J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 9(2), 224-250
SUMMER 1997
GASB VERSUS FASB: USER PERCEPTIONS OF THE
ALTERNATIVE FORMATS FOR PREPARING THE
STATEMENT OF CASH FLOWS
G. Robert Smith, Jr., Robert J. Freeman and Barry J. Bryan*
ABSTRACT. This paper reports results of a survey that examines user perceptions of
alternate formats of the Statement of Cash Flows (SCF) mandated by the Governmental
Accounting Standards Board (GASB) and the Financial Accounting Standards Board
(FASB). The formats were compared using seven reporting issues. The findings indicate that
users found the GASB SCF model to be superior to the FASB model for all issues. The
study has implications for both standard-setting bodies. The GASB has already considered
the results in developing a new reporting model for governmental entities. The FASB may at
some point want to reconsider its SCF reporting requirements.
INTRODUCTION
There are two alternate formats for preparing the Statement of Cash
Flows. One format is used in the private sector and is prescribed by the
Financial Accounting Standards Board (FASB) in its Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows. The other is used
in the public sector and is prescribed by the Governmental Accounting
Standards Board (GASB) in its Statement No. 9, Reporting Cash Flows of
Proprietary and Nonexpendable Trust Funds and Governmental Entities
That Use Proprietary Fund Accounting.
While the business sectors that use each statement are completely
separate, the FASB model could be adapted for use in the public sector.
______________
*G. Robert Smith, Jr., Ph.D., CPA, and Barry J. Bryan, Ph.D., CPA, are Assistant
Professors of Accounting at Auburn University; and Robert J. Freeman, Ph.D., CPA, is
the Distinguished Professor of Accounting at Texas Tech University and, since 1990, a
member of the Governmental Accounting Standards Board. Their teaching and
research interests are in governmental accounting and auditing.
Copyright © 1997 by PrAcademics Press
GASB VERSUS FASB: USER PERCEPTIONS
225
Indeed, in the interim between the time the FASB issued its statement in 1987
and the GASB issued its statement in 1989, the FASB model was allowed in
the public sector.
The purpose of this study is to examine which model is superior for
reporting cash flows in the public sector: the FASB model adapted for
governmental reporting or the GASB model. A survey of users, preparers,
and auditors was used to examine perceptions of the two models. As
reported in the following sections, the respondents found the GASB model to
be superior to the FASB model for reporting cash flows in the public sector.
These findings may have major implications for both standard-setting bodies
as they reexamine their respective financial reporting models.
The article will consist of a brief review of the evolution of cash flow
reporting standards, examine basic issues related to the FASB and GASB
models, describe research design and findings, and finally present some
conclusions about the two SCF models.
LITERATURE REVIEW
Cash flow reporting has been a Ahot topic@ for a number of years.
Indeed, some form of cash flow or funds flow reporting has been in use since
the 1860s. However, the debate has intensified in the last ten years as the
two accounting standard setting bodiesCthe Governmental Accounting
Standards Board (GASB) and the Financial Accounting Standards Board
(FASB)Chave both issued accounting standards addressing cash flow
reporting. The accounting standards at issue are:
- Statement of Financial Accounting Standards No. 95, Statement of
Cash Flows (FASBS 95), and
- Statement No. 9 of the Governmental Accounting Standards Board,
Reporting Cash Flows of Proprietary and Nonexpendable Trust
Funds and Governmental Entities That Use Proprietary Fund
Accounting (GASBS 9).
Both these standards replaced Accounting Principles Board Opinion No.
19, Reporting Changes in Financial Position (APBO 19), issued in 1971.
APBO 19 was the first accounting standard to require a funds flow statement
in both the public and private sectors although there had been other attempts
by in both the private sector (APBO 3, The Source and Application of
Funds) and the public sector (National Committee on Governmental
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SMITH, FREEMAN & BRYAN
Accounting Bulletin No. 14, Municipal Accounting and Auditing and
Governmental Accounting, Auditing, and Financial Reporting) to address
cash flow and funds flow reporting. The Opinion required a Statement of
Changes in Financial Position (SCFP) prepared on either a cash or working
capital basis.
FASBS 95 was extremely controversial when it was formulated and
issued in 1987. There was considerable debate at the FASB over the
requirements of statement of cash flows (SCF) standard. Arthur Wyatt
resigned from the FASB because the Board elected to allow the use of the
indirect method when preparing the SCF. Even when the standard was
issued, it was only by a 4-to-3 vote. The dissenting Board members found
fault with the classification of cash flows from interest and dividends received
and interest paid as well as some format issues in the standard. These cash
flow classifications are among the issues addressed in this study.
The issuance of FASBS 95 left governmental reporting for business-type
activities in a quandary. Should governments continue to use the SCFP as
required by APBO 19? Or, should governments start presenting the FASBS
95 statement of cash flows? For a while, not even the GASB was sure.
Initially, the Board stated that it would issue its own SCF standard, and that
governments were to continue reporting using the SCFP requirements until
the standard was issued. Then the GASB reversed its position, saying it
would not issue a SCF standard, and instructed governments to follow the
FASBS 95 requirements so long as the disclosure requirements of APBO 19
were met. Finally, the GASB decided to issue its own SCF standard.
The GASB issued its SCF standard in 1989, after considerable
discussion on whether the FASB model would be sufficient for governmental
reporting. This standard did not have the unanimous support of the Board; it
was issued by a 4-to-1 vote of the GASB members. Also, because the GASB
model differs significantly from the FASB model in both form and content,
many users questioned whether separate reporting models were needed for
the public and private sectors. These differences are discussed later in this
paper.
