URNS 25 A T B S A R G e tro E H T spe cti v e B Y TE RR Y K. PAT TO N E . FR A N D R O B E RT J A EM N “Now this is not the end.It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” bodies, the citizenry, and financial statement preparers and auditors — to create the standards that now exist. Winston Churchill, in a November 1942 speech Since its inception, the GASB has issued 54 statements, six interpretations, 14 technical bulletins, and five concepts statements. The first 25 years of the GASB can be viewed in many ways,but one perspective is to consider the significant improvements to governmental financial reporting that have occurred during the tenures of each of the three GASB chairmen. T he Governmental Accounting Standards Board (GASB) observes its 25th anniversary this year. The organization was created in 1984 as the authoritative body to establish financial reporting standards — generally accepted accounting principles (GAAP) — for state and local governments.This is a brief story of the first years of the GASB, including its major standards and the people who have done the work—the board and staff members. THE ANTONIO ERA The GASB, as originally constituted, was composed of five board members: four part-time members and a full-time chairman.Jim Antonio,the board’s first chairman,presided over the GASB during its formative years from its inception until June Before the GASB was formed, the long-standing National 1995. He and Marty Ives, the board’s first vice-chairman and Council on Governmental Accounting director of research and technical activ(NCGA) established financial reporting The original agenda primarily ities, worked with constituent groups to standards for state and local governdevelop and prioritize the original GASB ments. The NCGA was a 21-member included projects on topics that agenda,which has essentially been comboard that was created and supported by governmental accountants had pleted.1 David Bean has served as the the Municipal Finance Officers Association (renamed the Government discussed for many years — director of research and technical activities since 1990; Jay Fountain was assisFinance Officers Association in 1984). those subjects included financial tant director of research from 1986 until Although the NCGA had issued six statereporting for pensions, the 2004. ments, 11 interpretations, and one conThe original agenda primarily includcepts statement that had advanced govfinancial reporting entity, and ed projects on topics that governmental ernmental accounting, it was not considthe overall financial reporting accountants had discussed for many ered an independent standards-setting years — those subjects included finanmodel. body because most of its members came cial reporting for pensions, the financial from state and local governments,includreporting entity, and the overall financial ing many from management. reporting model. The Antonio era was During the late 1970s and early 1980s, parties who were marked by completion of some of the major projects on the interested in governmental financial reporting debated original agenda and the development of standards that reactwhether the NCGA or another body such as the Financial ed to standards issued by the FASB or to economic events. Accounting Standards Board (FASB) should establish GAAP One of the GASB’s early issues arose because the initial for state and local governments.The GASB was the answer to GAAP hierarchy — effective from 1984-1989 — required state that debate. and local governments to follow FASB guidance in situations The GASB is an independent standards-setting body that is where there was no GASB guidance.Thus,in several instances overseen by the Financial Accounting Foundation,which also when the GASB was planning to issue guidance on a topic, it oversees the FASB. GASB Statement No. 1, Authoritative Status issued standards that essentially stated,“Do Not Apply FASB of NCGA Pronouncements and AICPA Industry Audit Guide, was Statement No. XX.” For example, GASB Statement No. 4, issued in July 1984. It recognized the NCGA Statements and Applicability of FASB Statement No. 87,“Employers’ Accounting Interpretations as the authoritative standards starting point for for Pensions,” to State and Local Governmental Employers,effecstate and local government GAAP. Through the years, the tively made FASB Statement No. 87 inapplicable to governGASB has built upon this base with input from its constituent ments while the GASB was developing pension guidance for groups — investors and creditors, legislative and oversight state and local governments. April 2009 | Government Finance Review 21 Exhibit 1: GASB Member History Current Board Members Robert H. Attmore, Chairman | 2004-2009 | former deputy state comptroller, state of New York Michael D. Belsky | 2008-2012 | mayor of Highland Park, IL and former managing director, Fitch William W. Holder | 2000-2010 | professor of accounting, University of Southern California Jan I. Sylvis | 2007-2012 | chief of accounts, State of Tennessee Marcia Taylor | 2005-2010 | assistant manager, Mt. Lebanon, Pennsylvania Richard C.Tracy | 1999-2006 | retired director of audits, Portland, OR James M. Williams | 2002-2012 | retired partner, Ernst & Young Former Board Chairmen James F. Antonio, Chairman | 1984-95 | former Missouri state auditor Tom L. Allen, Chairman | 1994-2004 | former Utah state auditor Former Board Members Martin Ives | 1984-94 | former first deputy comptroller, New York Philip L. Defliese | 1984-90 | retired chairman and managing partner, Coopers & Lybrand (now PriceWaterhouseCoopers) Elmer B. Staats | 1984-90 | former comptroller general of the United States W. Gary Harmer | 1984-91 | retired business administrator, Salt Lake City School District, Utah Robert J. Freeman | 1990-2000 | distinguished