NAKED TRUTH.

GASB 34's REPORTING MODEL REQUIRES A BIG PICTURE ANALYSIS. NOW IT'S EASIER TO SEE JUST HOW GOVERNMENT IS SPENDING YOUR MONEY.

iNDUSTRY WATCHERS ARE CALLING GASB 34 the most significant change to occur in the history of governmental accounting. One of GASB's objectives in writing KY this new statement was to encourage more citizens to read and understand their government's financial statements.

GOVERNMENT MODELS ARE DIFFERENT

Since early in this century, governments have used a different financial reporting model than the private sector uses. Governments face important legal restrictions on how they can use resources. Unlike the private sector, a government's budget is not just a financial plan. The budget sets public policy and serves as a controlling document with legal sanctions to ensure compliance.

Because accountability and the need to demonstrate stewardship of public resources are so important, a major goal of governmental accounting and financial reporting is to demonstrate compliance with such finance-related legal and contractual restrictions.

In the governmental sector, nearly all financing decisions are made in the context of an annual or biennial appropriation budget. The emphasis on a government's financial reporting, therefore, has been to help decision-makers, whether legislators or citizens, understand how the money was spent. This is in marked contrast to the private sector where the emphasis is on an organization's ability to meet its operational costs and generate a profit. Government financial statements, in other words, focus on short-term financing while the private sector's emphasize an organization's ability to enhance its economic resources over the long-term.

To meet these needs, the governmental model has evolved with three distinct differences from the private sector's model. These differences are:

* Short-term emphasis on financial rather than economic resource flows.

* Fund accounting.

* Budgetary reporting.

Governments have traditionally reported on the financial resources they receive and how they were spent, rather than on revenues earned and costs incurred. Thus, for example, a government would report an expenditure for the entire cost of a vehicle when the vehicle is purchased rather than allocating the cost of that vehicle over its useful life.

Governments use separate funds to segregate financial resources that are subject to special regulations or restrictions. State and local government financial statements report these funds to demonstrate legal compliance.

Because governmental budgets are backed by legal sanctions and because of the importance governments have placed on demonstrating compliance with legal provisions, governments traditionally have presented budgets to actual comparisons in their financial statements.

But the segregation of assets into different funds, while useful for demonstrating compliance, made it difficult to assess the financial position of the government as a whole. The emphasis on flows of spendable resources meant that there was no information on the cost of governmental activities. Finally, many felt that budgetary reporting should be improved. GASB 34 addresses these concerns.

MORE USER-FRIENDLY

The first striking difference is that governmental financial statements prepared under GASB 34 report on the government as a whole rather than just a collection of funds and fund types. A common complaint for those deciphering government financial statements was that the multiple columns for each of the different fund types that the governments use was confusing. A reader trying to understand the operating results of the government as a whole would be confronted with three different operating statements: two for the governmental funds and one for the business-type activities, and each of those could contain multiple columns.

GASB 34 requires consolidated government-wide statements with a single statement of net assets and a single statement of activities. The objective is to help readers easily evaluate the financial condition of the complete governmental entity. For the first time, readers will be able to readily assess whether their government is better off at the end of the year than it was at the beginning.

The new statement of activities can only be called breathtaking in its scope. It attempts to show not only whether the government's revenues were sufficient to pay for all the services it delivered during the year, but also the gross and net economic costs of its major functions or activities.

OPERATING-COST ACCOUNTABILITY

The changes required in the new statement are driven by GASB's belief that there are two forms of accountability--fiscal and operational. Fiscal accountability is the need for governments to justify that their actions complied with public decisions. Operational accountability is defined as the need to report on how effectively governments met their operating objectives as well as their ability to continue to meet these objectives in the future.

The historical emphasis on fund reporting has met the first objective very well. GASB intends that governments meet the second by requiring that financial statements report governmental activities using the same accounting they have always used for reporting their business-type activities. Thus, for the first time governments will be required to report the operating costs of its governmental functions. An extremely controversial result of this requirement is that, with certain exceptions, governments must report and depreciate governmental infrastructure (such as streets, curbs and gutters, or bridges) which until now had been optional.

Government officials were concerned about using historical cost depreciation as a measure of the cost-of-use-of-infrastructure assets. The modified approach allows a government not to report depreciation expense for some infrastructure assets if the government is maintaining its infrastructure in a way that preserves those assets at a condition level established by the government.

FOCUS ON INDIVIDUAL FUNDS

In the past, governments have reported on fund types, such as special-revenue, capital-projects or debt-service funds. But, since each fund was created to segregate resources for some specific purpose, once the data for different funds was aggregated, the information was not very useful for demonstrating compliance with legal provisions. To address this problem, GASB requires that the new model's basic financial statements emphasize individual funds. Because a government typically can have dozens of funds, GASB has limited the requirement of individual fund data to a government's major individual governmental and enterprise funds.

In requiring both government-wide and fund data in the new model, GASB is recognizing the unique nature of government. GASB believes that only by assessing both fiscal and operational data can a reader determine how well a government is doing. Finally, to alleviate any confusion that could result from including different ways to measure operations, GASB requires that the different sets of information be reconciled.

FINANCIAL OVERVIEW NOW REQUIRED

Even those well-versed in financial statements have difficulties understanding a government's annual report because of fund accounting. The new model might increase the confusion, due to the multiple focuses required. To assist readers, GASB now requires a brief narrative overview and analysis of the financial statements that it calls "Management Discussion & Analysis." MD&A is required supplementary information and is therefore not audited. But it should include:

* Explanation of the different presentations that make up the report and their relationship to each other;

* Condensed financial information that allows readers to compare the current and prior years;

* Analysis of the government's overall financial position;

* Analysis of the changes from the original budget to the final amended budget and the final budget to actual expenditures;

* Significant capital asset and long-term debt activity;

* Any facts, decisions, or conditions known as of the close of field work that are expected to have a significant effect on financial position or results of operations.

EXPANDED BUDGETARY REPORTING

In the past, governments were required to issue a statement that compared the final amended budget to the actual amounts expended during the year. The budget, however, is a dynamic document. The final budget can be significantly different than the budget adopted prior to the beginning of the year. This is sometimes confusing to those who carefully monitor the budget-adoption process. The new reporting model, therefore, requires that the actual results now be compared to both the original and the final budget as amended.

SIGNIFICANT SHIFT

The shift in emphasis of governmental financial reporting from only fund types with different measures of performance to the government as a whole with a focus on the cost of delivering services is significant -- to put it mildly. GASB believes that these new financial statements will be more widely read and that the information will be more useful to a broader spectrum of users. It also believes that the emphasis on economic cost of service information will assist all of us involved in the management or oversight of state and local governments in making more efficient and effective use of the resources the taxpayers have given us.

Robert V. Stout is the finance director for the City of Modesto.