The debate about the GASB model was acerbated further when the
FASB issued Statement No. 117, Financial Statements for Not-for-Profit
Organizations. Part of the debate then was whether these organizations
should generally follow the private sector model or the public sector model.
GASB VERSUS FASB: USER PERCEPTIONS
227
Ultimately, the FASB elected to use a SCF format similar to the one in
FASBS 95.
Prior to this research, no empirical study had examined whether users
perceive a difference in the FASB and GASB SCF models for reporting cash
flows. This article reports the results of research that examines user
perceptions of these two models.
RESEARCH ISSUES
This study is based on the six pairs of issues that were directly related to
differences between the two SCF models. This section summarizes these six
issues and provides background on why the GASB and FASB SCF models
are different. One other pair, #7, examines the recipient=s overall preference
for one of the two models.
Model Issue #1
This issue addresses reporting cash receipts for interest earned on
investments and is one of the basic differences between the GASB and FASB
models. The FASB model reports the cash receipts for interest earned on
financial investments in the Operating Activities section. There was some
discussion before the issuance of FASBS 95 on where this amount should be
reported. In the Exposure Draft for the accounting standard the receipts were
reported in the Operating Activities section. Some respondents stated that the
receipts should more properly be reported in the Investing Activities section
because the interest represents a return on those investments. (1)
The FASB cites three principal reasons for maintaining the Operating
Activities classification:
- Almost all businesses classified cash receipts for interest as operating cash
flows on the Statement of Changes in Financial Position (SCFP).
- Interest received is commonly considered an operating cash flow by
banks and other financial institutions.
- The FASB perceived widespread support for the idea that the Operating
Activities section should contain those items used to calculate net income
to facilitate the reconciliation of net income to cash flows from operations
(FASB, 1987).
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SMITH, FREEMAN & BRYAN
As noted earlier, this was one of the primary issues on which three of the
FASB members dissented when the accounting standard was issued.
The GASB model places the interest earned on investments in securities
(equity and debt instruments that are not cash equivalents) in the Investing
Activities section. The GASB also uses this section to report the purchase
and sale of these investments. In the ABasis for Conclusions@ for GASBS
9, the Board stated:
The nature of investing activity in the governmental environment is
focused on the acquisition and disposition of debt and equity instruments
of other entities rather than on the investment of ownership capital in
capital assets. Therefore, it is more useful to reclassify investment
earnings (interest and dividends) as inflows from investing rather than
from operating activities. This presents a clearer picture of all the cash
flows from investing activities and is consistent with the reclassification of
interest expense discussed earlier. (GASB, 1989, paragraph 57)
Thus, the GASB avoided some fundamental flaws found in the FASB=s
support for placing interest earned in the Operating Activities section:
1. The FASB cited the widespread reporting of interest earned as operating
cash flows on the SCFP. However, a review of SCFPs prepared from
1971 to 1987 revealed that very few were prepared using the Operating,
Investing, and Financing sections allowed under APBO 19. Most SCFPs
were limited to Sources and Uses of either cash or working capital,
depending on the basis selected by the company.
2. The FASB stated that interest was an operating cash flow for banks and
other financial institutions. This statement was true, but one must
consider the nature of operations for a financial institution: to earn
interest on investments. Corporations rarely report interest as operating
revenue. Instead, a classified operating statement reports interest as an
other or nonoperating revenue. An operating statement prepared for a
government business-type activity also reports interest as nonoperating
revenue.
3. The FASB supported its decision to report interest as an Operating
Activity to facilitate the reconciliation of cash flows from operations to
net income. The GASB avoided this problem by reconciling cash flows
from operations to operating income rather than to net income.
Model Issue #2
GASB VERSUS FASB: USER PERCEPTIONS
229
This issue addresses the problem of reporting the proceeds from debt
issued to finance operating activities. The FASB SCF model reports all debt
proceeds in the same section: Financing Activities. The FASB stated that
this section includes A. . . obtaining resources from owners and providing
them with a return on, and a return of, their investment; borrowing money
and repaying the amounts borrowed, or otherwise settling the obligation; and
obtaining and paying for other resources obtained from creditors on long-term
credit@ (FASB, 1987, paragraph 18).
The GASB made the decision to categorize debt proceeds in two sections
depending on the purpose of the debt issue. For debt issued to support
operations, the GASB model uses Noncapital Financing Activities. For debt
issued to purchase capital assets, the GASB model uses Capital and Related
Financing Activities. To support this classification, the GASB stated:
Perhaps the most obvious difference [between public sector
businesses and private sector businesses] is the absence of
transactions with Aowners@ in governmental enterprises.
Governmental enterprises do not sell stock, pay dividends, or engage
in other transactions with owners; consequently, the significance of
the Afinancing@ category as defined in [FASBS 95] is diminished. . .
.
Many governmental enterprise funds and public authorities finance
their operations and manage their cash flow activities in a manner
that makes a clear distinction between Aoperating@ and Acapital.@
Capital budgeting and long-range capital planning are common, and
may even be required by law in some jurisdictions. Information
about the cash inflows and outflows of a capital program is useful for
identifying the level of capital spending and the nature and adequacy
of the sources of funding for the projects. (GASB, 1989,
paragraph 53)
Hence, the GASB sought to distinguish between debt issued to support
operations (Noncapital Financing Activities) and debt issued to acquire capital
assets (Capital and Related Financing Activities).
Model Issue #3
This issue addresses a government-unique problem of reporting transfer
payments to governmental funds. Transfers between funds are not an issue
in private sector financial reporting, so FASBS 95 did not discuss the issue.
