Magazine article Government Finance Review

Additional Reporting Model Proposals

Magazine article Government Finance Review

Additional Reporting Model Proposals

Article excerpt

In June 1999, the Governmental Accounting Standards Board (GASB) issued Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments. GASB Statement No. 34 established a new framework of financial reporting (i.e., "financial reporting model") for state and local governments. That same month, the GASB also issued two exposure drafts (EDs) on issues related to the new financial reporting model. One of these drafts proposes specific guidance on the proper application of modified accrual accounting. The other proposes to include public-sector colleges and universities within the scope of GASB Statement No. 34.

Modified Accrual Guidance. The GASB concluded in Statement No. 34 that governmental funds should continue to employ the modified accrual basis of accounting. As part of the study and deliberation that led to that decision, however, the board also concluded that additional guidance was needed on the proper application of the modified accrual basis of accounting. Specifically, the GASB was concerned that differences in interpretation of the current standard may have an adverse impact on comparability. The new ED, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, proposes guidance on several specific issues designed to remedy this perceived deficiency.

Limitation on the Accrual of Certain Liabilities in Governmental Funds. Under current generally accepted accounting principles (GAAP), certain accrued liabilities related to activities reported in governmental funds are reported as expenditures and fund liabilities only to the extent that they are "normally expected to be liquidated with expendable available financial resources." Specific examples include, claims and judgments, compensated absences, special termination benefits, and landfill closure and postclosure care costs. In practice, such liabilities normally are reported in the general long-term debt account group rather than in a governmental fund because they normally are expected to be liquidated with "amounts to be provided in future periods" rather than with "expendable available financial resources." However, when it is a government's practice to advance fund such amounts (e.g., a government that has adopted a policy to fund vacation leave as earned by employees), the related liability typically is reported in a governmental fund (i.e., to "offset" the assets accumulated for that purpose in the fund). The GASB proposes in its new ED to eliminate this latter practice entirely by allowing the accrual of a fund liability only "as payments come due upon the occurrence of relevant events such as employee resignations and retirements." Of course, governments still would be able to use an internal service fund for this purpose, if they wished to do so.

Requirement for the Immediate Accrual of Certain Liabilities in Governmental Funds. It generally has been assumed that amounts that normally are paid in a timely manner and in full from current financial resources (e.g., salaries and utilities) must be reported as fund liabilities when incurred. However, certain governments have avoided immediate recognition in some such cases by entering into special arrangements to defer payment. They argue that the amounts in question are not fund liabilities because these amounts, from their perspective, will not "normally...be liquidated with expendable available financial resources." The GASB, however, believes that the term "normally" should be interpreted on the basis of what is normal for governments in general, rather than on the basis of what is normal for any particular government. …

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