New Accounting Rules for Special Assessments

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New Accounting Rules For Special Assessments

When the National Council on Governmental Accounting (NCGA) revised the basic accounting principles for governmental units in 1979, its final product--NCGA Statement No. 1[4]--was generally acknowledged as eliminating several inconsistencies in governmental accounting and, in many instances, simplifying governmental accounting procedures. However, one issue that was neither fully resolved at that time nor through subsequent NCGA actions was the accounting for special assessments. Consequently, the conclusions in NCGA Statement No. 1 regarding the accounting for these assessments continued to attract much criticism.

Probably the primary reasons for this criticism were that (1) special assessment bonds were recorded as a liability rather than as an "other financing source" and (2) the modified accrual basis of accounting was used for these activities, where revenues had to be both "measurable" and "available" in order to be recognized. Because of these requirements, the NCGA concluded that the only "other financing sources" for special assessment funds were operating transfers from other governmental funds (such as the general fund) and that only the current portions of special assessments were revenue. Since construction-related expenditures were recognized immediately as incurred, it was normal for a special assessment fund to report a deficiency throughout most of its life. Thus, this fund's "artificial" deficit led to potentially misleading inferences regarding the fund's (and possibly the governmental unit's) financial health.

Additional criticism also resulted from the argument that special assessment activities (especially those involving capital improvements) were no different from activities presently being accounted for in other funds--notably the capital projects and debt service funds. The ambiguity of the NCGA statement's conclusions regarding service assessments was also noted, since questions had arisen regarding whether a separate special assessment fund was even required for these activities.

Because of these concerns, the Governmental Accounting Standards Board (GASB) placed this topic on its active agenda shortly after the Board's inception in 1984. Its initial public document was an October, 1985, Discussion Memorandum[1] that explored the alternative accounting treatments. After considering the input received from various respondents, the GASB reported its tentative conclusions in a July, 1986, Exposure Draft[2]. Again, additional comments were received from the public, and, after making several revisions, the GASB issued its final pronouncement, "Accounting and Financial Reporting for Special Assessments" (GASB Statement No. 6)[3] in January, 1987.

As a result of the Board's deliberations, new accounting and reporting procedures for special assessments must now be implemented. These requirements, the most notable of which includes the termination of the separate fund type for special assessments, are effective for financial statements issued for periods beginning after June 15, 1987, and are applicable for all state and local governmental entities that levy special assessments. Thus, all governmental units on a calendar year must comply with these new standards in their 1988 financial statements.

THE NATURE OF SPECIAL ASSESSMENTS

Special assessments are typically divided into two categories, those providing capital improvements and those providing services. In addition, when special assessment bonds are issued by the municipality to provide resources for some capital improvements, the municipality's legal responsibility for that debt can vary significantly. This section summarizes the particular aspects of special assessments that influenced the GASB's eventual conclusions.

Capital improvement assessments have two separate phases, a construction activity and a financing activity. …