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SMITH, FREEMAN & BRYAN
However, this analysis assumes that using the FASB model was an option, so
reporting transfers is still an important consideration.
Transfer payments between fundsCotherwise known as interfund
transfersCcan represent significant cash flows. Interfund transfers also
represent significant economic and political transactions for a government.
Thus, the GASB recognizes two types of interfund transfers: operating
transfers (the issue here) and residual equity transfers.
In this survey, reporting an operating transfer from a proprietary fund is
the analysis issue. The fund operating statement reports the transfers after
revenues and expenses, but before net income. In theory, reporting transfers
in the Operating Activities section is acceptable if one adopts the FASB
criterion of including all elements used in the calculation of net income in that
section. But since the GASB uses operating income as the reconciliation
point for the Operating Activities section, reporting transfers between funds in
the Noncapital Financing Activities section is more appropriate. The GASB
includes these types of payments in this section by stating, ACash outflows
for noncapital financing activities include ... cash paid to other funds, except
for quasi-external operating transactions@ (GASB, 1989, paragraph 21,
emphasis added).(2)
Model Issue #4
The reporting of cash payments for long-term investments in marketable
securities and capital acquisitions is the subject of this issue. As discussed
previously in issue #1, the FASB model reports all long-term investments in
financial securities and capital assets in the same section: Investing Activities.
The FASB defined this section by stating, AInvesting activities include
making and collecting loans and acquiring and disposing of debt or equity
instruments and property, plant, and equipment and other productive assets,
that is, assets held for or used in the production of goods or services by the
enterprise (other than materials that are part of the enterprise=s inventory)@
(FASB, 1987, paragraph 15). There was no other discussion of this issue in
FASBS 95.
The discussion on issue #2 provided some support for the GASB decision
to create separate sections for reporting financial investments and investments
in capital assets. The GASB went on to state that, Athe Board believes an
additional category for >capital and related financing= activities will provide
useful information about the capital activities of governmental enterprises@
GASB VERSUS FASB: USER PERCEPTIONS
231
(GASB, 1989, paragraph 54). Therefore, this issue represents a principal
difference between the two models.
Model Issue #5
Issue #5 is very similar to Issue #1 in that it is a debt-related issue. This
issue analyzes reporting cash paid for interest on debt. This issue is another
fundamental difference between the GASB and FASB SCF models. In
commenting on the responses received to the exposure draft for the SCF, the
FASB stated:
Some respondents to the Exposure Draft favored classifying interest paid
as a cash flow for financing activities .... Those respondents generally
said that interest paid, like dividends paid, is a direct consequence of a
financing decision and thus should be classified as a cash outflow for
financing activities. That is, both interest and dividends are returns on
the capital provided by creditors and investors, and both should be
classified with returns of those amounts because the distinction between
returns of and returns on investment are largely irrelevant in the context
of cash flows (FASB, 1987, paragraph 89).
The FASB then provided the same three issues used to support the placement
of interest and dividends received to support the placement interest paid.
The GASB=s decision to separate noncapital financing transactions from
capital and related financing transactions was discussed previously. The
GASB provided further support for the distinction by stating:
The financing category in [FASBS 95] includes cash inflows and
outflows related to both capital and noncapital borrowing. Capital
borrowing activity is another major element of the capital and related
financing category.
To show the complete picture of all cash inflows and outflows from
financing, acquiring, and disposing of capital assets, it is necessary to
include interest payments in this category rather than in the operating
category.
Similarly, interest on noncapital debt is classified as noncapital financing
so that it is treated consistently with capital interest and gives a more
complete picture of all inflows and outflows arising from noncapital debt
transactions (GASB, 1989, paragraph 57, emphasis added).
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SMITH, FREEMAN & BRYAN
Also, as with interest revenue, the proprietary fund operating statement
reported interest expense as a nonoperating item. Thus, the reconciliation of
operating income to cash flows from operations provided further support for
excluding interest payments from the Operating Activities section.
Model Issue #6
This issue addressed reporting subsidies received to support proprietary
fund operations. This type of subsidy was not discussed in FASBS 95 since
private sector businesses do not have transactions of this type. Nonetheless,
the FASB model could still be used in reporting this type of subsidy. Using
the FASB model the reporting of these subsidies would be the same as those
in issue #3; the payments would be reported in the Operating Activities
section.
NCGA Statement 1, Governmental Accounting and Financial Reporting
Principles, which has been adopted by the GASB, states that proprietary
funds were to be used, Ato account for a government=s ongoing
organizations and activities that are similar to those often found in the private
sector@ (NCGA, 1979, paragraph 26). Further, the Statement identifies two
circumstances in which the use of a proprietary fund would be appropriate:
... to account for operations (a) that are financed and operated in a
manner similar to private business enterprisesCwhere the intent of the
governing body is that the costs ... of providing goods or services to the
general public on a continuing basis be financed or recovered primarily
through user charges; or (b) where the governing body has decided that
periodic determination of revenues earned, expenses incurred, and/or net
income is appropriate for capital maintenance, public policy, management
control, accountability, or other purposes (NCGA, 1979, paragraph 26).
Given the above criteria for proprietary funds in this issue, the GASB
evidently did not intend for operating transfers to proprietary funds to be
considered part of operations but rather as a nonoperating subsidy.
Therefore, support for reporting subsidies as a Noncapital Financing Activity
would be consistent with the intent of the GASB.
Model Issue #7
This last issue is the defining issue for this section of the analysis and,
thus, is the dependent variable for this study. The respondent was to indicate
which SCF model was superior overall: the GASB SCF or the FASB SCF.
