The need for accounting standards for government entities has been long recognized, but the road to establishing the right body to set such standards was not a smooth one. Success was finally achieved 35 years ago with the creation of the Government Accounting Standards Board (GASB). The author examines the standards-setting landscape in which GASB was created, its major projects and accomplishments during its existence, and its plans for the future.
The Governmental Accounting Standards Board (GASB) recently celebrated its 35th anniversary. As The CPA Journal likewise celebrates its 90th anniversary and GASB begins its transition to its fifth chairman, Joel Black, now is an excellent time to look back at the board’s journey and forward to its next steps. This article addresses five questions that have been posed regarding GASB’s creation, its promise, the compromises that were made, its achievements, and the future of governmental accounting standards setting.
Why Was GASB Created?
The formal accounting standards-setting process for governments in the United States (other than the federal government, that is) began, ironically, in the private sector. The process, which has been in place since 1933, has taken several forms, beginning with the National Committee on Municipal Accounting and evolving through the establishment of the National Council on Governmental Accounting (NCGA) in 1974. All of those entities were associated with the Municipal Finance Officers Association (MFOA), now the Government Finance Officers Association (GFOA). The members of each iteration were all volunteers, and the staff members were drawn from the MFOA’s staff and consultants.
The financial health of governments has always ebbed and flowed with the overall economy, including several bankruptcies and defaults during the Great Depression. Soon after the NCGA was established, as a result of the overall economic downturn, the severe financial stress of several major governments came to light; the highest profile of those cases was the fiscal crisis of New York City, which reached its nadir in 1975. It is interesting to note that none of the high-profile cases involved bankruptcy; state governments, however, did intervene with a wide range of remedies, including the creation of oversight bodies.
Because the financial condition of governments attracted additional scrutiny during this period, some began to question the quality of governments’ financial statements, the standards that underlay those statements, and the body that established those standards. Some of that scrutiny came from Congress, specifically from Sen. Harrison Williams (D-N.J.), who in 1982 introduced legislation to create a new accounting standards-setting body for governments that would have federal oversight.
At the same time as the proposed Williams legislation was being considered, FASB was dipping its toe into government waters by stating that not-for-profit concepts could be applied to governments, and also by specifically including public-sector plans in the scope of its pension plan reporting standards. While many in government circles decried those efforts, some in the public sector actively encouraged FASB to take those steps.
The proposed Williams legislation and FASB’s action became rallying cries for the need to establish a new accounting standards-setting body for governments. The perceived need for these solutions, however, can be traced to one fact: the existing accounting standards-setting body was no longer fit for those purposes. The NCGA model had served its role well during simpler times; the list of past members included a who’s who of governmental accounting, with members having preparer, auditor, and user backgrounds. It was clear, however, that by the time NCGA Statement 1, Governmental Accounting and Financial Reporting Principles, was issued in 1979, the time for an alternative solution had already come. The NGCA was a 21-member, all-volunteer council that met four times per year; understaffed and underfunded, it could not keep up with an environment that had continued to evolve. While leaders clearly saw the need for a new governmental accounting standards setter, it was still five more years before GASB was finally established.
Anyone who says that GAAP can be established without some form of compromise either is not being forthright or is naive.
What Was GASB’s Promise?
When GASB was established in 1984, it faced high expectations. Some believed that it could tackle the financial reporting model, the financial reporting entity, revenue recognition, pension accounting, and a conceptual framework all within a few years. Standards setting, however, is a deliberate process by design. Major improvements generally are not intended to be developed and introduced in a short period of time. It takes extensive due process (i.e., stakeholder feedback) before standards become U.S. generally accepted accounting principles (GAAP).
The important takeaway is that when GASB was established, there were no promises of specific solutions. For example, there was no promise of different pension standards from FASB, or of private sector–based consolidated financial statements. The only promise, as codified in GASB’s mission statement, was to establish and improve financial accounting and reporting standards to provide useful information to users of financial reports and educate stake-holders on how to most effectively understand and implement those standards. These issues would be deliberated by a highly qualified board, researched by a full-time staff with extensive experience associated with governments, and subjected to extensive due process.
