The Accounting Angle
GASB Contemplates Changes
in Measurement Focus for
Governmental Funds
By Stephen J. Gauthier
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.
I
n 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
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.
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.
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).
Ultimately, the determining factor for
whether a given financial statement element appears in a given set of financial
POTENTIAL CHANGE
The PV proposes to address these
December 2011 | Government Finance Review 65
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.” Assets that would
be relevant from this near-term financial
resources perspective include:
n
Cash;
Government Finance
Officers Association
GFOA Consulting
What Governments
are Saying About
GFOA Consulting
“Our HRMS software selection
project simply would not have
progressed as it has without
the GFOA’s involvement.”
“GFOA staff went above
and beyond and exceeded
our expectations.”
Call Anne Kinney at 312-917-6102
to find out what GFOA Consulting
can do for you.
GFOA Consulting |
Research and Consulting Center |
312-977-9700 | consulting@gfoa.org |
www.gfoaconsulting.org
66 Government Finance Review | December 2011
n
inancial resources that can be conF
verted to cash within the near term;
and
repaid, because long-term loans receivable do not convert to cash in the near
term.
n
esources that are normally receivR
able at the end of the period and
due to convert to cash within the
near term.
Interest on Long-Term Debt.
Governmental funds do not normally
report an expenditure or a liability for
accrued interest on long-term debt until
payment is actually due, even though
interest is a cost associated with the
current period. The PV proposes to treat
accrued interest like other accrued liabilities. That is, interest incurred as of
the end of the period would be reported
as an expenditure and a liability in a
governmental fund to the extent that
it was due to be paid in the near term.
No expenditure or liability would be
recognized for the principal of long-term
debt, however, until payment was due
(interest is the cost of a service provided
in a given period — the rental of money
— whereas principal is not).
Liabilities would be relevant only if
they were payable (i.e., incurred) as of
the end of the period and due for payment in the near term.
If adopted, this modification of the
measurement focus used for governmental funds would produce some
important changes.
Prepayments. Today, governments
have the option of reporting prepayments as expenditures either when
they are made (purchases method) or
during the period in which benefit is
received (consumption method). The
PV proposes to mandate the use of the
purchases method. The reason is that
a prepayment does not convert to cash
in the near term, and therefore does not
qualify as a near-term financial asset.
Inventories of Supplies. Governments can currently use either the purchases method or the consumption
method to account for supplies inventories. The PV proposes to mandate
the use of the purchases method. Once
gain, supplies inventories, like prepayments, do not qualify as near-term financial assets because they do not convert
to cash in the near term.
Lending Activities. Governments
sometimes function as lenders (e.g., student loans). Today, such loans often
result in a long-term receivable being
reported in a governmental fund. The PV
proposes instead that long-term loans be
treated as outflows of resources when
made and as inflows of resources when
Revenue Anticipation Borrowings.
Currently, revenue anticipation borrowings are reported as a liability of the governmental fund that received the proceeds even if the repayment of principal
is not due until some future period. The
PV proposes that the principal of revenue anticipation borrowings be treated
just like any other debt principal. That is,
no liability would be reported in a governmental fund prior to maturity.
NEXT STEPS
The GASB plans to proceed toward
the release of an exposure draft during
the second quarter of 2012. The board
ultimately hopes to issue a final concepts statement on the topic in the first
quarter of 2013. y
STEPHEN J. GAUTHIER is director of the
GFOA’s Technical Services Center in
Chicago, Illinois.