GASB VERSUS FASB: USER PERCEPTIONS
233
This issue was to be used to divide the preceding issues for purposes of
analysis. The issue is straightforward. The recipient was asked to select
either the GASB model or the FASB model as superior overall, and then to
rate the selection using the same scale used in the other evaluations. For this
analysis this rating was dropped in order to make the dependent variable
dichotomous and allow the use of logit regression analysis.
RESEARCH DESIGN
The Instrument
An envelope, sent to each recipient, contained five separate items. The
items included:
- a cover letter from the researcher which explained the survey and what
was expected from the recipient;
- a letter from David R. Bean, the Director of Research for the GASB,
encouraging the person to respond to the survey;
- a Questionnaire Booklet, consisting of a three-part survey and the
Respondent Demographic Data;
- one of two Information Booklets used in the survey; and
- a postage paid envelope to return the completed survey.
The Questionnaire Booklet had three parts. Part I examined the
usefulness of cash flow information in assessing the operations of a
governmental entity. Part II compared the GASB and FASB models. Part
III examined the direct method and indirect method of preparing the SCF.
The focus for this study is Part II. The goal for this part of the survey was to
answer two research questions:
1. Do the preparers and users recognize and understand the differences
between the FASBS 95 and the GASBS 9 SCF models?
2. Do the preparers and users find one model superior to the other?
To answer these questions, ten issues were posed to the recipients (see
Appendix A). Of these ten, six related specifically to the differences between
the FASB and GASB SCF models (Table 1). The respondents= answers to
these questions should indicate whether they recognize and understand the
differences in the two reporting models and provide some indication of which
is perceived as the superior model.
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SMITH, FREEMAN & BRYAN
TABLE 1
Summary of SCF Model Issues.
______________________________________________________________
_
Issue Summary
Responses
#
--------------------------------------------------------------------------------------------1
Reporting interest received on
investments
Reporting debt issued to finance
operations.
Reporting subsidies paid to other
funds.
Reporting investments in longterm investments in marketable
securities.
a
b
a
b
a
b
a
5
Reporting interest paid on debt.
6
Reporting subsidies received from
other funds
a
b
a
b
2
3
4
b
FASBCoperating activity
GASBCinvesting activity
GASBCnoncapital financing activity
FASBCfinancing activity
GASBCnoncapital financing activity
FASBCoperating activity
FASBCinvesting activity (all
long-term investments)
GASBCinvesting activity restricted to
noncapital investments
FASBCoperating activity
GASBCfinancing activity
FASBCoperating activity
GASBCnoncapital financing activity
______________________________________________________________
The survey recipients were to respond the issues addressing
governmental financial reporting. The Questionnaire Booklet instructed the
recipient to examine two SCFs presented in the Information Booklet (shown
here in Appendices 2 and 3). All persons received the same SCFs. One SCF
was presented using the model required by GASBS 9 while the other was
prepared using the FASBS 95 model.
The SCF models include government-unique items such as interfund
transfers and loans and payments in lieu of taxes to highlight the differences
in the two models. Both SCFs used the direct method and included the
required reconciliation of operating income (or net income for the FASB
model) to net cash provided by operating activities. The purpose of the dual
display was to demonstrate how a government enterprise fund would report
using each model. Private sector-unique items such as issuing stock or paying
dividends were excluded.
GASB VERSUS FASB: USER PERCEPTIONS
235
As noted earlier, this part of the survey contained ten pairs of issues for
analysis of which six pairs specifically addressed issues related to the two
SCF models. Three other issues addressed reporting issues related to the
SCF but not restricted to it. The last issue asked the recipient to select the
superior SCF model. The scoring system used was:
1
no preference;
2
little preference;
3
moderate preference; and
4
strong preference.
When combined with the choice of model for each issue (GASB or FASB),
the scoring system results in a seven-point Likert scale where:
- 1 indicates a strong preference for the FASB model;
- 4 indicates no preference between the models; and
- 7 indicates a strong preference for the GASB model.
Survey Population
There were five groups of recipients in this survey: (1) finance directors
from major cities and counties; (2) members of citizen advocacy groups, such
as the League of Women Voters; (3) legislative officials from major cities and
counties; (4) credit rating agencies and creditors selected from the
membership of the National Federation of Municipal Analysts; and
(5) independent auditors selected from independent public accounting firms
and the fifty state auditor offices.
One thousand five hundred surveys were mailed. The surveys were
divided equally among the recipient groups identified above. The surveys
sent to finance directors and legislators were further divided between city and
county officials. Approximately 59 percent of the surveys were sent to city
officials and 41 percent were sent to county officials. Table 2 reports the
number of surveys sent and the number of responses received from each
recipient group.
The initial mailing for the survey was sent in June 1993, and contained all
of the items identified above. A follow-up mailing was sent to all
nonrespondents in early September 1993, containing the same materials as
the initial mailing except the cover letter from the GASB. The cover letter
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SMITH, FREEMAN & BRYAN
included in the follow-up mailing mentioned the initial mailing and encouraged
the recipients to respond. A follow-up postcard was sent in late
September 1993. The postcard alerted or reminded the recipients of the
survey and asked them to complete and return it as soon as possible.
