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Implementation of the new measurement focus and basis of accounting (MFBA) for governmental funds.

In May 1990, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 11, Measurement Focus and Basis of Accounting--Governmental Fund Operating Statements. This pronouncement marked the culmination of a project that had been on the GASB's agenda since the board was first established in June 1984. In GASB Statement No. 11, the board announced that it intended to significantly alter governmental fund operating statements starting with fiscal years beginning after June 15, 1994. The GASB also committed itself to the completion and simultaneous implementation of several related agenda projects (including financial reporting).


The original exposure draft (ED) for a new measurement focus and basis of accounting (MFBA) for governmental funds was issued in December 1987. Some of the more notable provisions of this first GASB proposal were as follows:

* expenditures would be recognized when

the related event occurred, regardless of

the timing of cash flows (e.g., the full

cost of vacation leave would be reported

as an expenditure in governmental funds

as earned, regardless of when the leave

was taken);

* revenues would be recognized when the

related event occurred, regardless of the

timing of cash flows (e.g., delinquent

property taxes would be considered

revenue" rather than "deferred

revenue," if it were considered probable

that they would eventually be collected);


* a variety of liabilities traditionally

reported in the general long-term debt

account group would instead be

reported in the governmental funds


For many states and larger cities, the "transfer" of certain liabilities (particularly compensated absences) from the general long-term debt account group to the general fund itself would have created a serious fund balance deficit, or at least seriously reduced fund balance. Therefore, many of these governments voiced strong objections to this original MFBA proposal.

In response to this controversy, the GFOA's membership voted in favor of a formal policy statement at the association's annual conference in Atlanta in May 1988. Key elements of this policy statement include the following:

* the MFBA should be implemented

simultaneously with a number of other

GASB projects, including the board's

financial reporting project;

* there should be at least a one-year

period from the issuance of a final

statement to the first day of the initial

year of implementation;

* governments should have a three-year

"implementation window" to "permit

governments to determine the impact,

prepare the public, adjust or modify

internal accounting procedures and

address the significant policy decisions

pertinent to these newly recognized

liabilities on an as-incurred basis;" and

* the GASB should complete the financial

reporting project "so that preparers,

attestors, governmental officials and

other users have an opportunity to know

not only how, but why, financial statements

are henceforth to be presented in

this manner.

The policy statement concluded that "the GASB must address these issues before the proposed MFBA will be acceptable to the government community."

After evaluating the reaction to the 1987 ED, the GASB issued a second ED that attempted to deflect many of the criticisms of the original proposal by separating the operating statement requirements of the proposed new MFBA from their potential balance sheet implications. In other words, the board believed it was possible to decide in favor of greater accrual in governmental fund operating statements (i.e., additional revenues and expenditures) without at the same time deciding whether these additional accruals ought to affect fund balance. Such balance sheet considerations were reserved, instead, for the board's financial reporting project.

The board's eventual final pronouncement, GASB Statement No. 11, essentially followed the direction set forth in the second ED. In other words, the GASB set forth rules that would require greater revenue and expenditure accruals in governmental fund operating statements, but at the same time the GASB deferred consideration of the potential balance sheet impact of these accruals to its separate financial reporting project. Also, as mentioned earlier, the board committed itself to implementing the new MFBA simultaneously with several other major projects, including the financial reporting project.

Recent developments

As time passed, it became increasingly clear to many that the GASB was unlikely to be able to complete work on all of its MFBA-related projects in time for the new MFBA's scheduled effective date (i.e., fiscal periods beginning after July 15, 1994). Therefore, the GASB had to decide either to delay implementation of GASB Statement No. 11 (to allow for the completion of related projects), or to reverse its earlier pledge to implement the new MFBA concurrently with related agenda projects (including the financial reporting project).

Recently, the GASB voted unanimously in favor of implementing GASB Statement No. 11 on schedule. To meet this goal, the GASB split its financial reporting model project into two portions. The first portion is to deal only with the minimum changes necessary to implement the new MFBA on schedule. The second portion of the project, no longer tied to MFBA implementation, will deal with broader issues affecting the governmental financial reporting model.

The board now is preparing to issue a preliminary views (PV) document setting forth two different approaches to how the new MFBA should be implemented. Both approaches would leave the amount reported as "fund balance" essentially unchanged. Nonetheless the balance sheet presentation of liabilities and equity would differ significantly between the two approaches.

The majority position, or "preliminary view," which reflects the opinion of three of the GASB's members, would require governments to report certain long-term liabilities in the governmental funds themselves. However, "fund balance" would no longer be defined as the difference between fund assets and fund liabilities. Rather, the difference between fund assets and fund liabilities would be known as "fund equity." Accordingly, a government in a negative equity position (i.e., fund liabilities exceed fund assets) could still report a positive fund balance. This approach is sometimes referred to as the "captioning" method (i.e., fund balance is no longer the difference between assets and liabilities, but simply one element or "caption" within the equity section of the balance sheet). The following illustration of this approach is based on a recent GASB working paper:
 Accounts payable $215,050
 Compensated absences 570,000
 Claims and judgments 200 000
 Total liabilities 985,050
Fund Balances:
 Reserved 85,200
 Unreserved 169,100
 Total fund balances 254,300
Net to be financed
 in future years (745,000)
Total equity
 (not required) (490,700)
 Total Liabilities
 and equity $494,350

The minority position, or "alternative view," which reflects the opinion of two GASB members, would continue to report long-term liabilities in the general long-term debt account group (GLTDAG) rather than in the governmental funds, leaving the current balance sheet presentation essentially unchanged. This method is sometimes known as the GLTDAG approach. Under this approach, the liabilities and equity section of the balance sheet illustrated above would be reported instead as follows:
Accounts payable $215,050
 Total liabilities 215,050
Fund balances:
 Reserved 110,200
 Unreserved 169,100
 Total fund balances 279,300
Total liabilities and
 equity $494,350

Under the majority approach, a separate statement of changes in fund balance would be used to "tie" the results of the operating statement (i.e., "excess of revenues and other financing sources over expenditures and other financing uses") to "fund balance" as reported on the balance sheet. Under the minority approach, this reconciliation would continue to be made on the face of the operating statement itself (i.e., a single "all-inclusive" statement would report both results of operations and changes in fund balance).

Future Directions

The GFOA is formally on record as opposing the implementation of the new MFBA prior to the completion of the GASB's broader financial reporting model project. Accordingly, both the GFOA's Committee on Accounting, Auditing and Financial Reporting, as well as the GFOA's Executive Board, have recently attempted to dissuade the GASB from issuing a PV prior to completion of the broader financial reporting model project. The editorial on page 3 of this issue of Government Finance Review sets forth the rationale for the GFOA's position.

The GASB plans to issue its PV on implementing GASB Statement No. 11 before the end of April. A public hearing on the PV is scheduled to be held in Orlando, Florida, on June 24, in connection with the GFOA's upcoming annual conference. The GFOA is scheduled to testify at that hearing. Members wishing to arrange to testify are encouraged to contact Ellen Falk of the GASB staff (203/847-0700, ext. 210).
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Article Details
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Author:Gauthier, Stephen J.
Publication:Government Finance Review
Date:Jun 1, 1992
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