether a government’s total revenue is greater than or equal to $75 million or less than $75 million. If a government’s revenue is greater than or equal to $75 million, then the proposed effective date is for fiscal years beginning after June 15, 2024. If a government’s revenue is less than $75 million, then the proposed effective date is for fiscal years beginning after June 15, 2025. Early application is expected to be permitted.