TABLE 2
Analysis of Surveys Sent, Undeliverable, and Completed
______________________________________________________________
_
Respondent Groups
Surveys Undeliverable Adjusted # Responses
Mailed Surveys
of Surveys Received
--------------------------------------------------------------------------------------------City Finance Directors
176
4
172
67
City Council Members
176
0
176
23
County Finance Directors
124
1
123
59
County Commissioners
124
3
121
13
NFMA Members
300
10
290
60
Auditors
300
5
295
140
Citizen Groups
300
20
280
63
Totals
1,500
43
1,457
425
______________________________________________________________
The Response
Of the 1,500 surveys sent out, 43 surveys were undeliverable for various
reasons, usually because the recipient was no longer at that address or the
address was invalid. Of the remaining 1,457 surveys, 425 usable responses
were receivedCa response rate of nearly 30 percent.
As shown in Table 3, over 87 percent of the 425 usable responses
received could be used in this analysis. The problem with most of the
unusable responses was that respondents failed to answer all the questions. A
few respondents indicated a preference for one statement but did not circle a
number to indicate the degree of preference. Even fewer respondents
circled the degree of preference without indicating which statement they
preferred. Given the systematic nature of the erroneous responses, the
analysis excluded all respondents who did not complete the survey correctly.
Nonetheless, most of the responses were used.
It can be noted immediately that the response groups in Table 3 are
different from the recipient groups in Table 2. It was always the intention in
GASB VERSUS FASB: USER PERCEPTIONS
237
this survey to combine the city finance directors and the county finance
directors into a single analysis group. Combining the city council members
and the county commissioners into a single legislator group was planned as
well. These groups are shown separately in Table 2 solely to report the
distribution of surveys between cities and counties.
Further combination of the response groups was not intended. However,
as shown in Table 2, the number of responses received from city council
TABLE 3
Summary of Responses
______________________________________________________________
_
Respondent Groups
Total Responses
Responses Used in
Received
Statistical Analyses
------------------------------------------------------------------------------------------Finance Directors
126
42.7%
119
94.4%
Citizens and Legislators
99
17.2%
74
74.7%
Creditors
60
20.7%
49
81.7%
Auditors
140
47.5%
128
91.4%
Totals
425
29.2%
370
87.1%
______________________________________________________________
_
members and county commissioners was poor. Only 36 of 289 legislators
(12.5 percent) responded. Since the numbers were so low, we were
concerned that the small sample size could cause analysis problems.
Therefore, the decision was made to combine the Legislators group with the
Citizens group for analysis purposes. Statistical comparisons revealed no
significant differences in the analysis of the Citizens group alone and the
combined Citizens and Legislators group.
RESEARCH ANALYSIS AND FINDINGS
The research analysis in this study involves logit regression analysis.
Logit regression is used because the dependent variable is dichotomous
(Stone and Rasp, 1991). The dependent variable is a dummy variable with a
value of one when a respondent selects the GASB method of reporting cash
flows as preferable to the FASB method, as opposed to a value of zero when
238
SMITH, FREEMAN & BRYAN
a respondent selects the FASB method of reporting cash flows as preferable
to the GASB method.
Maddala (1991) states that logit regression analysis is the appropriate
procedure where disproportionate sampling from two populations (i.e., those
indicating a preference for the GASB method and those indicating a
preference for the FASB method) occurs. He notes that, AThe coefficients
of the explanatory variables are not affected by the unequal sampling rates
from the two groups. It is only the constant term that is affected@ (Maddala,
1991, p. 793). Correcting for the bias in the constant term is only important
if the logit analysis is being used to obtain parameter estimates for purposes of
developing a predictive model (Palepu, 1986). This study does not develop a
predictive model of the choice of the GASB model as opposed to the FASB
model, so bias in the constant term has no effect on the analysis and logit
regression is appropriate for testing the hypotheses.
The following logit regression model is used to test the relationship
between preference for the GASB model as opposed to the FASB model and
the relative degree of preference for the particular model chosen:
CHOICEi
=
á + â1MI1 + â2MI2 + â3MI3 + â4MI4 +
â5MI1 + â6MI7 + åi(1)
where:
CHOICE = a dummy variable with a value of one when a firm prefers
the GASB method of reporting cash flows and a value of
zero when a firm prefers the FASB method of reporting
cash flows
i = respondent 1 though 370
MI1 = the degree of preference for the method chosen based on
reporting cash receipts for interest earned on investments
MI2 = the degree of preference for the method chosen based on
reporting the proceeds from debt issued to finance operating
activities
MI3 = the degree of preference for the method chosen based on
the problem of reporting transfer payments to governmental
funds
GASB VERSUS FASB: USER PERCEPTIONS
239
MI4 = the degree of preference for the method chosen based on
the reporting of cash payments for long-term investments in
marketable securities and capital acquisitions
MI5 = the degree of preference for the method chosen based on
reporting cash paid for interest on debt
MI7 = the degree of preference for the method chosen based on
reporting subsidies received to support proprietary fund
operations
å = the residual
If the respondents believe the GASB model is superior for reporting the
above cash flows, the â values should have positive signs. The values should
be negative if the respondents believe the FASB model is superior.
Table 4 reports logit regression results for the model. MI2, MI3, and
MI5 all show significance at the 0.01 level. Each of these issues shows a
preference for the GASB model. In addition, MI4 shows significance at the
0.05 level and a preference for the GASB model. Finally, MI1 is significant
only at the 0.1 level, but it demonstrates a surprising preference for the FASB
model. Only MI7 did not prove to be statistically significant. These results
are analyzed below.
