GFOA responds to GASB reporting model initiative.

Recently, the Government Finance Officers Association (GFOA) formally responded to the Governmental Accounting Standards Board's (GASB) invitation to comment (ITC) document on a proposed new Governmental Financial Reporting Model. The GFOA's response was prepared by the Committee on Accounting, Auditing and Financial Reporting and was approved by the GFOAs Executive Board. This article will discuss some of the key positions taken by the GFOA on proposals contained in the GASB's ITC document.

Overview

The GASB's ITC document presents two different approaches that the board could follow in changing the current governmental financial reporting model. These approaches are referred to in the ITC document as Model 1 and Model 2. While both models share many common features, they differ substantially on a number of key issues. The GFOA supports the basic concepts and approach of Model 1 of the ITC document. At the same time, the GFOA believes a number of important changes should be made to that model.

Aggregated Reporting

Under current generally accepted accounting principles (GAAP), financial data are never aggregated beyond the fund-type level. That is to say, data from one fund type (e.g., the general fund) are never combined in a single column with data from another fund type (e.g., special revenue funds). Both Model 1 and Model 2 propose to change current practice by adding a new, highly aggregated level of reporting to the existing combining/individual fund and combined financial statements. This new level of reporting would be known as top-of-the-pyramid (TOP) financial statements. Model 1, for example, would use just two columns to report all of an entity's governmental and proprietary activities at the TOP level. Model 2 proposes a single column for this purpose.

GFOA supports the introduction of TOP-level financial statements but believes these should replace rather than supplement the combined financial statements. In other words, the GFOA believes a comprehensive annual financial report should include only TOP-level financial statements and combining/individual fund financial statements.

General Purpose Financial Statements

The GFOA believes that the fundamental concept of "liftable" general purpose financial statements (GPFS) is flawed and detracts from the primacy of the comprehensive annual financial report (CAFR). Accordingly, the GFOA does not believe that any portion of the CAFR should be separately designated as the GPFS. Instead, if less detailed information is needed in particular circumstances (e.g., offering statements) the data should be extracted from the CAFR and presented as "condensed financial statements" (i.e., not a complete presentation in conformity with GAAP).(1)

Both Model 1 and Model 2 would expand, rather than eliminate, the concept of GPFS. Specifically, both GASB models would require that the GPFS contain not only combined and TOP-level financial statements, but also individual fund statements for major funds. The GFOA objects to including individual fund information within the GPFS, if GPFS are to be retained, because this information would only duplicate information already available elsewhere within the CAFR, thereby further adding to the length of an already long document.

Differential Reporting

The GFOA believes that modified accrual accounting should be maintained at the individual fund level for governmental funds, while full accrual accounting should be implemented at the TOP level of reporting (i.e., "differential" reporting). The GFOA supports differential reporting because it would maintain the traditional role of governmental funds as short-term financing vehicles while at the same time clearly demonstrating the long-term financial implications of all transactions and events. Model 1 supports differential reporting; Model 2 opposes it.

Historically, governmental funds have operated much like checkbooks: the key information provided is the balance available for spending. If checkbook owners were required to record nonspendable assets in their checkbooks, such as a house, as well as the total balance of outstanding debt, such as the mortgage, the most critical information provided by a checkbook - balance available for spending - would be obscured, if not lost altogether. The result could be "bouncing" checks or a failure to use available resources to best advantage (e.g., Is there really no money available for an oil change today because of a mortgage payment due 30 years from now?).

That is not to say, of course, that a checkbook provides an adequate view of its owner's overall finances. Rather, a checkbook is just one very important piece of the total financial picture. If a checkbook owner wishes to buy a car, for example, additional information also would be required concerning nonspendable assets and outstanding debt. Likewise, the governmental fund is just one very important piece of the government's total financial picture. In the GFOA's view, the information from governmental funds needs to be combined with additional information at the TOP level to provide an adequate view of the government's total financial picture, as proposed in Model 1.

The GFOA notes in its response that some have criticized the proposal for differential reporting. These critics argue that differential reporting would confuse readers of the financial statements by introducing "multiple" measurement focuses. The GFOA disagrees. Current financial resources are simply a component or subset of total financial resources, and the two are in no way inconsistent. If it is not "inconsistent" or "confusing" to provide detailed schedules of selected revenues (e.g., taxes) or selected assets (e.g., receivables), the GFOA argues, why would it be inconsistent or confusing to provide additional information on the current portion of financial resources in the form of individual fund financial statements? To the contrary, the GFOA believes that confusion is much more likely to result from the proposal in Model 2 to force noncurrent assets and liabilities into a structure (i.e., governmental funds) specifically designed to provide information on expendable available financial resources, and so used for more than half a century by state and local governments.

