The GASB on July 24, 2020, published an exposure draft that aims to improve the information state and local governments provide in their annual financial reports.
The board said it is seeking comments by Feb. 26, 2021, on the changes, issued as GASB Exposure Draft No. 3-25, Financial Reporting Model Improvements. Public hearings and user forums are being held on the exposure draft in March and April 2021.
The revisions are being made to provide consistency in the reporting of key information that help with assessing the accountability of governments and in making economic, social and political decisions, a text of the report states.
The GASB’s research found that the old financial reporting model remains effective in most respects, but there were areas that needed to be improved. The management’s discussion and analysis (MD&A), for example, is well received but would benefit from clarifying current provisions, the board said. Moreover, governments vary in practice in relation to distinguishing between operating and non-operating revenues and expenses for business type activities. MD&A in annual reports precedes financial statements to provide an objective and easily readable analysis of the government’s financial activities based on currently known facts, decisions or conditions.
If finalized, the GASB proposal would be effective based on a government’s total annual revenues in the first fiscal year beginning after June 15, 2022, the proposal states. Governments with total annual revenues of $75 million or more would apply the requirements to fiscal years beginning after June 15, 2024. Governments with total annual revenues of less than $75 million would apply it to fiscal years beginning after June 15, 2025. Earlier application would be encouraged.
Seven notable aspects of the proposed changes are as follows:
- Application of the short-term financial resources measurement focus and accrual basis of accounting in governmental funds: the existing current financial resources measurement focus and modified accrual basis of accounting would be replaced so that the information that is presented has conceptual consistency. Auditors and financial statement preparers will incur costs to implement the changes, primarily in the assessment of whether a transaction is short term or long term.
- Management’s discussion and analysis (MD&A): the changes discourage the inclusion of boilerplate and duplicative information in MD&A so that the quality of the analysis of changes from the prior year presented by governments will be improved. This would provide greater clarity about what items should be presented as currently known facts, decisions or conditions. Those changes also are expected to benefit preparers and auditors by further clarifying what information should be presented in MD&A.
- Presentation of governmental fund financial statements: revisions will provide financial statement users with more valuable information that uniformly disaggregates short-term financial resource flows related to capital assets and long-term debt (including transfers, as applicable) from flows related to current activities.
- Presentation of the proprietary fund statement of revenues, expenses and changes in fund net position: provides a uniform set of definitions rather than government-specific definitions.
- Unusual or infrequent items: requires entities to separately present unusual or infrequent items, rather than special and extraordinary items in the resource flows statement. Financial statement users will be able to identify transactions that may affect their analysis of trends and will provide additional information regarding the program or identifiable activities of the item. Preparers and auditors no longer need to assess whether an item is either unusual in nature or infrequent in occurrence or both to determine whether the item should be presented as an extraordinary item or a special item.
- Information about major component units in basic financial statements: improves the ability for users to locate the information because the alternatives for presentation have been reduced. Furthermore, costs associated with the requirement are expected to be limited to minor reformatting because for most governments, it is the location of the information that may change, not the information itself.
- Budgetary comparison information: requires the use of a single communication method and presentation of both the original-budget-to-final-budget variance and the final-budget-to-actual variance. Additionally, it requires the relocation of the analysis of significant variances from MD&A to notes to required supplementary information (RSI), which will help financial statement users’ ability to assess accountability.
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