TABLE 4
Results of Logit Analysis
______________________________________________________________
_
Variable
Coefficient
p-value and Significance
--------------------------------------------------------------------------------------------M11
-0.1766
0.0583*
M12
0.2518
0.0002***
M13
0.2746
0.0002***
M14
0.1968
0.0141**
M15
0.1839
0.0087***
M17
0.0274
0.7178
______________________________________________________________
Levels of significance:
* 0.10 level
** 0.05 level
240
SMITH, FREEMAN & BRYAN
*** 0.01 level
The basic argument in this analysis is whether the FASB SCF model is
superior (some might say sufficient) for reporting cash flows of government
business-type operations or the GASB model is perceived to be a significantly
better model. These results would seem to indicate that the differences in the
two models are significant and that users and preparers believe the GASB
model to be the superior one. In analyzing the results one should not be
misled by the differences between the public and private sectors. What is
important in these results is that the users and preparers of governmental
reports believe that the GASB model is superior to the FASB model for
reporting these types of governmental cash flows.
Of the three variables significant at the 0.01 level, perhaps the most
important is MI5. This issue defines a fundamental difference between the
SCF models. As noted in the earlier discussion, the FASB made the decision
to include interest payments in the Operating Activities section. Perhaps in
response to the widespread criticism by users in the private sector, the GASB
reported the cash flows in the financing sections. This variable indicates that
users believe the GASB made the correct decision for reporting cash
payments for interest on debt.
The significance level of MI2 is somewhat less than MI5. Many users of
governmental financial reports believe distinguishing between debt issued to
support operations and debt issued to finance capital acquisitions is very
important. The FASB model does not allow making distinctions between
operating debt and capital debt. Thus, the GASB model provides better
disclosures in this area for governmental reporting.
Finally, the third highly significant variable is MI3. These cash transfers
from business-type activities to the governmental funds typically are a means
of providing financial support for general government operations. Since this
function is not usually the reason for establishing a business-type activity
within a government, these transfers should not be reported in the operating
section of the SCF. Such reporting would be required in the FASB model,
but is avoided in the GASB model through the use of the Noncapital
Financing section.
There are two surprising findings with MI1. First, it is only moderately
significant in the model. Second and even more surprisingly, it has an
opposite sign from the other statistically significant issues. Like MI5, this
issue marks a fundamental difference in the GASB and FASB SCF models.
Recall that in MI5, cash payments for interest are reported as operating cash
GASB VERSUS FASB: USER PERCEPTIONS
241
flows in the FASB model but financing cash flows in the GASB model. MI1
represents the flip side of this issue, where cash receipts from interest and
dividends are reported as operating cash flows in the FASB model, but are
presented as investing cash flows in the GASB model. Also, there was strong
opposition at the FASB against reporting cash receipts from interest and
dividends in the Operating Activities section. Therefore, it was expected that
both MI5 and MI1 would have the same sign and nearly the same level of
significance.
This difference may be explained by some users and preparers wanting to
Aplus up@ the operating cash flows of the business-type activity while not
decreasing these cash flows with interest payments (MI5). The result is
certainly not consistent with the other findings.
The remaining variableCMI7Cwas not statistically significant in the
model. This issue represents the opposite side of MI3, and it was expected
that it would have the same sign and degree of significance. Although the
signs are the same, no conclusions can be drawn given the reported p-value.
FINAL ANALYSIS
The research questions posed earlier in this paper may now be answered:
1. Do the preparers and users recognize and understand the differences
between the FASBS 95 and the GASBS 9 SCF models? The answer to
this question must be YES, given the statistical significance of the
variables tested above. While MI1 did not have the expected sign and
MI7 was not significant, it is apparent that the respondents could
distinguish between the two models.
2. Do the preparers and users find one model superior to the other? The
answer to this question must be that preparers and users believe the
GASB model is superior to the FASB model.
This analysis leads one to believe that the GASB was correct in issuing a
standard requiring a different format for the SCFCone more suitable for
governmental reporting. This result also tends to support the GASB=s
decision to continue to use this SCF model as part of the new reporting model
currently being proposed.
The results also prompt two additional research questions. First, is the
GASB model more appropriate than the FASB model for reporting cash flows
of private sector not-for-profit organizations (as was discussed when the
242
SMITH, FREEMAN & BRYAN
FASB issued Statement No. 117)? Second, would the GASB model be
preferred to the FASB model for reporting cash flows for businesses?
Only additional research can answer these important questions. When
the FASB tested its model, it had only its proposed model and the SCFP to
use for comparison purposes. Perhaps the GASB model could prove useful
in reporting cash flows in the private sector.
NOTES
1. The FASB uses the investing section to report the acquisition and sale of
all long-term investments, including both capital assets (property, plant,
and equipment) and investments in securities.
2. Quasi-external operating transactions are the result of a transaction made
between funds as part of the ordinary course of business for the funds
involved.
REFERENCES
Accounting Principles Board (1963), Opinion No. 3, The Statement of
Source and Application of Funds, New York: American Institute of
Certified Public Accountants.
Accounting Principles Board (1971), Opinion No. 19, Reporting Changes in
Financial Position, New York: American Institute of Certified Public
Accountants.
Financial Accounting Standards Board (1987), Statement of Financial
Accounting Standards No. 95, Statement of Cash Flows, Stamford, CT:
Author.
Financial Accounting Standards Board (1993), Statement of Financial
Accounting Standards No. 117, Financial Statements of Not-for-Profit
Organizations, Stamford, CT: Author.
Governmental Accounting Standards Board (1989), Statement No. 9 of the
Governmental Accounting Standards Board, Reporting Cash Flows of
Proprietary and Nonexpendable Trust Funds and Governmental
Entities That Use Proprietary Fund Accounting, Stamford, CT:
Author.
Maddala, G. S. (1991, October), AA Perspective on the Use of
Limited-dependent and Qualitative Variables Models in Accounting
Research,@ The Accounting Review, 66: 788-807.
