GASB 34: Dramatic Changes are in Store forState and Local Government Financial Reporting

Robert L. Putman

And

Ronald W. Kilgore

Robert L. Putman is Professor of Accountancy at the University of Tennessee at Mar-tin. He can be reached at 229B Business Administration Building; University of Tennes-see at Martin; Martin, TN 38237. His e-mail address is bputman@utm.edu. Professor Putman received his B.S. from Mississippi State University and the MBA and DBA from the University of Memphis. He is a Certified Public Accountant with membership in the American Institute of CPAs, the Tennessee Society of CPAs, the American Accounting Association, and the Tennessee Society of Accounting Educators. He teaches Not-for-Profit, Financial and Management Accounting at both graduate and undergraduate levels at UTM.

Ronald W. Kilgore is Professor of Accountancy at the University of Tennessee at Martin. He can be reached at 138 Business Administration Building; University of Ten-nessee at Martin; Martin, TN 38237. His e-mail address is rkilgore@utm.edu. Profes-sor Kilgore received the B.S. from the University of Tennessee at Martin and the M.S. and PhD from the University of Mississippi. He teaches undergraduate Not-for-Profit and Financial Accounting at UTM.

GASB 34: Dramatic Changes are in Store for State and Local Government Financial Reporting

INTRODUCTION

The Governmental Accounting Standards Board (GASB) changed state and local gov-

ernment financial reporting significantly with the issuance of Statement Number 34. Be-

cause of the complexity of the standard, implementation of GASB 34 by state and local

governments will require sophisticated accounting expertise. This may be in the form of

additional training to in-house accountants, outside consultation, or a combination of the

two.

The primary impact of GASB 34 is the requirement that two levels of financial state-

ments be presented instead of funds statements only. Government-wide financial state-

ments prepared using the accrual basis of accounting and economic resources measure-

ment focus, in addition to traditional fund financial statements, will be required in the fu-

ture. Some of the funds statements use the modified accrual basis of accounting and the

flow of financial resources measurement focus. It is important for CPAs to understand

the ramifications of these changes in financial reporting format whether they are involved

in state and local government auditing or simply explaining the new format to interested

user groups.

The purpose of this article is to highlight some of the major changes that GASB 34 will

require in future financial reporting of state and local governments. As a means of better

understanding of the requirements of GASB 34, the writers present an example of the two

levels of financial reporting required of a typical city. Major changes in reporting of gen-

eral fixed assets and general long-term debt are highlighted in this example.

EARLY WORK OF GASB

Traditionally, state and local government financial reporting used fund accounting as

the method of reporting on management and accountability of financial resources. Fund

accounting provides adequate control over the flow of specific purpose funds entrusted to

public officials. However, this method of reporting sometimes provides confusing infor-

mation on true financial position and operating efficiency of entities.

In the early 1990s GASB’s primary work involved the establishment of a financial re-

porting model that would make state and local government financial reporting more like

business entities. The GASB issued Standard Number 11 in 1990 as its first attempt at

the task. The primary impetus of GASB 11 was to place all governmental type funds on

the full accrual basis of accounting and economic resource measurement focus. GASB

11 received an unruly welcome by traditional governmental accountants and certified

public accountants. The primary criticisms were that accountability of funds would be

jeopardized and implementation problems would be too costly. After a subsequent

GASB Standard delayed implementation of GASB 11, it was put on the back burner in

search of a better model. As the model developed, it was evident that two levels of finan-

cial statement presentations would best satisfy the diverse user needs of state and local

government financial information.

CHANGES INTRODUCED BY GASB 34

GASB 34 was issued in June 1999. This standard provides the most sweeping changes

in state and local government financial reporting since the inception of GASB. Imple-

mentation dates vary depending upon the amount of revenues governmental entities re-

ported in 1999. The largest entities (those with more than $100 million in revenue in

1999) are required to implement GASB 34 for fiscal years beginning after June 15, 2001.

State and local governments will need to invest additional resources into their financial

reporting format in order to comply with GASB 34. Will the requirements of this stan-

dard improve financial reporting for state and local governments sufficiently to justify

such increased cost? Currently, debate exists (Statler, 2000; Chase and Triggs, 2001) as

to whether or not implementation of the new standard will be cost beneficial to users of

the financial statements. In this article the writers investigate specific changes in finan-

cial reporting required by GASB 34 and then discuss the major effects of such changes

on financial reporting of state and local governments.