professor of accounting emeritus,Texas Tech University Anthony M. Mandolini | 1990-92 | retired partner, KPMG Peat Marwick (now KPMG) Barbara A. Henderson | 1991-99 | retired director of finance, Fullerton, California Edward M. Klasny | 1992-2002 | retired partner, Ernst & Whinney (now Ernst & Young) Paul R. Reilly | 1995-2005 | retired finance director and comptroller, Madison, Wisconsin Cynthia B. Green | 1997-2007 | former vice-president for state studies, Citizens Budget Commission Edward B. Mazur | 1997-2007 | retired vice-president for administration and finance,Virginia State University (also former comptroller, Commonwealth of Virginia) Girard C. Miller | 2007-2008 | retired president of Janus Funds and chief operating officer of Janus Capital Group 22 Government Finance Review | April 2009 The best method for governments to report pensions was a major source of disagreement among accountants before the GASB was established, and this dispute was one of the primary factors leading to the conclusion that an independent standards-setting body was needed for state and local government. The GASB immediately began work on a pension disclosure project that was completed in November 1986 with the issuance of GASB Statement No. 5, Disclosure of Pension Information by Public Employee Retirement Systems and State and Local Governmental Employers. It was not until near the end of the Antonio chairmanship — and after much deliberation — that the board issued three pension related standards in 1994 (GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans; Statement No. 26, Financial Reporting for Postemployment Healthcare Plans Administered by Defined Benefit Pension Plans; and Statement No. 27, Accounting for Pensions by State and Local Governmental Employers) that established comprehensive guidance on pension recognition, measurement, display, and disclosure. The board members who worked on these and more recent standards are listed in Exhibit 1. In addition to the board, several GASB staff members — particularly Penny Wardlow and Lorraine Kremer — also were instrumental in developing this series of pension standards. Exhibit 2 lists the key staff members who have worked for the GASB. Other major financial reporting standards issued during the Antonio era include Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements; Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting; and Statement 14, The Financial Reporting Entity. Statement No. 3 and Statement No. 9 could be considered reactive standards,but for different reasons.The former,issued in 1986,provides disclosure requirements regarding risks associated with a government’s deposits and investments. This project, which was led by staff member Venita Wood, was added to the GASB agenda as a result of the banking failures during the mid-1980s. GASB Statement No. 9 was issued in September 1989 to provide a format for the statement of cash flows that fits proprietary funds of governments better than the format the FASB adopted in its Statement No.95,Statement of Cash Flows, issued in November 1987. GASB Statement No. 14 was issued after a reexamination of the financial reporting entity standards developed by the NCGA. The underlying principle of Statement No. 14 — accountability — was developed in the first of two concepts statements issued during the Antonio era. Paragraph 12 of Statement No. 14 explains that the financial reporting entity consists of the primary government and its component units — organizations for which the primary government is primarily accountable and certain other organizations that, if excluded, would cause the reporting entity’s financial statements to be misleading. Ken Schermann, one of the original GASB staff members, was the lead project manager on Statement No. 9 and Statement No. 14; Barb Chaney also was instrumental in their development. THE ALLEN ERA Tom Allen served as the Board’s chairman from July 1995 until June 2004. Bob Freeman served as vice-chairman from 1998 to 2000. In 1997, the GASB’s part-time membership was increased from four to six board members — for a total of seven board members — to be consistent with the FASB membership at that time. The Allen era may be best remembered for completing the financial reporting model and postemployment benefits other than pensions (OPEB) projects, although many other standards were issued during his tenure. The Financial Reporting Model Project. The financial reporting model project was a complete reexamination of the content and format of state and local government financial reports, including required supplementary information (RSI). Many of the issues addressed in the project had been debated by accountants for years. For example, should governmental financial statements be aggregated, or is disaggregated fund and fund type information adequate? Should fund financial statements and budgetary comparison information be retained? Should all of a government’s economic resources, including its capital assets and long-term liabilities, be reported as part of its governmental net assets and activities? Should the modified accrual basis, the accrual basis, or another basis be used? The issues addressed in the project were pervasive, contentious, and of such great importance to the GASB’s constituents that the reporting model project took 15 years to complete. The GASB issued numerous due process documents,read nearly 800 comment letters from constituents,and conducted 25 user focus groups and 15 public hearings. The due process leading to the adoption of Statement No.34,Basic Financial Statements — and Management’s Discussion and Analysis — for State and Local Governments, even included both the 1990 adoption of Statement No. 11, Measurement Focus and Basis of Accounting — Governmental Fund Operating