GASB VERSUS FASB: USER PERCEPTIONS
243
National Committee on Municipal Accounting (1951), National Committee on
Governmental Accounting Bulletin No. 14, Municipal Accounting and
Auditing, Chicago: Municipal Finance Officers Association.
National Committee on Municipal Accounting (1968), Governmental
Accounting, Auditing, and Financial Reporting, Chicago: Municipal
Finance Officers Association.
National Council on Governmental Accounting (1979), Statement No. 1,
Governmental Accounting and Financial Reporting Principles,
Chicago: Municipal Finance Officers Association.
Palepu, K. (1986, March), APredicting Takeover Targets: A Methodological
and Empirical Analysis,@ Journal of Accounting and Economics 8:
3-35.
Stone, M., and Rasp, J. (1991, January), ATradeoffs in the Choice Between
Logit and OLS for Accounting Choice Studies,@ The Accounting
Review, 66, 170-187.
244
SMITH, FREEMAN & BRYAN
APPENDIX A
Survey Questions
PART II
Part II of the Information Booklet (pages 4 and 5) contains two Statements of Cash Flows
prepared using the requirements of the GASB and the FASB.
Please review these two Statements of Cash Flows. The statements are prepared for the
same governmental entity. The SCF on page 4 is the GASB format; the statement on page 5
is the FASB format. Government-unique items, such as interfund transfers, are included in
these examples to highlight the differences in format. Each issue addressed in this section
pertains to the differences in the two SCF formats.
In responding to the questions in this section, we are interested in your point of view, not the
position of the GASB or the FASB.
The following pairs of statements compare the organization and design of the Statement of
Cash Flows prepared in accordance with GASB Statement No. 9 and FASB Statement No.
95. We are interested in your opinionCnot the position of the GASB or the
FASBCconcerning each of the issues expressed below. For each pair of statements place a
check (T) next to the one with which you most agree. Then, indicate how strongly
you prefer the statement you chose by circling the corresponding number: (1) no
preference, (2) little preference, (3) moderate preference, or (4) strong preference. Circle
only one number for the statement selected.
Example:
_____ a. I would rather watch a college
football game.
or
_____ b. I would rather watch a college
basketball game.
1._____ a. I believe that cash receipts for
interest earned on investments should be
classified as a cash flow from "operating"
activities.
or
_____ b. I believe that cash receipts for
interest earned on investments should be
classified as a cash flow from "investing"
activities.
Degree of
Preference
Strong
None
1
2
3
4
1
2
3
4
GASB VERSUS FASB: USER PERCEPTIONS
245
Appendix A
(continued)
Survey Questions
Part II (continued)
2._____ a. I believe that debt issued to finance
operations should be reported in a separate section from debt
issued to finance capital acquisitions.
or
_____ b. I believe that all debt issues should be reported in
the same section.
3._____ a. I believe that payments made from an
enterprise fund to support the operations of another
government activity should be classified as a
"noncapital financing" activity for the enterprise fund.
or
b.I believe that payments made from an enterprise fund to
support the operations of another government activity should be classified as an
"operating" activity for the enterprise fund.
4._____ a. I believe that cash paid for long-term
investments in marketable securities and cash paid for capital
acquisitions should be reported in the same section.
or
_____ b. I believe that cash paid for long-term investments
should be reported in a separate section from cash paid for
capital acquisitions.
5._____ a. I believe that cash paid for interest on debt
should be reported as an "operating" activity.
or
_____ b. I believe that cash paid for interest on debt should
be reported as a "financing" activity.
Degree of Preference
Strong
None
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
246
SMITH, FREEMAN & BRYAN
Appendix A
(concluded)
Survey Questions
Part II (continued)
6._____ a. I believe that the reconciliation of net income
or operating income to cash flows from operating activities
is essential to understanding the SCF.
or
_____ b. I believe that the reconciliation of net income or
operating income to cash flows from operating activities is
redundant.
7._____ a. I believe that subsidies received to support
the operations of an enterprise fund from other funds should
be reported as an "operating" activity.
or
_____ b. I believe that subsidies received to support the
operations of an enterprise fund from other funds should be
reported as a "noncapital financing" activity.
8._____ a. I believe governmental fund financial
statements should be different from the proprietary funds,
including the SCF.
or
_____ b. I believe governmental fund and proprietary fund
financial statements should be the same.
9._____ a. I believe that government enterprises should
use the same financia l statements as private sector
businesses.
or
_____ b. I believe that government enterprises should have
unique financial statements.
10._____ a. I believe the GASB SCF format is superior
overall to the FASB SCF format.
or
_____ b. I believe the FASB SCF format is
superior overall to the GASB SCF format.