Were Compromises Made?
Anyone who says that GAAP can be established without some form of compromise either is not being forthright or is naïve. In a perfect world, each accounting standards setter would establish a conceptually pure framework based solely on financial statement users’ needs and then close its doors. The framework would be developed so that all preparers would apply its spirit in a consistent manner that would result in timely, comparable, relevant, and understandable financial reports, both the day it was written and far in the future.
Unfortunately, this is not a perfect world. First, all users do not think alike. One of the biggest challenges that GASB faces is, in fact, a diverse set of users. In Concepts Statement 1, Objectives of Financial Reporting, GASB divided those users into three categories: 1) those to whom the government is primarily accountable (the citizenry), 2) those who directly represent the citizens (legislative and oversight bodies), and 3) those who lend or who participate in the lending process (investors and creditors). Place an advocate for a citizens’ group and a legislative staff member in the same room (which GASB does in user forums and research roundtables), and the likelihood of hearing the same message is not high. The same type of challenge is faced with the wide range of public-sector entities, from states to electric utilities, state auditors to one-person accounting firms, and even the GASB project staff. This diversity results in compromises. Even the most avid GASB fans periodically disagree with the board.
From a project standpoint, the level of perceived compromise is determined by the assessor. For example, Statement 11, Measurement Focus and Basis of Accounting—Governmental Fund Operating Statements, was a compromise. The board was attempting to establish a beachhead with a new financial reporting model; however, the original five members could not arrive at an agreement on which liabilities should be presented in the balance sheet of governmental funds before two of those board members’ terms expired. In the following year, a third original board member’s term expired. The three new board members did not support the foundational principles of the total financial resources measurement focus introduced in Statement 11; as a result, the effective dates of Statement 11 and other standards were indefinitely delayed with the 1993 release of Statement 17, Measurement Focus and Basis of Accounting—Governmental Fund Operating Statements: Amendment of the Effective Dates of GASB Statement No. 11 and Related Statements.
Statement 17 was itself another compromise. Some stakeholders wanted to put Statement 11 to rest once and for all, while others wanted it to live to fight another day. The delay allowed the board an opportunity to regroup and begin to develop the financial reporting model that would become Statement 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. Some view Statement 34 as the ultimate compromise, retaining fund financial statements and introducing government-wide financial statements all within the basic financial statements. When asked, some board members will say that Statement 34 was a compromise, particularly in light of the hundreds of provisions contained within it. The basic financial statements, however, were not intended to be a compromise; instead, Statement 34 was intended to reflect the common needs of financial statement users. The board found that financial statement users need both short- and long-term information, as well as both detailed and summarized information.
Over the years, GASB’s independence has been challenged, with threats of cutting off funding (which has been addressed in part by the funding mechanism established in the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010) and calls for its outright elimination. GASB has, however, been able to weather those storms without compromising its independence.
What Has GASB Achieved?
GASB’s greatest achievement has been to provide governments with standards that have resulted in a significant increase in the quality of information provided in governmental financial reports. Furthermore, Statement 34 likely is at the top of everyone’s list of the most successful single standards. The introduction of management’s discussion and analysis (MD&A), an economic resources measurement focus, and a requirement to report general government infrastructure certainly were ground-breaking in the U.S. government environment. The inclusion of any one of those three requirements in a statement would have registered on a greatest achievement list, but all three together helped to bring governmental reporting into the 21st century. The attention paid by stakeholders to those provisions, however, overwhelmed several other noteworthy improvements contained in Statement 34. These include major fund reporting, which helped to preserve a reporting unit materiality approach that encompassed fund reporting, a direct method cash flows statement for proprietary funds, and the introduction of an original budget column to budgetary comparisons.
Over the years, GASB’s independence has been challenged, with threats of cutting off funding and calls for its outright elimination.