Statements and its rescission in 1993. The GASB issued Statement No. 34 in June 1999 to provide a comprehensive model for state and local governmental financial reporting. Allen characterized the standard as “the most significant change in the history of governmental accounting.”2 Statement No. 34 requires presentation of two types of financial statements — government-wide financial statements and fund financial statements. The governmentwide statements present consolidating aggregated information, while the fund financial statements present disaggregated information. Generally, the traditional fund financial statements are retained and improved — major funds are reported individually — because readers of governmental financial statements found the additional, detailed major fund information more useful for making decisions than the fund-type information presented in pre-Statement No. 34 financial statements. The government-wide financial statements present governmental and business-type activities of the primary government and discretely presented component units in separate columns. These statements are prepared using the economic resources measurement focus and accrual basis of accounting. Thus, both capital assets (including infrastructure and April 2009 | Government Finance Review 23 intangible assets) and long-term liabilities are reported in the government-wide statement of net assets. The governmentwide statement of activities provides a measure of the cost of a government’s services, which allows readers of the financial statements the opportunity to assess whether the net costs of providing current year services are borne by past, current, or future taxpayers. GASB Statement No. 34 reaffirmed the board’s belief that budgetary comparison reporting is necessary for external financial reporting. Governments must present budgetary comparisons for their general fund and major special revenue funds as part of their basic financial statements or as RSI schedules. nizing nonexchange transactions in government-wide and fund financial statements. Other Projects. The last remaining major liability not reported in the government-wide financial statements after Statement No. 34 was the OPEB liability. The framework used for reporting OPEB was that developed for the pension standards several years earlier, and in 2004, the GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which provide guidance on recognition, measurement, display, and disclosure for OPEB plans and employers. These two statements, plus the pension standards and two minor statements issued in 2005 and 2007,provide comprehensive guidance for reporting all postemployment benefits. Karl Johnson and Michelle Czerkawski are the GASB staff memreporting model bers primarily responsible for developing the OPEB standards. Statement No. 34 also adds an important component to RSI — management’s discussion and analysis (MD&A) — which precedes a government’s basic financial statements. MD&A is intended to The financial be an objective,easily readable analysis project was a complete reexamiof a government’s financial activities One other standard developed durand status that provides readers with an nation of the content and format ing the Allen era should be noted. overview of a government’s financial of state and local government GASB Statement No. 40, Deposit and statements. Readers of financial statefinancial reports, including required Investment Risk Disclosures — an ments have been particularly pleased amendment of GASB Statement No. 3, with the MD&A requirements, no doubt supplementary information. issued in 2003,requires governments to in part because its explanations and disclose the risks — such as credit risk, analyses of state and local governinterest rate risk,concentration of credit ments’ financial statements and other risk, and foreign currency risk — associated with their information help readers understand the financial statements deposits and investments.This standard, unlike Statement No. and why a government’s financial position has improved or 3, was not issued in response to a financial crisis. Instead, it is deteriorated as a result of its current year’s operations. a proactive standard that was developed because of needs In summary, Statement No.34 provides answers to questions expressed by those in the investor and creditor community. that had been subject to debate for many years. Its development required tremendous effort by the board and its entire THE ATTMORE ERA staff. Senior staff members who made major contributions Bob Attmore joined the board as chairman in July 2004 and include David Bean, Ken Schermann, Suesan Patton, Bob was recently reappointed through June 2014. Thus far, the Buckham, Jay Fountain, and Penny Wardlow. Joe Blythe Attmore era has not resulted in many major new financial was the project manager on a related standard, GASB reporting standards. Rather, his term reflects the maturity of Statement No. 35, Basic Financial Statements — and the GASB as a standards-setting body and has been marked Management’s Discussion and Analysis — for Public Colleges by an emphasis on completing a conceptual framework for and Universities — an amendment of GASB Statement governmental financial reporting and a proactive approach to No. 34, which provides guidance on applying the reporting setting standards. model to colleges and universities. Another related standard, GASB Statement No. 33, Accounting and Financial Reporting GASB Concepts Statement No. 1, Objectives of Financial for Nonexchange Transactions, provides guidance for recogReporting, and Concepts Statement No. 2, Service Efforts and 24 Government Finance Review | April 2009 Accomplishments Reporting, were issued during the Antonio era. No concepts statements were issued during the Allen era, though Statement No. 33 and Statement No. 34 were developed using an informal conceptual framework that is described in the basis for conclusions section of those statements. In 2004, the board decided that completing a conceptual framework for financial reporting would be a priority. Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements — the first in an anticipated series of three concepts statements — was issued in 2005. This statement provides a communication methods conceptual framework to assist board decisions about where information should be placed in general purpose external financial reports that contain basic financial statements, notes to basic financial statements, and supporting information — required supplementary information and supplementary information. Concepts Statement No. 4, Elements of Financial Statements, issued in 2007,identifies and defines the elements of financial statements: assets, liabilities, deferred outflows of resources, deferred inflows of resources,outflows of resources,inflows of resources, and net position. Currently, the board is working on the final concepts statement in this series. It will provide a conceptual basis for recognizing elements in financial statements and determining the appropriate measurement attribute (e.g., initial value or remeasured value) for each element. The GASB issued Concepts Statement No. 5, Service Efforts and Accomplishments Reporting — an amendment of GASB Concepts Statement No. 2, in 2008. Concepts Statement No. 5 clarifies that it is beyond the scope of the GASB to develop specific nonfinancial measures or indicators of service or to establish performance benchmarks. It is also intended to serve as a framework for the board to consider in developing suggested guidelines for the voluntary reporting of performance information. Through the years, many staff members have contributed to the GASB’s conceptual framework.These include Penny Wardlow, Terry Patton, Roberta Reese, Jay Fountain, and Ken Schermann. The GASB has issued important standards during the Attmore era. These include Statement No. 51, Accounting and Financial Reporting for Intangible Assets, to clarify questions raised about intangible assets after the issuance of Statement No. 34, which required reporting intangible assets that are used in operations. Greg Driscoll was project manager on the intangible assets project. Randy Finden was project manager Exhibit 2: Key Current and Former Staff Members of the GASB Current Technical Staff David Bean Kip Betz Michelle Czerkawski Randy Finden Wesley Galloway Karl Johnson Dean Mead Lisa Parker Roberta Reese Ken Schermann Current and Former Practice Fellows Lisa Avis* Harriett Commons Donna Cullen Greg Driscoll Dan Kolvak Andy Richards* Bob Scott Jaimie Soulvie Former Technical Staff Joe Blythe Bob Bramlett Bob Buckham Sue Budak Wilson Campbell Barb Chaney Jim Davis Judy Doneiko Jay Fountain Dick Haas Aarne Hartikka Israel Herskowitz David Jones Lorraine Kremer Jake Lorentz Suesan Patton Terry Patton Rob Stout Tom Strayer Penny Wardlow Venita Wood Administrative Staff Greta DeAngelis* Ellen Falk Mary Milligan* Ragan Vincent* Patti Waterbury* * Current GASB staff on Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, a proactive standard that was issued in 2008.Statement No.53 was not issued as a result of a failure of derivative instruments used by governments.Rather,the board concluded that the users of governmental financial statements needed more information about the risks associated with derivative instruments and that recognition of such instruments in financial statements should be improved. April 2009 | Government Finance Review 25 The best method for governments to report pensions was a major source of disagreement among accountants before the GASB was established, and this dispute was one of the primary factors leading to the conclusion that an independent standards-setting body was needed for state and local government. THE FUTURE The GASB has accomplished much during its first 25 years. The formative years have ended, the initial major projects have been completed, and the GASB has reached a state of maturity.This does not mean that the need for state and local government financial reporting standards-setting has ended. Governments continue to enter into transactions such as public private partnerships that have not been independently considered, and Concepts Statement No. 3, No. 4, and No. 5 should be applied. In addition, the recognition and measurement concepts statement needs to completed and applied, several GASB pronouncements need to be revisited, international issues may need to be considered, and practice issues will arise from time to time.As long as governments are innovative in their efforts to finance services provided to their constituents,an independent standards-setting body will be needed to develop financial reporting guidance.Thus,there will continue to be a role for the GASB into the foreseeable future. ❙ Notes 1.Terry K. Patton and Robert J. (Bob) Freeman,“Governmental Accounting Standards Come of Age: Highlights From the First 20 Years,” Government Finance Review,April 2005. 2. Governmental Accounting Standards Board,“GASB Releases New Standard That Will Significantly Change Financial Reporting by State and Local Governments,” news release, June 30, 1999. TERRY K. PATTON, Ph.D., CPA, CGFM, is the Robert Madera Distinguished Professor of Accounting at Midwestern State University. He was a project manager for the GASB from 1997 to 1999 and research manager from 2001 to 2007. ROBERT J. FREEMAN, Ph.D., CPA, is the Distinguished Professor of Accounting Emeritus at Texas Tech University. He was a member of the GASB from 1990 to 2000 and served as vice chairman from 1998 to 2000. 26 Government Finance Review | April 2009