Closing the gaps in GAAP: GASB's implementation guides play an integral role in governmental accounting.

EXECUTIVE SUMMARY

* GASB regularly issues implementation guides, which are staff "question and answer" (Q&A) documents that are intended to reflect the GASB staff's understanding of the board's intent when it adopted the related statements.

* Implementation guides have a relatively low level of authority in the government GAAP hierarchy in SAS no. 69. but they have become increasingly vital to CPAs who must apply GASB standards in preparing and auditing the financial statements of state and local governments.

* Individual professionals have a responsibility to comply with higher-level authoritative guidance, in accordance with the GAAP hierarchy, if they determine that a conflict exists between an implementation guide and more authoritative guidance in GASB statements of standards or interpretations.

* Since 2003, GASB has issued a Comprehensive Implementation Guide each year with questions relating to existing standards added, deleted or modified as the staff and the board deem necessary. This means financial statement preparers and auditors must stay abreast of the guide's ever-changing content.

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A standard setter's job is far from complete when it issues a new accounting statement. Sure, the drafters may have a clear understanding of the official language, but it's almost impossible to conceive of every practical effect the new rule will have on how financial statement preparers do their jobs. That's where GASB's implementation guides come into play.

The Governmental Accounting Standards Board (GASB) issues the guides, which are staff "question and answer" (Q&A) documents. They are intended to reflect the GASB staff's understanding of the board's intent when it adopted the related statements. In recent years, the board issued the guidance more contemporaneously with the adoption of new standards to provide immediate answers to the rank-and-file who must apply the new rule.

Implementation guide projects are announced publicly, and the draft is exposed to the board and an advisory committee. However, implementation guides do not receive the public exposure and input required in adopting statements, interpretations and technical bulletins. Although an implementation guide will not be issued if a majority of the board members object to its issuance, the guides are not adopted by the board but are issued under the authority of the GASB director of research and technical activities.

Implementation guides have a relatively low level of authority in the government GAAP hierarchy (only "other accounting literature" is lower), but they have become increasingly vital to CPAs who must apply GASB standards in preparing and auditing the financial statements of state and local governments. This article discusses the growing importance of the guides, provides an update of the most recent Comprehensive Implementation Guide, and points out the responsibility of preparers to carefully evaluate and apply the latest guidance it contains.

EXPANDED ROLE

Two recent developments have made the guides critical to understanding and properly implementing government GAAP. First, the guides' breadth of coverage has become increasingly more comprehensive. Second, the advent of the "comprehensive" implementation guide means that:

* New questions (and thus new guidance) can be added periodically without the need for a substantial enough body of questions to justify a separate guide.

* Old questions can be deleted or their answers can be modified.

* The guidance in guides on a specific statement can be incorporated directly into the revisions of the comprehensive guide.

BREADTH OF COVERAGE

In GASB's earlier years (the board was founded in 1984), individual implementation guides were issued covering only a specific standard or closely related standards on a specific topic (for example, deposits and investments, cash flows, risk financing, reporting entity, pensions and investments). The individual guides were issued only if there were Substantial questions regarding the application of the specific standard, typically were not developed and issued until some time after adoption of a statement, and were relatively infrequent.

Implementation guides originally were intended to be static documents. Once issued, they were not revised. GASB issued six static guides between 1991 and 1998. These six guides (the latest on GASB Statement no. 31) contained questions relating to a total of eight statements. Thus, of the first 31 GASB statements, eight were addressed in static individual implementation guides.

Since 2000, GASB has issued five individual guides that contain questions related to at least 10 of the 18 statements issued since that time. This is in large part because GASB Statement no. 34 is a far-reaching document. The statement, titled Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, was described by then-GASB Chairman Tom L. Allen as "the most significant change in the history of governmental accounting." Statement no. 34 has been amended by several other documents, and two of the five implementation guides were Statement no. 34-related guides.

The integral role that implementation guides now play in setting and applying GAAP is demonstrated in the timing of the development and publication of the most recent individual implementation guides. The first several individual implementation guides were issued after--typically well after--the related statement's effective date in response to issues that arose during the initial implementation process. In contrast, recent guides have often been drafted during the later stages of adopting the related statement and are published before the effective dates of the new rule. Likewise, questions on new statements that are not the subjects of new individual implementation guides typically are added to the comprehensive guide soon after the statement is issued.

COMPREHENSIVE IMPLEMENTATION GUIDES

Beginning in 2003, GASB has issued a Comprehensive Implementation Guide each year. The first comprehensive guide included both the still effective guidance of the individual (specific topic) implementation guides and additional questions not included previously. Since the Comprehensive Implementation Guide is not a static document, but is revised annually, most new standards eventually result in changes to the guide's questions and answers. Questions on standards that are unrelated to one of the statements covered by individual implementation guides are added to the final chapter of the latest edition of the comprehensive guide. Again, questions relating to existing standards can be added, deleted or modified as deemed necessary by GASB staff with each revision.