Two Levels of Financial Statements Required

Prior to GASB 34 state and local government transactions were reported and accounted

for through the use of funds established for specific purposes. The three categories of

funds are governmental, proprietary, and fiduciary. All governmental type funds were re-

quired to use the modified accrual basis of accounting and the flow of financial resources

measurement focus. Proprietary funds, such as utility departments, operate more like

businesses. Accordingly, these funds used accrual basis accounting and the flow of eco-

nomic resources measurement focus prior to GASB 34. GASB 34 will have minimal im-

pact on proprietary fund operations. Fiduciary fund transactions were presented previ-

ously using both methods depending upon the type of fiduciary relationship involved in

operations of each fund. Under GASB 34 fiduciary funds will be reported using accrual

basis accounting and the flow of economic resources measurement focus.

The primary argument for establishing the new model for state and local government

reporting is to make such reporting more meaningful to its varied users, especially bond

rating agencies. Even so, argument exists that financial reporting based on fund account-

ing is the best way to assure accountability of public funds. GASB resolved this argu-

ment by requiring two levels for presentation of financial statements. Government-wide

financial statements require the combining of governmental activities and business type

activities on a full accrual basis of accounting and the economic resources measurement

focus.

With a few exceptions, state and local governments will continue to maintain fund ac-

counting and reporting for governmental type funds the same way as before GASB 34 is-

suance. Fiduciary fund activities will continue to report using accrual accounting and

economic resources measurement focus in fund accounting but will not be a part of gov-

ernment-wide financial reporting. Reconciliation schedules between government-wide

and fund financial statements may be presented on the face of the governmental fund fi-

nancial statements or as notes to the financial statements. Exhibit 1 presents the new re-

porting requirements.

===============================================================Insert Exhibit 1 here===============================================================

Treatment of General Government General Fixed Assets

The new standard changes the way that state and local governments report general gov-

ernment fixed assets. Previously, entities recorded expenditures as capital outlay expen-

ditures in the current period in conformance with the flow of financial resources measure-

ment focus. The cost of fixed assets was then capitalized in the general fixed assets

group of accounts. The original cost of fixed assets remained on the books until disposal.

Since no depreciation was reported for general fixed assets, many governments over-

stated fixed asset values in annual financial statements. GASB requires fixed assets to be

reported in the government-wide statement of net assets, net of accumulated depreciation.

Annual depreciation is reflected in the government-wide statement of activities. Thus,

the value of general government fixed assets on the government-wide financial state-

ments more closely relates to the way it is presented by proprietary businesses. At the

same time, the flow of financial resources measurement focus provides appropriate ac-

countability through fund accounting processes.

General Government Long-Term Debt

Prior to GASB 34 long-term liabilities of general government were reported in the gen-

eral long-term debt group of accounts. Whenever the government entity borrowed

money using bonds or other long-term debt instruments, the face value of the debt was

recorded as a liability in this group of accounts. Since account groups are self-balancing,

as are funds, a debit entry was made simultaneously in the account group to recognize the

amount to be provided for repayment of the debt. On combined financial statements this

debit was often misinterpreted, as assets owned by the entity. GASB 34 eliminated ac-

count groups from fund reporting. Instead, general long-term debt is now reported under

government activities in the government-wide statement of net assets. Just as there is a

need for a reconciliation item between government-wide and fund financial statements

for general fixed assets, there is also a need of one for general long-term debt.

Other Changes Required by GASB 34

GASB 34 requires specific format for government-wide and fund financial statements.

Refer to Exhibits 2 through 6 for an overview of this new format. A management discus-

sion and analysis report is required for state and local government financial reports. In

this report the primary oversight officials of the government entity discuss such things as

the government's overall financial position and a brief analysis of financial statement

highlights.

Internal service funds were covered by proprietary fund requirements prior to the enact-

ment of GASB 34. Accordingly, this type of fund used full accrual accounting and eco-

nomic resource measurement focus before the new standard was issued. Internal service

fund activities are combined with governmental fund activities for government-wide fi-

nancial statement presentation. Enterprise funds are the only proprietary funds presented

as business-type activities on government-wide financial statements.

New infrastructure reporting requirements are also included in GASB 34. Infrastruc-

ture assets, such as streets and sewer systems, will be capitalized retroactively and depre-

ciated. Governments will be allowed to adopt the modified approach in lieu of actual de-

preciation of infrastructure assets. The modified approach requires maintenance sched-

ules that help infrastructure assets maintain book values over years of usage.

AN ILLUSTRATION OF THE NEW REPORTING FORMAT

The following example involves hypothetical City of A's activities for the fiscal year

ended June 30, 2003. Information is presented using the two levels of financial state-

ments and reporting formats required by GASB 34. The major points of emphasis are the

reconciliation schedules (Exhibits 4 and 7) of government-wide financial statements with

fund financial statements. Hopefully, readers will gain a greater appreciation of the

changes required in financial reporting for state and local governments through observing

this example.

