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GASB after the five-year structure review.


Extensive review produced changes, but overall the GASB will continue much as it has.

The trustees of the Financial Accounting Foundation now have acted on all of the recommendations from the first review of the Governmental Accounting Standards Board's standard-setting apparatus and it is time to take stock.

The jurisdiction question, which affects certain separate financial reports issued by governmentally owned entities, received most of the attention in the press, but the review was far broader than that. It covered every facet of the GASB's operations, including the most important issue of all--the future of the GASB, that is, whether it should continue as it was created five years ago. We'll look at that threshold issue first, then consider the more significant of the many adopted proposals to improve the standard-setting process and the jurisdiction issue. But first let's look at how the review itself worked.


The review process was lengthy. Plans for the review were developed by a committee of FAF trustees and members of the Governmental Accounting Standards Advisory Council (GASAC), whose work began in March 1987. Those plans were followed by the committee to review structure for governmental accounting standards (CRSGAS--pronounced cars gas), also a committee of trustees and GASAC members, which started its review in January 1988. Its report was issued a year later with a wide distribution to encourage public comment. The CRSGAS report contained 35 recommendations covering--among other things--the GASB's operations, organization, efficiency, relations with constituents, due process procedures and, of course, jurisdiction. The FAF's board of trustees completed all but one of the decisions to adopt, reject or modify the report's recommendations by the end of October 1989. The last issue to be resolved was the jurisdiction question.


There must have been doubt of some sort in the minds of the parties who negotiated the structure agreement that created the GASB in 1984. Only such doubt can explain the fact that the agreement specified a review would take place after five years and that, after the review, the FAF would have both the option of spinning off the GASB under a new foundation and the option of merging the GASB with the FASB. Such a merger would give the appearance of the absorption of the smaller, younger GASB by the FASB.

The founders did much better than their worst fears, for the five-year reviewers and the FAF board of trustees each concluded unanimously that the GASB had been performing well in the public interest, was structurally sound and should continue to serve under the FAF as the standard-setting body for government entities. This was the review's most important single finding.

The CRSGAS report argues the transition to a merged FASB-GASB or to a spun-off, independent GASB would be disrupting and neither option is superior to retaining the current arrangement; but the primary reason given by the committee for retaining the current arrangement is that the GASB has performed well in the public interest since its inception. Much of the support for this finding is scattered throughout the CRSGAS report and is unlikely ever to receive the attention given to the enumerated recommendations. Nevertheless, the support is abundant. For example, CRSGAS found the mix of agenda projects had been sound, the GASB's pace in issuing pronouncements has been neither excessive nor unproductive, pronouncements were generally well written, the board was appropriately objective and independent, the due-process procedures are well conceived and diligently observed, the staff is well constituted, personnel administration is effective and appropriate procedures are in place for self-assessment.


The attention given the jurisdiction issue shouldn't overshadow the other important results of the GASB review. The FAF trustees adopted many recommendations--dealing with the GASB's structure, its relationship with the FAF, constituent relations, due process and GASAC's authority--that will permanently change the standard-setting process. These recommendations represent, in CRSGAS's view, "a combination of fine-tuning and the appropriate evolution of an institution that is now only in its fifth year."

GASB's structure. The FAF adopted four recommendations that will change the selection of GASB members and the conditions of their service:

1. GASB members will be selected using criteria similar to those for selecting FASB members.

2. GASB members' compensation will be increased.

3. The current mix of full- and part-time GASB members will be replaced by a full-time board, funding permitting. (Three GASB members now serve part-time, and the fifth serves as director of research as well as a GASB member.)

4. GASB members' terms will be staggered so they expire in an evenly spaced sequence, instead of simultaneously.

Relationship with the FAF. Two changes are designed to create a closer relationship between the FAF board of trustees and the GASB:

1. The FAF will hold confidential consultations with each GASB member periodically to discuss the member's performance.

2. The FAF will be obligated to evaluate first-term GASB members before their terms end to determine their appropriateness as candidates for reappointment.

The relationship between the FAF and the GASB also will be enhanced by a decision that the FAF and GASAC should be more active in raising funds for the GASB. In the past, the largest portion of the funds raised for the GASB originated in the states and was raised under the auspices of GASAC.

Constituent relations and due process. The trustees adopted a battery of recommendations aimed at enhancing communications between the GASB and its constituents and improving due-process procedures. But the volume of these recommendations does not mean the GASB has been doing a poor job communicating with its constituents. In fact, CRSGAS concluded the GASB had done a remarkably good job in gaining respect for its work. CRSGAS also noted the GASB due-process procedures were well designed and diligently followed.

The recommendations include making the GASB's communications program formal, providing tailored messages for specific sets of constituents, conveying the potential consequences of standards and making additional efforts to reach financial statement users and small and single-purpose government entities. Two recommendations on communications were adopted to minimize problems in implementing standards. The GASB will include application examples in all proposals and final standards, and it will increase its participation in educational programs to help constituents understand and apply complex standards.