Virtually every standard issued after GASB Statement no. 31 is the subject of (1) at least a limited number of staff questions and answers in either the Comprehensive Implementation Guide or (2) a new individual guide developed for that specific standard. This is true of every standard issued after GASB Statement no. 34 except the most recent two--GASB Statement no. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, and Statement no. 49, Accounting and Financial Reporting for Pollution and Remediation Liabilities. Questions on those statements likely will be included in the next revision.

Another consequence of publishing an annual update is that the guidance is not static; it can change even if no new standards are issued. Changes to the comprehensive guide have included:

* Incorporation of new questions related to new standards (including addition of the questions from new individual guides).

* Deletion or modification of questions in prior guides as a result of new standards.

* Addition of new questions related to existing guides on specific statements even though no new standard amending the statement covered by the guide has been issued.

* Deletion of questions or modifications of previous questions and responses in the previous Comprehensive Implementation Guide even though no new standard has been issued related to the question.

Practitioners, however, still need the individual guides until they have been included in the comprehensive guide.

ANNUAL UPDATES

Given the increasing importance of implementation guides and the annual changes in the Comprehensive Implementation Guide, financial statement preparers must stay abreast of the ever-changing content. The Exhibit provides a detailed analysis of selected guidance provided in the new questions included in its most recent (2006) update.

A CAVEAT

While the guidance in GASB's various implementation guides is sound, well documented, and not apt to be questioned, individual professionals have a responsibility to comply with higher-level authoritative guidance if they determine that a conflict exists between an implementation guide and more authoritative guidance in GASB statements of standards or interpretations (see sidebar "The GAAP Hierarchy"). Although such conflicts are rare, professionals must be aware of that possibility given the volume and variety of questions addressed and the difficulty of determining and clarifying the board's intent after the fact. If preparers or auditors do not understand or agree with the guidance in an implementation guide, they should communicate their concerns to GASB staff. In the meantime, they normally should follow the guidance.

The annual revisions of the Comprehensive Implementation Guide provide an opportunity for GASB staff to refine, revise or even eliminate previous guidance when new standards .or further experience and information indicate such revisions are appropriate. GASB staff indicates changes in previous guidance at the end of each individual question using a notation that provides the history of the development of the question and response as well as in the "Finding List of Original Questions and Answers" contained in the guide's appendix. Further, Appendix A of the guide provides more detailed information about the additions to, deletions from, and amendments to questions in the most recent previous Comprehensive Implementation Guide. Appendix A of the 2006 Comprehensive Implementation Guide contains five pages of summaries of changes.

As the Comprehensive Implementation Guide is updated, preparers and auditors should be particularly attentive to any significant changes in previous implementation guide responses. Awareness of these changes is needed to apply the standards properly in the current period and to recognize accounting changes that result from applying the new guidance in the current year after applying the original guidance in prior years.

CONCLUSION

GASB implementation guides provide an extremely valuable service to preparers and auditors, cover an ever-growing range of issues, and address application of the standards to practical problems encountered in practice. The Comprehensive Implementation Guide is a particularly useful resource but requires users to be alert to year-to-year changes. GASB attempts to identify these changes clearly. New individual implementation guides are essential to planning the application of new statements. It is important to remember that while implementation guides are less authoritative than most other portions of professional literature, they address topics not covered elsewhere. Finally, they should be used in an especially thoughtful and informed manner.

AICPA RESOURCES

Conferences

* Governmental Accounting and Auditing Update Conference (GAAC) East, Aug. 20-21, Washington, D.C.

* Governmental Accounting and Auditing Update Conference (GAAC) West, Sept. 17-18, Tempe, Ariz.

CPE 

* Governmental Accounting and Auditing Update 200?-2008 Edition (Paperback #?36477, DVD/Manual #186483).

Publications

* State and Local Governments--Audit and Accounting Guide (#012666JA).

* State and Local Governmental Developments-Audit Risk Alert (#022436JA).

* Auditing Governmental Financial Statements: Programs and Other Practice Aids (#006602JA).

* State and Local Governments--Checklists and Illustrative Financial Statements [Subscription] (#WSG-CL).

For more information or to place an order, go to www.cpa2biz.com, or call the Institute at 888-777-7077.

Web site

AICPA's Governmental Audit Quality Center, www.aicpa.org/GAO.C

RELATED ARTICLE: The GAAP hierarchy.

In establishing the proper accounting treatment of a transaction or event, certain sources are accorded higher levels of authority than others. With regard to GASB standards, the GAAP hierarchy is defined in Statement on Auditing Standards (SAS) no. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles (AICPA, Professional Standards, Vol. 1, AU sec. 411.12, and AU sec. 411.13). The paragraph titled "Application to State and Local Government Entities" instructs practitioners to refer to authorities in the following order of importance:

1. GASB statements and interpretations; AICPA and FASB pronouncements specifically made applicable to state and local governments by GASB.