Exhibit 2 presents a condensed balance sheet of all governmental type funds for City of

A for the year ended June 30, 2003. For illustrative purposes it is assumed that there are

no component units to be included. The balance sheet includes assets and liabilities for

governmental type funds only. Prior to GASB 34, it would have included proprietary

funds, fiduciary funds, and groups of accounts along with memorandum only totals.

===============================================================Insert Exhibit 2 here=============================================================== Exhibit 3 illustrates the government-wide statement of net assets. The neat aggregated

appearance of this financial statement provides information comparable to business enti-

ties with similar financial positions. Governmental activities and business-type activities

of the governmental entity are presented in columnar format. As a potential creditor or

investor of the City of A, one can readily obtain necessary financial information for deci-

sion-making purposes from the new government-wide format.

===============================================================Insert Exhibit 3 here============================================================================

The reconciliation of governmental fund ending balances from the balance sheet to the

statement of net assets is illustrated in Exhibit 4. In this example, the only items neces-

sary to reconcile are capital assets not included in fund financial statements and long-

term debt not due and payable in the current period, also not included in the fund finan-

cial statements.

===============================================================Insert Exhibit 4 here=============================================================== The statement of revenue, expenditures, and changes in fund balances for governmental

type funds is presented in Exhibit 5. Modified accrual basis of accounting continues to

be used for all transactions reported as governmental fund activities. Evident in this

presentation is the flow of financial resources measurement focus. Expenditures are cate-

gorized as current and capital outlay. Capital outlay expenditures are included on the

government-wide statement of net assets as capital assets net of accumulated deprecia-

tion.

==============================================================

Insert Exhibit 5 here

==============================================================

The new government-wide statement of activities is used for state and local govern-

ments in accounting for current year operations. Exhibit 6 presents the statement of ac-

tivities for City of A. Government and business-type activities are again presented sepa-

rately. However, the information is presented by rows on this new financial statement.

Expenses are reported in the first column followed by charges for services, grants, and

exchange revenue. The last three columns report net excess of revenue (expenses) by

government, business-type, and total activities. As one would expect, the subtotal of

governmental activities generates a deficiency. The reason for this is because non-ex-

change revenues, such as taxes, are subsequently added to this subtotal. The process

gives the reader an idea of the percentage of governmental-type activities that are fi-

nanced by non-exchange revenue such as taxes.

Reconciliation of governmental fund activities to the government-wide statement of

activities is presented in Exhibit 7. This reconciliation involves the differences in capital

expenditures from governmental funds and depreciation expense from government-wide

financial statements. It also reflects the differences in bond proceeds and repayments

during the period since long-term debt is not shown in general government fund state-

ments.

CONCLUSIONS

The implementation of GASB 34 brings with it numerous improvements in financial

reporting for state and local governments. Serving user needs should always be the pri -

mary objective of accounting standards setting bodies in their quest for better financial

reporting. It is apparent that the GASB kept this objective at the forefront in their work

on Statement Number 34. Users of state and local government financial statements are a

diverse group that includes the citizens, public oversight officials, investors, and credi-

tors. GASB opted for the presentation of two levels of financial statements in its attempt

to satisfy the diverse needs of the various users.

The government-wide financial statements will be of primary interest to investors and

creditors. From these two financial statements they can readily determine the financial

position and the status of current operations of the governmental entity in its entirety.

These financial statements are presented on an aggregated basis with clear distinction be-

tween governmental activities and business-type activities. Also, assets, liabilities, rev-

enue, and expenses are defined on government-wide financial statements in the same way

as they are on business financial statements.

Citizens and public oversight officials in search of public money accountability can

move to fund financial statements in order to satisfy their user needs. Funds, with em-

phasis on flow of financial resources, will continue to serve as an excellent tool of ac-

countability. It appears that, at long last, GASB has produced a model that best meets the

needs of all users of state and local government financial information.

REFERENCES

Chase, Bruce W. and Laura B. Triggs (2001). How to Implement GASB Statement No. 34. Journal of Accountancy. November, 71-79.

Engstrom, John H. and Paula A. Copley (2001). Essentials of Accounting for Governmen-tal and Not-For-Profit Organizations, 6th ed. 213-222.

Governmental Accounting Standards Board. Statement Number 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Govern-ments. Norwalk, Ct., June 1999.

Statler, Bill (2000). Why is GASB 34 Such a Big Deal? Western City. November. http://westerncity.com.