While the improvements introduced by Statement 34 were monumental, it was released in June 1999. What has GASB done to significantly improve financial reporting since then?
Over the years, GASB has devoted a considerable amount of attention to investments and fair value. In 1986, it issued Statement 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, which introduced fair value disclosures for investments. In retrospect, those disclosures were not a groundbreaking starting point, but rather an important first step. The watershed moment with regard to investments and fair value came in 1997, with the issuance of Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, which fully embraced fair value reporting for all investments. Statement 31 remains controversial to this day, as some still advocate for a held-to-maturity carveout; the board has held fast, however, to its belief that fair value is the most appropriate measurement attribute, recently reaffirming this decision in Statement 72, Fair Value Measurement and Application.
Postemployment benefits also highlight the changing nature of accounting standards setting. The first standards had humble beginnings that focused almost entirely on disclosures, such as in Statement 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers, for pensions, and Statement 12, Disclosure of Information on Postemployment Benefits Other Than Pension Benefits by State and Local Governmental Employers, for other postemployment benefits (OPEB). GASB then stabilized employer pension accounting standards with Statement 27, Accounting for Pensions by State and Local Governmental Employers.
A major breakthrough regarding OPEB accounting occurred with the 2004 release of Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. For the first time, there was a requirement to disclose the full obligation associated with OPEB and report a liability based on pension accounting principles. That statement also proved to be controversial; one state actually passed legislation allowing a departure related to OPEB from its statutory requirement for local governments to follow U.S. GAAP. Fortunately, few governments applied that option, and that legislation was eventually repealed. There are still, however, some stakeholders who advocate that when OPEB is not a legal liability, it should not be reported as a liability in the financial statements. To drive the opposing view home, GASB used OPEB as an example of a constructive liability in Concepts Statement 4, Elements of Financial Statements.
GASB currently is working on what it refers to as the “Big Three”–the financial reporting model, revenue and expense recognition, and note disclosures.
The next step in the development of postemployment benefit accounting standards was the issuance of Statement 68, Accounting and Financial Reporting for Pensions—an amendment of Statement 27—and Statement 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. Both statements represented a marked departure from prior guidance, as GASB dropped a funding-based approach to recognizing the liabilities and embraced an accounting-based approach that reported the net pension liability and the net OPEB liability in the economic resources measurement focus–based financial statements. These statements were not without controversy; some stakeholders believe they went too far by abandoning ties to a fund-based approach, while others maintain that GASB did not go far enough with regard to measurement issues such as the discount rate.
Finally, any discussion of GASB achievements would not be complete without a mention of the conceptual framework. Concepts Statement 1 was issued in 1987, but the three primary financial reporting objectives and nine subobjectives therein still hold up today. The conceptual framework has expanded over the years, addressing topics such as communications methods, the previously mentioned elements of financial reporting, and the measurement of elements. Of particular import are deferred inflows of resources and deferred outflows of resources; while the other financial statement elements have been around for more than 50 years, those two elements were introduced in 2007. Rather than try to pound the square pegs of debits and credits that do not meet the definitions of the other elements into a round hole, GASB decided to establish the deferrals elements, another decision that was not without controversy.
What Comes Next?
GASB currently is working on what it refers to as the “Big Three”—the financial reporting model, revenue and expense recognition, and note disclosures. Although these projects are distinct, by their nature there is overlap, which presents challenges for GASB and those who participate in its due process.
The financial reporting model project began its life six years ago as a research activity with the goal of determining which provisions of Statement 34 and related standards worked and which could be improved. The research found that MD&A was well received but could be improved to clarify current provisions, including currently known facts that affect the future, and certain redundancies could be eliminated. In addition, the board has been deliberating several formatting issues related to government-wide statements, but at this point, no major changes are on the horizon. In addition, the optional reporting of budgetary comparison information as either a basic financial statement or a required supplementary information (RSI) schedule is expected to be eliminated; instead, RSI has been proposed as the single solution.