Five of the recommendations are aimed at improving due process by increasing the likelihood constituents will provide written input when the GASB seeks comments on standard-setting issues. Another recommendation calls for the GASB to make additional efforts to get representatives of financial statement users to serve on its task forces.

The trustees adopted two additional due-process recommendations to reduce the likelihood of implementation problems and allow more rapid response to any that arise: The GASB will field test certain of its proposals and will consider giving its chairman the authority to reconvene task forces to learn of implementation problems when that action is appropriate.

GASAC's authority. GASAC's approval authority over prospective GASB members originally had been limited to appointments made before the mandatory structure review. CRSGAS considered whether to extend it. On the one hand, government constituents wanted individuals with government backgrounds to be able to prevent appointments not in the interest of those constituents. On the other hand was the concern that the power to veto appointments held by a body providing advice on technical matters impaired the appearance of the GASB's independence. The FAF trustees resolved these issues by putting effective veto power in the hands of the three trustees nominated by government organizations.


Special entities--a term coined during the review--refers to entities that may be owned by either government or nongovernment bodies. For example, colleges and universities may be owned by governments or may be private, not-for-profit entities. Pension plans, utilities, airports and healthcare facilities may also be government- or nongovernment-owned.

The 1984 structure agreement specified the jurisdictional arrangement in a single sentence: "Generally accepted accounting principles applicable to separately issued general purpose financial statements of certain entities or activities in the public sector should be guided by standards of the FASB except in circumstances where the GASB has issued a pronouncement applicable to such entities or activities."

This became the basis for dividing jurisdiction over special entities' separately issued general purpose financial statements according to whether the entity was governmentally or privately owned. It allows that, whenever the GASB issues a pronouncement applicable to government special entities' separately issued general purpose financial statements, the pronouncement applies and, starting with its second statement, the GASB's standards included language stating they so applied. In the debates on jurisdiction, this ownership principle meant the GASB's standards would apply to the separately issued general purpose financial statements of all governmentally owned special entities and the FASB's standards would apply to those of all nongovernmentally owned special entities.

Criticism of the ownership principle. The ownership principle was criticized by some as sacrificing comparability of financial statements and thus handicapping their users. The critics focus on the image of users (say, creditors and potential creditors) comparing the financial statements of governmentally and privately owned special entities (say, utilities) and having a difficult time because the financial statements are prepared according to different sets of accounting standards (for example, according to different standards for depreciation or pension accounting).

The ownership principle also has been questioned on the grounds that since certain groups of special entities (for example, utilities, hospitals and colleges and universities) have in the past used common accounting standards and constitute "industries," such entities should be assured they will continue to be able to use common standards. This means having a single standard setter. Proponents of this view hold that to have two sets of accounting standards for entities in the same industry is to permit two types of accounting for similar transactions. They note ownership is not a sure indication of whether or to what degree an entity's economic activities are intrinsically commercial, governmental or not-for-profit.

Support for the ownership principle. The arguments of those who question assigning jurisdiction based on ownership are rejected by those who believe the GASB should have jurisdiction over all government special entities. They challenge the notion that investors and creditors are the critical users whose interests are at stake, maintaining that government users--particularly legislative bodies--should be considered the critical group. They believe it is wrong to equate legislative bodies with "management." Supporters of the ownership principle note the GASB gives special consideration to public accountability that is appropriate for government special entities. They hold that the accountability obligations of government special entities are not diminished and should not be overlooked just because private-sector entities engage in similar activities. They also argue ultimate authority over accounting standards for local government entities--including special entities--lies with the sovereign states, which have delegated that authority to the GASB. According to this view, the FAF can't unilaterally change that delegation of authority without usurping the authority of the states. Finally, they maintain the states would not accept a situation in which accounting standards for state and local government entities were being set by a board whose jurisdiction did not include all government special entities.

What is the status quo? The jurisdiction issue also raised an important practical question: Which approach to jurisdictional assignment would minimize disruption for the participants in the financial reporting process? This weighed heavily in favor of the status quo, but opinions even differed on what constituted the status quo.

The status quo for jurisdiction--the ownership principle--was held to be different from the status quo for actual standard setting. Special entities had not been the subject of particular standard setting by the GASB, so it was argued the ownership principle had never been made effective. Thus, special entities that to date had their accounting determined primarily under the aegis of the FASB and its predecessors would suffer less disruption if the FASB was given formal jurisdiction. Others held the role of industry groups (such as the National Association of College and University Business Officers, or NACUBO) and American Institute of CPAs audit and accounting guides in establishing the accounting for special entities meant neither the GASB nor the FASB could claim its standards represented the status quo.

The CRSGAS recommendation. CRSGAS carefully considered the arguments for and against the ownership principle and the possible effects on the status quo of any new jurisdictional arrangement. It commissioned a study of jurisdiction and special entities, prepared by the U.S. General Accounting Office, Arthur Andersen & Co. and Arthur Young & Company. CRSGAS heard presentations from constituent organizations and Professor John H. Engstrom (author of Information Needs of College and University Financial Decision Makers). It questioned, listened and deliberated.