Degree of Preference
Strong
None
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
GASB VERSUS FASB: USER PERCEPTIONS
247
APPENDIX B
SCF Prepared According to GASB Statement 9
City of Local Government
Enterprise Fund
Statement of Cash Flows
For the Year Ended June 30, 199X
Cash Flows from Operating Activities
Cash Received from Customers.................................................................. $6,350,000
Other Operating Revenues ..............................................................................120,000
Cash Paid to Employees.............................................................................(3,450,000)
Cash Paid to Suppliers for Goods and Services ............................................(2,765,000)
Payment in Lieu of Taxes to General Fund .................................................. (250,000)
Net Cash Provided (Used) by Operating Activities
$ 5,000
Cash Flows from Noncapital Financing Activities
Residual Equity Transfer from General Fund ....................................................100,000
Proceeds from Bond Issue ..............................................................................600,000
Repayment of Bonds......................................................................................(50,000)
Operating Transfer from Special Revenue Fund................................................. 45,000
Operating Transfer to General Fund................................................................(15,000)
Advance from General Fund............................................................................. 10,000
Interest Paid on Bonds ...................................................................................(25,000)
Net Cash Provided (Used) by Noncapital Financing Activities...........665,000
Cash Flows from Capital and Related Financing Activities
Proceeds from Bond Issue ........................................................................... 1,200,000
Repayment of Bonds.................................................................................... (100,000)
Proceeds from Sale of Equipment ..................................................................... 25,000
Acquisition of Capital Assets ........................................................................ (750,000)
Residual Equity Transfer from Capital Projects Fund.......................................... 50,000
Interest Paid on Bonds ................................................................................. (100,000)
Net Cash Provided (Used) by Capital and Related
Financing Activities..........................................................................325,000
Cash Flows from Investing Activities
Proceeds from Sale of Investments................................................................... 65,000
Purchase of Investments .............................................................................. (800,000)
Interest on Investments ................................................................................. 97,500
Net Cash Provided (Used) by Investing Activities .......................... (637,500)
Net Increase (Decrease) in Cash and Cash Equivalents ............................357,500
Cash and Cash Equivalents at the Beginning of the Year ......................... 527,000
Cash and Cash Equivalents at the End of the Year .................................$ 884,500
248
SMITH, FREEMAN & BRYAN
APPENDIX B (Continued)
Reconciliation of Operating Income to Net Cash Provided by Operating Activities
Operating Income......................................................................................... $135,000
Adjustments to reconcile operating income to net cash provided
by operating activities
Depreciation ....................................................................................... 230,500
Changes in assets and liabilities
(Increase) Decrease in Accounts Receivable ..................................(260,000)
Increase (Decrease) in Allowance for Doubtful Accounts .....................5,000
(Increase) Decrease in Inventory of Materials and Supplies .............. (13,000)
(Increase) Decrease in Prepaid Expenses...........................................10,000
Increase (Decrease) in Vouchers Payable ....................................... (41,500)
Increase (Decrease) in Accrued Salaries and Wages Payable ........... (27,000)
Increase (Decrease) in Compensated Absences....................................6,000
Increase (Decrease) in Other Accrued Liabilities ........................... (40,000)
Net Cash Provided (Used) by Operating Activities ..................................$ 5,000
Noncash investing, capital, and financing activities:
In 1992, long-term bonds were exchanged for land, $1,000,000.
GASB VERSUS FASB: USER PERCEPTIONS
249
APPENDIX C
SCF Prepared According to FASB Statement 95
City of Local Government
Enterprise Fund
Statement of Cash Flows
For the Year Ended June 30, 199X
Cash Flows from Operating Activities
Cash Received from Customers.................................................................. $6,350,000
Interest on Investments .................................................................................... 97,500
Other Operating Revenues ..............................................................................120,000
Operating Transfer from Special Revenue Fund................................................. 45,000
Cash Paid for Purchases ............................................................................(1,765,000)
Cash Paid for Operating Expenses..............................................................(4,450,000)
Interest Paid on Bonds ................................................................................. (125,000)
Taxes Paid .............................................................................................. (250,000)
Operating Transfer to General Fund............................................................ (15,000)
Net Cash Provided (Used) by Operating Activities .......................
7,500
Cash Flows from Investing Activities
Proceeds from Sale of Investments................................................................... 65,000
Purchase of Investments .............................................................................. (800,000)
Proceeds from Sale of Capital Assets ............................................................... 25,000
Acquisition of Capital Assets ........................................................................ (750,000)
Net Cash Provided (Used) by Investing Activities ........................(1,460,000)
Cash Flows from Financing Activities
Proceeds from Bond Issue ........................................................................... 1,800,000
Repayment of Bonds................................................................................... (150,000)
Residual Equity Transfer from General Fund ....................................................100,000
Residual Equity Transfer from Capital Projects Fund.......................................... 50,000
Advance from General Fund......................................................................... 10,000
Net Cash Provided (Used) by Financing Activities.......................... 1,810,000
Net Increase (Decrease) in Cash and Cash Equivalents ............................357,500
Cash and Cash Equivalents at the Beginning of the Year ........................ 527,000
Cash and Cash Equivalents at the End of the Year ................................$ 884,500
250
SMITH, FREEMAN & BRYAN
APPENDIX C (Continued
Reconciliation of Operating Income to Net Cash Provided by Operating Activities
Net Income.................................................................................................... $98,500
Adjustments to reconcile operating income to net cash provided
by operating activities
Depreciation........................................................................................... 230,500
Gain on Sale of Investments ................................................................... (15,000)
Loss on Sale of Capital Assets...................................................................35,000
Changes in assets and liabilities
(Increase) Decrease in Accounts Receivable ..................................(260,000)
Increase (Decrease) in Allowance for Doubtful Accounts .....................5,000
(Increase) Decrease in Accrued Interest Receivable .............................1,500
(Increase) Decrease in Inventory of Materials and Supplies .............. (13,000)
(Increase) Decrease in Prepaid Expenses...........................................10,000
Increase (Decrease) in Vouchers Payable ....................................... (41,500)
Increase (Decrease) in Accrued Salaries and Wages Payable ........... (27,000)
Increase (Decrease) in Accrued Interest Payable ...............................17,500
Increase (Decrease) in Compensated Absences....................................6,000
Increase (Decrease) in Other Accrued Liabilities ........................... (40,000)
Net Cash Provided (Used) by Operating Activities ...............................$
7,500
Noncash investing and financing activities:
Long-term bonds were exchanged for land, $1,000,000.