The Governmental Accounting Standards Board has issued two documents describing its preliminary views on lease accounting for state and local governments, and financial reporting for fiduciary responsibilities, as it solicits public comments on possible standards.
The first document, Preliminary Views, Leases, includes proposals to improve the accounting and financial reporting for leases for state and local governments from both a lessee and lessor perspective.
GASB’s sister organization, the Financial Accounting Standards Board, has been working with the International Accounting Standards Board to converge the standards for leasing contracts under U.S. GAAP and International Financial Reporting Standards for public companies. Both boards still disagree over some key elements of the final leasing standards, but FASB expects to issue updated standards by the end of next year for public companies, with the goal of putting leases on the balance sheet for the first time at many companies.
GASB, which sets accounting standards for state and local governments in the U.S., noted that many such governments use leasing to finance certain necessary items—including vehicles, heavy equipment, and buildings—without having to actually purchase them. Some governments also serve in a lessor capacity by leasing assets to other entities.
The purpose of the Preliminary Views document is to obtain comments from stakeholders on GASB’s views before developing more detailed proposals for changes to existing accounting and financial reporting standards. The proposals present GASB’s current thinking on the issues associated with accounting for leases—which are based on the foundational principle that all leases are financings of the right to use an underlying asset.
The document includes proposals on how leases would be presented in the financial statements and essential information related to leases that governments would disclose in the notes.
Under the proposal, lessee governments would report the following in their financial statements for all leases except short-term leases of 12 months or less: an intangible asset that represents the government’s right to use the leased asset; a corresponding liability for lease payments; amortization expense related to the lease asset (recognizing the asset amount as an expense over the term of the lease); and interest expense related to the lease liability.
Government lessors would report the following in their financial statements for all leases except short-term leases: a receivable for the right to receive payments; a corresponding deferred inflow of resources to reflect resources related to future periods; lease revenue (and a corresponding reduction in the deferred inflow) systematically over the term of the lease; and interest revenue related to the receivable.
“The Preliminary Views more closely aligns the accounting and financial reporting for leases with the economic substance of those transactions,” said GASB chair David A. Vaudt in a statement Thursday. “The board has an opportunity to make changes to the current guidance on leases that would result in greater transparency, reduced complexity in application, and more meaningful information for financial statements users.”
GASB plans to host public hearings on the Preliminary Views document on April 8, 9, and 10, 2015. Locations and other details, including instructions for registering to participate, are highlighted in the document.
Fiduciary Responsibilities Reporting
Also on Thursday, GASB released for public comment another Preliminary Views document, Financial Reporting for Fiduciary Responsibilities. The Preliminary Views presents GASB’s current thinking on fundamental issues associated with the reporting of activities in which a government has a fiduciary responsibility. In this context, fiduciary responsibility generally relates to a government controlling assets belonging to others in a trustee or custodial capacity.
GASB said its primary objective in this project is to enhance the consistency and comparability of when and how governments report their fiduciary activities in basic financial statements. The purpose of the document is to get comments from stakeholders before developing more detailed proposals for changes to existing financial reporting standards.
“The current state and local government accounting and financial reporting literature does not adequately define what constitutes a fiduciary responsibility,” said Vaudt. “The changes the board is proposing would give governments and their auditors clearer guidance for determining which activities should be reported in fiduciary funds and in which type of fiduciary fund the activities should be reported.”
The Preliminary Views proposed by GASB, if approved as a final standard, would enhance reporting of fiduciary activities by defining when a government has a fiduciary responsibility and, therefore, is required to present fiduciary fund financial statements; clarifying financial reporting requirements for fiduciary responsibilities, including a requirement for business-type activities that serve in a fiduciary capacity; and introducing the use of a financial statement that reports the inflows and outflows of resources for all fiduciary fund types.
“This proposal would provide financial statement users with needed information regarding both general and special-purpose governments, including business-type activities such as public universities, hospitals and utilities, which generally have not reported their fiduciary activities in the past,” said Vaudt.
GASB said the views presented in the document are based on extensive outreach with stakeholders during the pre-agenda research phase.
Like the other document on lease accounting, the Preliminary Views document on fiduciary responsibilities reporting is available on GASB’s Web site, www.gasb.org. GASB is asking stakeholders to review the proposals and provide comments by March 6, 2015.
GASB also plans to host public hearings on its Preliminary Views on fiduciary responsibilities on April 8, 9, and 10, 2015. Locations and other details, including instructions for registering to participate, are included in the document.
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