While Statement 34 introduced major fund reporting, the measurement focus and basis of accounting of the governmental funds were left untouched. GASB recognizes that the governmental fund reporting model was built on accounting conventions developed over the past 120 years that are conceptually inconsistent, and is attempting to eliminate that conceptual inconsistency by proposing a governmental fund financial reporting model based on a short-term measurement focus and an accrual basis of accounting applied within the context of that focus. While GASB has explored many other models, ranging from reporting governmental funds only on a budgetary basis to restructuring the fund model and introducing an economic resources measurement focus, it has tentatively concluded that the proposed basic financial statements still need to present short-term, long-term, detailed, and aggregate information, and that this information should be principles based.
While the issues addressed in the financial reporting model are complex, there is no more challenging project on GASB’s current technical agenda than revenue and expense recognition. When this project reaches its conclusion, it will establish standards on the classification, recognition, and measurement of most transactions that ultimately are reported as revenue or expense.
Revenue and expense transactions are currently classified as either exchange or nonexchange transactions; after carefully studying how these classification decisions are made in practice, however, the board has tentatively concluded that a different classification model needs to be employed in order to provide greater consistency and comparability in financial reporting. To that end, GASB explored a performance obligation/non-performance obligation model, but tentatively concluded that a title-neutral approach should be presented for public comment in a “Preliminary Views” document. GASB also has been developing proposed recognition criteria and measurement guidance for revenue- and expense-based transactions within the scope of the project. Given the magnitude of this project, it should be closely followed.
The last of the Big Three is a conceptual project at this point. Concepts Statement 3, Communications Methods in General Purpose External Financial Reports That Contain Basic Financial Statements, provides that notes “are essential to a user’s understanding of those financial statements” (paragraph 36), but does not provide a framework for determining what is essential. GASB has developed proposed criteria for making that determination that are currently out for public comment. When that Concepts Statement is finalized, GASB will use those criteria to determine the continued need for current disclosures and to assess potential new disclosures.
In addition to these projects, the board also has several practice issues on its agenda, including projects that reassess older accounting literature (for example, compensated absences and prior-period adjustments) and address issues that were initially outside the scope of other standards (for example, subscription-based information technology arrangements). Many of these practice issues will be addressed by final standards in the near future.
An Unfinished Story
GASB’s board members and staff are often asked, “Will you ever be finished?” While many would like the answer to be “yes,” the ever-changing governmental environment dictates otherwise. As society and governments evolve, GASB must and will be ready to meet those challenges.
It has been a successful first 35 years, but all that has been accomplished could not have been achieved without the support of GASB’s stakeholders. To remain successful, GASB continues to need feedback, which can be provided in many forms. The board encourages CPAs and other stakeholders to let GASB know where they stand, and why.
Timeline of GASB’s History
- 1984 – GASB established
- 1986 – Statement 3 introduces fair value disclosures for investments
- 1987 – Rule 203 status as a U.S. GAAP standards setter granted by the AICPA
- 1987 – GASB Concepts Statement 1 lays out objectives of financial reporting
- 1989 – Jurisdictional arrangement with FASB reaffirmed
- 1991 – Statement 14 on financial reporting entities
- 1994 – Statement 27 on pensions, including recognition of the net pension obligation
- 1997 – Statement 31 on fair value reporting for investments
- 1998 – Statement 33 on accounting for nonexchange transactions
- 1999 – Statement 34 on basic financial statements and MD&A
- 2004 – Statement 45 on OPEB, including recognition of the net OPEB obligation
- 2007 – Conceptual framework expanded to address elements definitions, including deferrals
- 2009 – Statement 54 on fund balance reporting
- 2010 – Dodd-Frank Wall Street Reform Act establishes stable funding source for GASB
- 2012 – Statement 68 on pensions, including recognition of the net pension liability
- 2015 – Statement 72 on fair value measurement and application
- 2015 – Statement 75 on OPEB, including recognition of the net OPEB liability
- 2017 – Statement 87 on leases