CRSGAS recommended the ownership principle be applicable in all cases except three: hospitals; gas, water and electric utilities; and colleges and universities (other than two-year colleges with the power to tax). The nongovernmentally owned members of these three groups would continue to follow the FASB's standards. Those governmentally owned would have "core" financial statements prepared under FASB standards and any additional data needed to meet public accountability obligations prepared under GASB standards. This solution was designed to satisfy both the finding that the three groups had users who compared their financial statements and the belief that public accountability needs could not be ignored for these entities.

Back to the drawing board. The initial reaction against the CRSGAS recommendation was so strong that the issue was sent to a special compromise committee, half of whose six members were government representatives. In May 1989, the FAF trustees, because of strong opposition from government groups, rejected the compromise committee's proposal to alter the CRSGAS recommendation by assigning the GASB full jurisdiction for the separately issued general purpose financial statements of all colleges and universities (the minority position in the CRSGAS report). Then, in the summer of 1989, the compromise committee made a new recommendation for approximately the same three groups of special entities mentioned above: The FASB should be the sole standard setter over their separately issued general purpose financial statements, except that the governing board of any government special entity in the three groups could elect to have the GASB serve permanently as its standard setter for such statements. The FAF trustees decided to expose this proposal for public comment.

Some opponents of the ownership principle believed the option to elect the GASB was as much a threat to comparability as the ownership principle itself. Government groups held that the compromise committee's proposal was as unacceptable as the earlier proposals; both proposals reduced the GASB's jurisdiction over certain government special entities.

Because the compromise committee's recommendations faced the same opposition as CRSGAS's, the FAF trustees voted on October 30, 1989, to adopt the CRSGAS recommendation--with an important modification. The executive committee of the board of trustees was to be responsible for working out implementation of the recommendation. This modification opened the way for more negotiations.

At that point, the government groups that had been party to the founding of the GASB announced in a press release the initiation of action that could have led to the creation of a new body to set accounting standards for state and local government entities. This possibility had been repeatedly mentioned, so the announcement was not a surprise. But it still changed the situation substantially. All parties were facing far more closely an outcome that no one really desired--two bodies claiming authority to set accounting standards for state and local government entities, as well as more than one body claiming jurisdiction over the separately issued general purpose financial statements of those special entity groups considered industries by proponents of the CRSGAS proposal.

The FAF had to consider whether such a schism was in the interest of financial statement users. And the government organizations had to consider that, while the premise for their action was a desire to prevent the GASB from being weakened by the jurisdictional proposal, setting up a competing board would clearly threaten GASB's existence.

A week later, the FAF president and the GASAC chairman announced a new proposal that was to settle the issue. The provision on jurisdiction for special entities in the 1984 structure agreement would remain in place, and the GASB would be charged in its mission statement with being mindful of the need in some instances for comparability between government and private sector special entities' separately issued general purpose financial statements. Conveniently, the mission statement was just being formulated at the time as a result of a CRSGAS recommendation.


The "GAAP hierarchy" problem qualifies as a jurisdictional question, but it was not very controversial. It refers to the applicability of FASB pronouncements to GASB constituents' financial statements, a question that arises whenever the FASB issues a pronouncement on a subject that the GASB has not addressed. When the GASB was formed, the founders set out in the structure agreement a priority sequence indicating the applicability of pronouncements (the so-called GAAP hierarchy). The FASB's pronouncements were listed after those of the GASB. Since then, the GASB has found it necessary to deny the applicability of two FASB statements to preparers from state and local government entities. In this way, the FASB's pronouncements and plans affect the GASB's agenda, and GASB constituents cannot consider the GASB their standard setter in all circumstances. The heart of the change that will remedy this problem is that compliance with FASB statements and interpretations will not be mandatory for GASB constituents unless the GASB designates them as mandatory.


The main finding from the review process was that the GASB should continue to serve under the FAF as the standard-setting body for government entities. This finding--at one point threatened by the potential consequences of the special-entities question--was the result of a long and thorough study. From due process to FAF oversight and from compensation to constituent relations, the structure of setting government accounting standards has received the kind of analysis its importance merits. The analysis was accompanied by many recommendations to improve the efficiency and effectiveness of the GASB's operations that were approved by the FAF's trustees. Implementing those recommendations should benefit both the GASB and all those with a stake in financial reporting by government entities.

JOHN R. MILLER, CPA, is a partner and national director of government services with KPMG Peat Marwick, New York. He serves as chairman of the American Institute of CPAs government accounting and auditing committee. He is also a member of the Governmental Accounting Standards Advisory Committee and of the committee to review structure for governmental accounting standards. PETER D. JACOBSON, PhD, is the editor in the department of professional practice-auditing at KPMG Peat Marwick, New York.
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Author:Jacobson, Peter D.
Publication:Journal of Accountancy
Date:Apr 1, 1990
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