Statement No. 46 of the Governmental Accounting Standards Board--net assets restricted by enabling legislation.
GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, requires that limitations on the use of net assets imposed by enabling legislation be reported as restricted net assets. In the process of applying this provision, some governments have had difficulty interpreting the requirement that those restrictions be "legally enforceable." The confusion over this phrase has resulted in a diversity of practice that has diminished comparability.
This Statement clarifies that a legally enforceable enabling legislation restriction is one that a party external to a government--such as citizens, public interest groups, or the judiciary--can compel a government to honor. The Statement states that the legal enforceability of an enabling legislation restriction should be reevaluated if any of the resources raised by the enabling legislation are used for a purpose not specified by the enabling legislation or if a government has other cause for reconsideration. Although the determination that a particular restriction is not legally enforceable may cause a government to review the enforceability of other restrictions, it should not necessarily lead a government to the same conclusion for all enabling legislation restrictions.
This Statement also specifies the accounting and financial reporting requirements if new enabling legislation replaces existing enabling legislation or if legal enforceability is reevaluated. Finally; this Statement requires governments to disclose the portion of total net assets that is restricted by enabling legislation. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2005.
How the Changes in This Statement Improve Financial Reporting
The clarifications in this Statement should improve the understandability and comparability of net asset information by making the assessment of legal enforceability more uniform across governments. For example, it should minimize the chances that a government will make an across-the-board determination that none or all of its enabling legislation restrictions are legally enforceable without considering each restriction individually. The additional accounting and financial reporting guidance should help governments determine how to respond to changes in the circumstances surrounding an enabling legislation restriction. The disclosure of the amount of net assets restricted by enabling legislation will allow users to distinguish qualifying restrictions on resource use imposed through a government's own actions from other types of net asset restrictions.
CONTENTS Introduction/1 Standards of Governmental Accounting and Financial Reporting/2-6 Scope and Applicability/2 Determining Legal Enforceability/3 Changes in Circumstances Related to Enabling Legislation/4-5 Disclosure Requirement/6 Effective Date and Transition/7 Appendix A: Background Information/8-14 Appendix B: Basis for Conclusions/15-26 Appendix C: Illustrations/27 Appendix D: Codification Instructions/28
1. The objective of this Statement is to enhance the usefulness and comparability of net asset information reported by state and local governments by clarifying the meaning of the phrase legally enforceable as it applies to restrictions imposed on net asset use by enabling legislation and by specifying the accounting and financial reporting requirements for those restricted net assets.
STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL REPORTING
Scope and Applicability
2. This Statement establishes and modifies requirements related to restrictions of net assets resulting from enabling legislation. It amends GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis-for State and Local Governments, paragraph 34. This Statement applies to all state and local governments.
Determining Legal Enforceability
3. Legal enforceability means that a government can be compelled by an external party--such as citizens, public interest groups, or the judiciary--to use resources created by enabling legislation only for the purposes specified by the legislation. Generally, the enforceability of an enabling legislation restriction is determined by professional judgment, which may be based on actions such as analyzing the legislation to determine if it meets the qualifying criteria for enabling legislation, reviewing determinations made for similar legislation of the government or other governments, or obtaining the opinion of legal counsel. However, enforceability cannot ultimately be proven unless tested through the judicial process, which may never occur. The determination of legal enforceability should be based on the underlying facts and circumstances surrounding each individual restriction. The determination that a particular restriction is not legally enforceable may lead a government to reevaluate the legal enforceability of similar enabling legislation restrictions, but should not necessarily lead a government to conclude that all enabling legislation restrictions are unenforceable.
Changes in Circumstances Related to Enabling Legislation
4. If a government passes new enabling legislation that replaces the original enabling legislation by establishing new legally enforceable restrictions on the resources raised by the original enabling legislation, then from that period forward the resources accumulated under the new enabling legislation should be reported as restricted to the purpose specified by the new enabling legislation. Professional judgment should be used to determine if remaining balances accumulated under the original enabling legislation should continue to be reported as restricted for the original purpose, restricted to the purpose specified in the new legislation, or unrestricted.
5. If resources are used for a purpose other than those stipulated in the enabling legislation or if there is other cause for reconsideration, governments should reevaluate the legal enforceability of the restrictions to determine if the resources should continue to be reported as restricted. If reevaluation results in a determination that a particular restriction is no longer legally enforceable, then from the beginning of that period forward the resources should be reported as unrestricted. If it is determined that the restrictions continue to be legally enforceable, then for the purposes of financial reporting, the restricted net assets should not reflect any reduction for resources used for purposes not stipulated by the enabling legislation.
6. The amount of the primary government's net assets at the end of the reporting period that are restricted by enabling legislation should be disclosed in the notes to the financial statements.
EFFECTIVE DATE AND TRANSITION
7. The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2005. Earlier application is encouraged. Accounting changes adopted to conform to the provisions of this Statement should be applied retroactively by reclassifying net asset information, if practical, in financial statements for all prior periods presented. In the period this Statement is first applied, the financial statements should disclose the nature of any reclassification and its effect. Also, the reason for not reclassifying net asset information for prior periods presented should be explained.
This Statement was issued by unanimous vote of the seven members of the Governmental Accounting Standard Board:
Robert H. Attmore, Chairman Cynthia B. Green William W. Holder Edward J. Mazur Paul R. Reilly Richard C. Tracy James W. Williams
Space considerations prevent publishing here the appendices to GASB Statement no. 46. Since the appendices often are important to understanding GASB statements, readers are advised to obtain complete copies. For additional copies of GASB statements and/or information on applicable prices and discount rates, contact the GASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone: 800-748-0659.
Copyright [c] 2004 by Governmental Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Governmental Accounting Standards Board.
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|Title Annotation:||Official Releases|
|Publication:||Journal of Accountancy|
|Date:||Mar 1, 2005|
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