by Glenn Cheney
Norwalk, Conn -- The Governmental Accounting Standards Board made solid progress in 2003 and plans to move several projects forward before the end of June 2004, when chairman Tom Allen reaches the end of his second and final five-year term.
“We are focusing on June 30 to get as much wrapped up as we can,” Allen said shortly after the board’s January meeting.
The Financial Accounting Foundation, which oversees and arranges funding for GASB, is searching for a board member to replace Allen. A decision is expected in the first quarter.
Among the more important projects of the last several months were two on post-employment benefits other than pension plans. The board issued two exposure drafts — one on accounting for the plans themselves, and another for employers’ reporting on post-employment benefits. Only the former, however, has been approved for issuance. Issuance is expected in March or April of 2004.
The draft on reporting by employers, on the other hand, met resistance. Actuaries criticized a provision that allowed governments to not report on certain seemingly insignificant liabilities. The board listened and decided, unanimously, to redeliberate the issue.
At presstime, another exposure draft was expected by the end of January, and it should have a relatively short exposure period. Allen hopes to have a final statement issued before the end of his term.
In November of last year, the board issued Statement 42, on asset impairment and insurance recovery. It requires governments to report the effects of impairments brought on by unexpected events, such as natural disasters, advances in technology that render equipment obsolete, unforeseen changes in demographics and changes in regulation.
The standard complements GASB’s Statement 34, which required the capitalization of assets but did not provide for their impairment. Statement 42 was widely praised for improving transparency and establishing consistency in financial statements.
During 2003, the board took a new direction for issuing implementation guidance. Previously, the board had issued guidance on new statements only after it had noted several problems or accumulated enough questions regarding a given statement. In 2002, the board decided to issue comprehensive annual guidance on whatever statements needed explanation.
In May of 2003, the first such annual guidance was published. “This is part of our outreach to our constituency,” Allen said. “This is how we try to be more helpful to them.”
On Dec. 31, 2003, the board proposed a technical bulletin on accounting for the settlements made between tobacco companies and state governments across the country. The technical bulletin dealt with situations where states create isolated tobacco settlement authorities to receive annual payments.
In the face of widespread financial woes, many states have been borrowing against those future revenues. In some cases, governments have given up a future revenue stream without recognizing a liability. GASB has proposed that these authorities be considered component units of governments and that revenues and assets be recognized accordingly.
The proposal, which may be finalized as early as March of 2004, sets the stage for a new and much more complex project on securitization.
“More and more governments are trying to figure out how to take future revenue streams and sell them,” Allen said. “We clearly need better guidance on that issue. It’s important because governments can get pretty creative, and they need to balance the budget without raising taxes.”
Allen said that discussions on securitizations would not likely begin until late in 2004. The board spent a lot of time in 2003 working on one of two concept statements that are needed to complete the board’s conceptual framework.
By the time Allen steps down, the board hopes to issue an exposure draft on concepts in communicating financial information on the face of financial statements and in disclosures and supplemental information.
“We’ve been doing these things sort of by the seat of our pants, without definitions for these kinds of information, so I’m hoping that we can complete an exposure draft by June 30 to provide guidance not only to the board, but to communicate to our constituency how to treat information,” Allen said.
Shortly after a new chairman is appointed — a five-year term will begin on July 1 — the board will take up a concept statement project on the definitions of the elements of communication. Deliberations are likely to be protracted.
Last year, the board also issued a technical bulletin requiring extensive disclosures about the intent, fair value and risks associated with derivatives.
Tough on derivatives
About six months ago, GASB added a tougher derivatives project to its agenda. It deals with the recognition of derivatives and changes in their fair value. Allen is far from sure how the project will turn out.
“We’ve scheduled an exposure draft for the third quarter of 2004, but at this point in time, I’d say it’s a crapshoot whether we’re actually going to require recognition or not,” Allen said.
Allen is also hoping that before June 30 the board will issue a proposal to improve existing guidance on net asset fund balances — the governmental equivalent of stockholders’ equity. The board currently requires those funds to be separated into three components; net capital assets; restricted capital assets; and unrestricted capital assets.
Financial problems have led some states to blur the line between restricted and unrestricted capital assets. The board is trying to tighten the definitions of restriction. The board also hopes to draw guidelines that will avoid inconsistencies in the reporting of fund balances.
“We need to provide better definitions for both of those bottom lines — government-wide accrual statements and modified accrual fund statements,” Allen said. “We want to produce more consistent reporting of the bottom line.”
The board will also continue redeliberating a proposal on economic conditions that are presented in non-mandatory comprehensive annual reports. Allen hopes to get the final statement out by June 30.
