Proposed Changes to the Governmental Reporting Model
by Michael "Mike" A. Hoerig, CPA, Audit Partner
Posted on February 26, 2019
In September 2018, the Government Accounting Standards Board (GASB) issued a Preliminary Views document titled “Financial Reporting Model Improvements.” The document outlines a number of potential changes that GASB has researched since the project began in 2015. Aside from enhancing the effectiveness of government financials, GASB also notes that a key aspect of the project is to “…look for opportunities to reduce the complexity and the length of the financial statements.” Here is a brief summary of the proposed changes.
Governmental Fund Financials
The Preliminary Views document contains a number of suggested changes, including changes to the fund financial statements that appear in the basic financials. If the suggestions were adopted as-is, all governments would one day report a “Short-Term Financial Resources Balance Sheet” and a “Statement of Short-Term Financial Resource Flows”. Part of GASB’s plan to simplifying the financials is to rename these statements to help emphasize the near-term timeframe of the fund financials (as opposed to the long-term nature of the government-wide statements). In addition to changing financial statement titles, the Preliminary Views document also suggests new report layouts that include the following sections:
- Short-Term Financial Resources Balance Sheet
- short-term assets,
- short-term liabilities,
- deferred outflows of short-term financial resources,
- deferred inflows of short-term financial resources,
- short-term financial resources fund balances,
- Statement of Short-Term Financial Resource Flows
- inflows of short term financial resources for current activities,
- outflows of short-term financial resources for current activities, and
- net flows of short-term financial resources for noncurrent activities
A further emphasis of the short-term nature of the fund statements would also be accomplished by requiring a report header that reads “This financial statement presents a short-term view of governmental fund activities and reports items of a long-term nature differently from how they are reported in the government-wide financial statements.” Appendix D of the Preliminary Views document includes examples of these potential reporting changes, with comparisons to the current reporting model.
Proprietary Fund Financials
The Preliminary Views document also suggests changes to proprietary fund statements. Proposed changes include more clearly defining the difference between operating and nonoperating activity, and specifying that nonoperating activities include (a) subsidies received and provided, (b) revenues and expenses related to financing, (c) resources from the disposal of capital assets and inventory, and (d) investment income and expenses. By definition, operating activities would consist of everything other than nonoperating activities.
In addition to these new definitions, GASB also proposes a new subtotal on the proprietary funds activity statement. The additional subtotal would appear after net income/loss from operating activities and after noncapital subsidies, but before any financing, investing and capital activities. The purpose of the new subtotal would be to help emphasize the amount of reliance on subsidy activity to support the fund’s operations.
The current reporting model allows for the presentation of budgetary comparison statements for major General and Special Revenue funds either in the basic financial statements, or as required supplementary information (RSI). However, GASB’s research indicates that allowing each government to dictate the presentation location can create confusion for readers who attempt to compare government financials; and therefore, the Preliminary Views document suggests limiting presentation to the RSI section only. GASB also proposes adding a new variance column to the budgetary comparison schedule that calculates the difference between the adopted and final budgeted amounts.
Another proposal in the Preliminary Views addresses the preferred presentation of major component units when it is not feasible to include them on the face of the government-wide statement of net position or statement of activities. In this circumstance, GASB suggests a combining presentation in the basic financials section, but after presentation of the fund financials.
Finally, one last proposal suggests the inclusion of a government-wide schedule of expenses by natural or program classification. This schedule would be presented as supplementary information, and would only be applicable to governments that prepare a comprehensive annual financial report (CAFR). Examples of the suggested format are provided in Appendix D of the Preliminary Views document.
While the comment period for the Preliminary Views document closed in February 2019, there will still be opportunities for governments and stakeholders to provide feedback. GASB anticipates an Exposure Draft to occur in 2020, at which time additional comments can be provided. Currently, GASB projects a final Statement issuance in early 2022.