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Additional Reporting Model Proposals.

In June 1999, the Governmental Accounting Standards Board (GASB) issued Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments. GASB Statement No. 34 established a new framework of financial reporting (i.e., "financial reporting model") for state and local governments. That same month, the GASB also issued two exposure drafts (EDs) on issues related to the new financial reporting model. One of these drafts proposes specific guidance on the proper application of modified accrual accounting. The other proposes to include public-sector colleges and universities within the scope of GASB Statement No. 34.

Modified Accrual Guidance. The GASB concluded in Statement No. 34 that governmental funds should continue to employ the modified accrual basis of accounting. As part of the study and deliberation that led to that decision, however, the board also concluded that additional guidance was needed on the proper application of the modified accrual basis of accounting. Specifically, the GASB was concerned that differences in interpretation of the current standard may have an adverse impact on comparability. The new ED, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, proposes guidance on several specific issues designed to remedy this perceived deficiency.

Limitation on the Accrual of Certain Liabilities in Governmental Funds. Under current generally accepted accounting principles (GAAP), certain accrued liabilities related to activities reported in governmental funds are reported as expenditures and fund liabilities only to the extent that they are "normally expected to be liquidated with expendable available financial resources." Specific examples include, claims and judgments, compensated absences, special termination benefits, and landfill closure and postclosure care costs. In practice, such liabilities normally are reported in the general long-term debt account group rather than in a governmental fund because they normally are expected to be liquidated with "amounts to be provided in future periods" rather than with "expendable available financial resources." However, when it is a government's practice to advance fund such amounts (e.g., a government that has adopted a policy to fund vacation leave as earned by employees), the related liability typically is reported in a governmental fund (i.e., to "offset" the assets accumulated for that purpose in the fund). The GASB proposes in its new ED to eliminate this latter practice entirely by allowing the accrual of a fund liability only "as payments come due upon the occurrence of relevant events such as employee resignations and retirements." Of course, governments still would be able to use an internal service fund for this purpose, if they wished to do so.

Requirement for the Immediate Accrual of Certain Liabilities in Governmental Funds. It generally has been assumed that amounts that normally are paid in a timely manner and in full from current financial resources (e.g., salaries and utilities) must be reported as fund liabilities when incurred. However, certain governments have avoided immediate recognition in some such cases by entering into special arrangements to defer payment. They argue that the amounts in question are not fund liabilities because these amounts, from their perspective, will not " liquidated with expendable available financial resources." The GASB, however, believes that the term "normally" should be interpreted on the basis of what is normal for governments in general, rather than on the basis of what is normal for any particular government. Accordingly, the ED proposes to clarify that a fund liability and expenditure should be accrued if governments (in a collective sense) normally pay a particular type of liability in a timely manner and in full from current financial resources.

Limitations on Accrual in Debt Service Funds. Under current GAAP, governments have the option of reporting an expenditure and liability for debt service in advance of maturity if they have provided financial resources to a debt service fund for payment of liabilities that will mature early in the following period. The ED, following the example of the 1994 edition of Governmental Accounting, Auditing and Financial Reporting, proposes to limit "early in the following period" to no more than one month. The ED also would not permit the use of the early recognition option in connection with nondedicated resources (i.e., resources transferred to a debt service fund at the discretion of management).

College and University Reporting. Until recent years, colleges and universities in both the public and private sectors typically employed their own unique financial reporting model. This traditional model was eventually replaced for private-sector institutions by the Financial Accounting Standards Board's Statement No. 117, Financial Statements of Not-for-Profit Organizations. Traditional college and university accounting and financial reporting, however, remains the norm for most public-sector institutions, consistent with GASB Statement No. 15, Governmental College and University Accounting and Financial Reporting Models.

The GASB expressly excluded public-sector colleges and universities from the scope of GASB Statement No. 34 because it intended to establish a separate financial reporting model for such institutions that would be more closely tied to the traditional college and university model. However, the recent movement by private-sector institutions away from traditional college and university accounting has had the practical effect of eliminating much of the demand for a separate college and university financial reporting model tied to traditional practice. Accordingly, the GASB is now proposing in its revised ED Basic Financial Statements--and Management's Discussion and Analysis--for Public Colleges and Universities that public-sector colleges and universities be incorporated within the new governmental financial reporting model established by GASB Statement No. 34 as "special-purpose governments." It allows flexibility in how colleges and universities present their separately issued financial statements. Specifical ly, they would be able to employ any one of the following approaches in their separately issued financial statements, regardless of whether or not they are legally separate entities:

* special-purpose government engaged only in business-type activities (i.e., proprietary fund accounting);

* special-purpose government engaged only in governmental activities (i.e., governmental fund accounting);

* special-purpose government engaged in both governmental and business-type activities.

Effective Date. If approved, the final guidance proposed in both exposure drafts would become part of the implementation of GASB Statement No. 34.

STEPHEN GAUTHIER is Director of GFOA's Technical Services Center in Chicago, Illinois.
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Publication:Government Finance Review
Date:Dec 1, 1999
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