It may seem belated, but the Governmental Accounting Standards Board has just recently gotten around to defining such fundamental accounting concepts as "asset" and "liability."It has also defined a pair of distinct financial statement elements that are new to accounting and whose definitions should clarify certain questions that have confounded governmental accountants and auditors for years.
These definitions of elements old and new are carefully worded philosophical essences derived after months of discussion in the board's broad, long-term project to develop a conceptual framework on which future standards will stand.
Gerry Boaz, a technical analyst with the Tennessee Division of State Audit, praised the board's conclusions. "After the board took into consideration some of the due-process comments on some of the more controversial issues, such as liabilities, it is a much better document and should assist auditors in at least determining what the board's intent is on certain of their elements," Boaz said. "The concepts of assets and liabilities will be important in certain projects that are coming down the pike, such as intangible assets."
The six core elements of financial statements that GASB defined are based on the objectives of financial accounting that are unique to governmental reporting. Rather than reflecting the goal of earning profit, as corporate reporting does, they reflect the goal of a government, which is to provide services to the public.
The statement defines "asset" as a "resource with present service capacity that the government presently controls." A "liability" is a "present obligation to sacrifice resources that the government has little or no discretion to avoid." A "net position" is "the residual of all other elements presented in a statement of financial position."
The two newly defined elements are:
* "Deferred outflow of resources:" a consumption of net assets by the government that is applicable to a future reporting period; and,
* "Deferred inflow of resources:" an acquisition of net assets by the government that is applicable to future reporting periods.
The statement also defines "outflow of resources" as a consumption of net assets by the government that is applicable to the reporting period, and "inflow of resources" as an acquisition of net assets by the government that is applicable to the reporting period.
GASB project manager Roberta Reese explained the difficulty of accurately naming these terms and opting for the term "outflow" rather than "expense."
"We use slightly different words because we needed the terms to be measurement-focus neutral," Reese said. "In governmental accounting, some financial statements are prepared on the economic resources measurement focus, and some are prepared on the current financial resources management focus. We used terms that didn't imply one measurement focus or the other. Using the term 'expenses' would imply economic resources focus. Under the current financial resources focus, an outflow would be called an 'expenditure.'"
Currently, only one standard would require the reporting of deferred inflow as an element in a statement - Statement 48, on sales and pledges of future revenues. If a government sells a future revenue stream, the proceeds from the sale would meet the definition of a deferred inflow of resources.
A standard in the works on derivatives, however, may call for such categories.
"We didn't want to make our definitions of assets and liabilities loose enough to accommodate those concepts," Reese said. "We wanted to make those definitions tight, so that whenever someone is reading a set of financial statements and they see something identified as an asset or liability, they know for sure what it is. We don't want these deferred items to be confused with assets or liabilities."
Reese said that the primary purpose of the definitions is to guide the board in the setting of future standards. The definitions in themselves do not change accounting, reporting, presentation or recognition.
Concept Statement 4 follows statements on the objectives of financial reporting, service efforts and accomplishments reporting, and communication methods. The next project will broach recognition and measurement attributes.
Boaz predicted that this next project will prove interesting, as the board begins to grapple with the use of fair value and historical value.
Deliberations are expected to begin in October, with an exposure draft predicted for November 2008 and a final statement possible by June 2009.
The Federal Accounting Standards Advisory Board is also working on a concepts statement on the elements of financial statements. Its current draft defines the concepts of expenses and revenues, but does not discuss such terms as inflows and outflows of resources, nor does it include deferred inflows and outflows.