Account Groups

The GFOA proposes to eliminate both of the account groups and to report their assets and liabilities as part of governmental activities at the TOP level of reporting. Both Model I and Model 2 support the abolition of the account groups. Model 2, however, would eliminate most general fixed assets from the face of the financial statements; whereas Model 1 (like the GFOA) would continue to report all of a government's noninfrastructure general fixed assets.

Capital Reporting

The GFOA supports Model 1's proposal to continue to report expenditures in governmental funds for both capital outlays and the repayment of debt service principal. Model 2, on the other hand, would report an expenditure only for debt service principal payments, and not for capital outlay, when capital acquisition was financed by debt.

Proponents of Model 2 argue that interperiod equity requires that only a single expenditure (i.e., debt service or capital outlay) be reported in connection with capital acquisition. The GFOA, however, believes that debt service payments and capital outlays are both flows of financial resources and therefore should be reported in an operating statement prepared in conformity with a flow of financial resources measurement focus.

Proprietary Fund Reporting

The GFOA believes that proprietary funds should continue to be reported using the flow of economic resources measurement focus and the accrual basis of accounting at both the TOP level and the combining/individual fund level.

Model 1 supports converting proprietary funds to the financial resources measurement focus at the TOP level of reporting. Model 2 would modify the application of the flow of economic resources measurement focus to proprietary funds by mandating that debt service expenditures be reported in lieu of depreciation expense in certain circumstances.

Budgetary Reporting

The GFOA believes that there is no value to budgetary comparison statements that combine information from more than one individual fund. This position is shared by Model 1 and Model 2, both of which would eliminate the combined statement of revenues, expenditures and other changes in fund balance (budget and actual). Individual fund budget-to-actual comparisons, however, would still be required.

The GFOA does not support the proposal contained in Model 1 and Model 2 to require that information on the original budget be presented as part of the budget-to-actual comparison statement. The GFOA has several reasons for taking this position.

* Historically, the role of the budgetary comparison statement has been to demonstrate legal compliance, not budgetary performance. Information on the original budget is irrelevant for this purpose.

* Comparing the final amended budget and the original budget is a poor measure of budgetary performance. Only service efforts and accomplishments measures effectively demonstrate budgetary performance, and these measures should be part of budgetary reporting rather than financial reporting.

* Comparisons with the original budget may create the false impression that it is desirable not to amend the budget, regardless of changed circumstances.

* The GFOA is concerned about the potential for excessive note disclosures if governments are placed in the position of effectively being forced to explain and justify budgetary amendments. The practical benefit of such disclosures, in the view of the GFOA, is questionable.

Budgetary Fund Balance

Model 1 proposes to report a portion of governmental fund equity as "budgetary fund balance" at both the TOP and combined financial statement levels. Model 2 would report budgetary fund balance at the combined financial statement level. In both cases, the amount of budgetary fund balance would be determined using the basis of accounting employed for budgetary purposes.

The GFOA objects to the proposal to report budgetary fund balance on GAAP financial statements. GAAP reporting is valuable for budgeting purposes precisely because it provides standardized measures. In the GFOA's view, information presented on the budgetary basis of accounting should be included only in the budgetary comparison statement.

Cash Flows Reporting

Both Model 1 and Model 2 would require cash flows reporting for all funds. The GFOA supports the proposal to mandate cash flows reporting for both governmental and proprietary funds at the TOP and combining/individual fund reporting levels.

Fiduciary Funds

Model 1 and Model 2 would both include on the face of the TOP and combined financial statements only those fiduciary funds that support the government's activities. The GFOA supports this position.

Conclusion

The comment deadline on the GASB's ITC document was October 30, 1994. The GASB, however, will continue to consider responses received throughout the course of its deliberations. GFOA members and other interested parties are encouraged to make their views on the ITC document known to the GASB. Responses should be addressed to David R. Bean, Director of Research, Governmental Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06886-5116.

NOTE

1 The GFOA contemplates no change in the scope of the audit. In other words, the GFOA's proposal would only require an auditor to render an opinion by fund type (i.e., the total columns for each of the combining statements). Full scope auditing would be encouraged but not required.

STEPHEN GAUTHIER is director of GFOA's Technical Services Center.