2. GASB technical bulletins; AICPA industry audit and accounting guides and statements of position when cleared by GASB.

3. AICPA AcSEC practice bulletins when cleared by GASB; and consensus positions of a group of accountants organized by GASB. (To date, there is no guidance in this category.)

4. Implementation guides published by the GASB staff; and practices that are widely recognized and prevalent in state and local government.

5. Other accounting literature.

Craig D. Shoulders, Ph.D., is a professor of accounting at the University of North Carolina at Pembroke. Robert J. Freeman, CPA, Ph.D., is the distinguished professor of accounting at Texas Tech University. Their e-mail addresses are [e-mail] and [e-mail], respectively.

Exhibit

Analysis of Guidance in Selected New Questions
in the 2006 Comprehensive Implementation Guide

Question Topic and Number   Analysis

Modified Approach--         A government should expense all
Treatment of Cost of New    preservation costs. Preservation
Bridge to Replace Old       costs include the:
Bridge in Bridge Network      * Cost of construction of a new bridge
(Question 7.17.5)               adjacent to a similar old bridge being
                                replaced
                              * Cost of tearing down and removing the
                                old bridge
                            Capitalize any portion of the new bridge
                            cost associated with increased capacity
                            or efficiency

Classification of           * No portion of the liability for closure
Liability for Closure          and postclosure costs may be deducted
and Postclosure Costs of       from Net Assets Invested in Capital
a Municipal Solid Waste        Assets, Net of Related Debt.
Landfill for Net Asst       * The liability
Calculation Purposes           * Reduces restricted net assets
(Question 7.22.15)               if funded with restricted assets
                               * Otherwise, reduces unrestricted
                                 net assets

Reporting of Correction     Report corrections of errors in
of Errors in Previously     previously issued financial statements
Issued Financial            as restatements of beginning net assets/
Statements                  fund equity
(Question 7.22.16)

Net Assets Restricted       Question 7.24.24 states that a restricted
by Enabling Legislation     tax(es) established by statutes of one
(Question 7.24.24)          government and shared with others
                              * Should be disclosed as restricted by
                                enabling legislation in the report of
                                the taxing governments
                              * Is externally restricted for the other
                                governments with which the tax(es) are
                                shared

Restricted Net Assets       * Any bond proceeds required by a bond
From Bond Proceeds             indenture to be set aside as a bond and
Required to Be Used for a      interest reserve are restricted assets.
Bond and Interest Reserve   * A corresponding amount of the bonds
(Question 7.24.25)             should be used to calculate restricted
                               net assets, not deducted from invested
                               in capital assets, net of related debt.

Budgetary Comparison        * The legally adopted budget requirement
Required If Legally            applies to the General Fund (as well as
                               to major Special Revenue Funds).

Adopted Annual Budget       * If a budget is not legally adopted
(Question 7.91.13)             for the General Fund, a budgetary
                               comparison is not required.
                            * The same is true for major Special
                               Revenue Funds.

Meaning of                  A budget is considered to be "legally
"Legally Adopted"           adopted" only if the budget is required
(Question 7.91.14)          for the government to create the legal
                            authority to spend resources.

Retroactive Reporting       * Retroactive reporting of infrastructure
Resulting From                 must be presented as a prior period
Implementing the               adjustment.
Requirement to              * Restatement of beginning net assets and
Retroactively Report           affected note disclosures is required.
General Infrastructure      * Treatment as a current-year addition to
(Question 7.104.17)            capital assets is prohibited.

Inclusion of Enterprise     All general obligation bonds are to be
Fund General Obligation       included in the schedule of general
Bonds in Schedule of          bonded debt.
Ratios of General Bonded      * Most are reported with the
Debt (Question 9.25.4)          governmental activities debt.
                              * This question describes general
                                obligation bonds that should be
                                reported as business-type activities
                                debt--i.e., general obligation bonds
                                that were issued to finance enterprise
                                fund assets, are being accounted for
                                in enterprise funds, and are being
                                repaid with enterprise fund revenues.

Compensated Absences        * Governments may not recognize
Liability and Expenditure      governmental fund compensated absences
Recognition--Government        liabilities and expenditures when those
Funds (Question Z.16.2)        benefits vest as a result of years of
                               service.
                            * Maturity (becoming due and payable)
                               of the compensated absence liability
                               determines the timing of expenditure
                               and liability recognition in
                               governmental funds.

Applicability of Post-      Except for enterprise fund and business-
Nov. 30, 1989 Amendments    type activities, governments should apply
of FASB Standards           FASB and predecessor organization
(Question Z.20.1)           pronouncements
                              * That were in effect on Nov. 30, 1989
                              * Without giving effect to amendments
                                after Nov. 30, 1989.

Insurance Recoveries        Reporting of insurance recoveries is not
(Question Z.42.11)          affected by whether the recovery is from
                            the government's insurer or another
                            party's insurer.

For additional questions and analyses, visit www.aicpa.
org/download/pubs/jofa/june2007/implementationQs.pdf.