Exhibit 1Financial Statements Required by GASB 34

First Level (Government-Wide)

Second Level (Fund Reporting)

*Not included in government-wide financial statements

Exhibit 2City of A – Balance Sheet (In $millions)

Governmental FundsJune 30, 2003

Special Capital Debt Total General Revenue Projects Service Govt. Funds Assets: Financial 4,500 500 1,500 500 7,000 Other 500 500

Total Assets 5,000 500 1,500 500 7,500

Liabilities: Current 1,600 400 100 2,100 Other 400 0 0 0 400 Total Liabilities 2,000 400 0 100 2,500

Fund Balances: Reserved 100 1,500 400 2,000 Unreserved 3,000 3,000

Statement of Net Assets(Includes General Fixed Assets and General Long-Term Debt)

Statement of Activities(Full accrual basis of accounting and total flow of economic resources)

Governmental Type Funds Balance Sheet

Proprietary Type Funds Statement of Net Assets

Fiduciary Type Funds Statement of Net Assets*

Governmental Type FundsRevenue, Expenditures and Changes in

Fund Balances

Proprietary Type Funds Revenue, Expenses and And Changes in Net Assets Cash Flow Statement

Fiduciary Type Funds Changes in Net Assets*

Total Fund Balances 3,000 100 1,500 400 5,000 Total Liabilities and Fund Balances 5,000 500 1,500 500 7,500

Exhibit 3City of A

Statement of Net Assets (In $millions)June 30, 2003

Governmental Business-Type Activities Activities Total Assets: Non-Capital Assets 7,500 4,000 11,500 Capital Assets, net of Accumulated Depreciation 32,500 26,000 58,500Total Assets 40,000 30,000 70,000

Liabilities: Current Liabilities 2,500 1,500 4,000 Long-Term Liabilities 12,500 14,000 26,500 Total Liabilities 15,000 15,500 30,500

Net Assets: Invested in Capital Assets- Net of Related Debt 22,500 13,000 35,500 Restricted 1,000 500 1,500 Unrestricted 1,500 1,000 2,500

Total Net Assets 25,000 14,500 39,500

Exhibit 4City of A – Reconciliation of Balance Sheet of Governmental Funds

to the Statement of Net AssetsAs of June 30, 2003

Fund balances reported in governmental funds Balance Sheet……….. 5,000Capital assets used in governmental activities not financial resources, therefore, are not reported in the fund……….. ……….……………. 32,500

Long-term liabilities, including bonds payable, are not due and payable in the current period, therefore, are not reported in the fund. (12,500)

Net assets of governmental activities………………………………….. 25,000

Exhibit 5City of A – Governmental Type Funds

Statement of Revenue, Expenditures, and Changes in Fund Balances(In $millions)

For Year Ended June 30, 2003

Special Capital Debt General Revenue Projects Service Totals

Revenue: 3,600 2,500 1,000 500 7,600

Expenditures: Non-capital 2,500 2,400 400 5,300 Capital 2,000 2,000Total Expenditures 2,500 2,400 2,000 400 7,300

Excess (Deficiency) Revenue over Expenditures 1,100 100 (1,000) 100 300Fund Bals. Beg. of Year 1,900 0 2,500 300 4,700

Fund Bals. End of Year 3,000 100 1,500 400 5,000

Exhibit 6City of A – Statement of Activities (In $millions)

For Year Ended June 30, 2003 Net (Expenses) Revenue Program and Changes in Net Assets and Governmental Business-Type Functions/Programs Expenses Other Revenue Activities Activities Total

Government Activities 7,500 500 ( 7,000 ) ( 7,000 )Business-Type Activities 2,900 3,000 100 100

Total Government 10,400 3,500 ( 7,000 ) 100 ( 6,900 )

General Revenues: Non-Exchange Revenue 6,800 6,800 Licenses, Permits, Investment Income 300 50 350

Change in Net Assets 100 150 250Net Assets-Beginning 24,900 14,350 39,250

Net Assets-Ending 25,000 14,500 39,500

Exhibit 7City of A – Reconciliation of the Statement of Revenues, Expenditures

and Changes in Fund Balances of Governmental Funds to theStatement of Activities

For the Year Ended June 30, 2003

Net change in fund balances—total governmental funds………… 300 Governmental funds report capital outlays as expenditures. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount depreciation exceeded capital outlays in the current period……………………………………………………. (1,500)

Bond proceeds provide current financial resources to governmental Funds, but issuing debt increases long-term liabilities in the State- ment of Net Assets. Repayment of bond principal is an expenditure in governmental funds, but the repayment reduces long-term liabilities in the Statement of Net Assets. This is the amount by which proceeds exceeded repayments in the current period…………………………. 1,300

Changes in net assets of governmental activities……………………… 100