GASB Contemplates Changes in Measurement Focus for Governmental Funds: The GASB's Recently Published Preliminary Views on the Recognition of Elements of Financial Statements and Measurement Approaches Proposes Modifying the Measurement Focus Currently Used to Prepare Governmental Fund Financial Statements

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In late June 2011, the Governmental Accounting Standards Board (GASB) published its preliminary views (PV) on the Recognition of Elements of Financial Statements and Measurement Approaches. Among other matters, the PV explores the possibility of modifying the measurement focus currently used to prepare governmental fund financial statements.

BACKGROUND

An item must meet the definition of one of the seven financial statement elements (i.e., assets, liabilities, outflows of resources, inflows of resources, deferred outflows of resources, deferred inflows of resources, and net position) to appear on the face of the basic financial statements. Meeting the definition of a financial statement element, however, does not automatically mean that a specific item will be included in a given set of financial statements. Land and buildings used in operations, for instance, clearly qualify as assets, yet neither is included in a governmental fund balance sheet. Similarly, long-term debt obligations do not appear in a governmental fund balance sheet, even though they meet the definition of liabilities. Conversely, land, buildings, and long-term debt obligations related to governmental activities all appear in the government-wide financial statements.

Ultimately, the determining factor for whether a given financial statement element appears in a given set of financial statements depends on the measurement focus used to prepare those statements. Governmental funds have historically focused on current financial resources. Thus, land and buildings used in operations are not reported in governmental funds because they are not financial resources. So too, long-term debt obligations are not reported in governmental funds because they do not represent a draw upon current financial resources.

One of the key questions raised by the PV is whether the current financial resources measurement focus now used for governmental funds should be modified. Some critics have argued that the existing notion of current financial resources fails to provide a clear and compelling rationale for including some items in governmental fund financial statements, while excluding others. Why, for example, are long-term receivables reported as assets on a balance sheet that purports to focus on current financial resources? Others argue that the recognition of financial statement elements is not always symmetrical. For example, governmental funds report revenue for amounts that will be collected only a month or more following the close of the period (e.g., property tax collections), but do not report expenditures for period-related payments that must be made as soon or even sooner (e.g., accrued interest on long-term debt).

POTENTIAL CHANGE

The PV proposes to address these criticisms by modifying the measurement focus used for governmental fund financial statements. Specifically, the PV proposes to shift the measurement focus of governmental funds from current financial resources to near-term financial resources. For this purpose, near-term would describe "the period subsequent to the end of the reporting period during which financial resources at period-end can be converted to cash to satisfy obligations for spending for the reporting period. …