The Governmental Accounting Standards Board is juggling a variety of projects to improve accounting for state and local governments as they come under pressure from the threat of reduced funding from the federal government.
"If you'd asked me a year ago, I would have said the idea that they might be losing a substantial amount of federal funding is probably not something I would have worried about too much," said GASB chair Joel Black in an interview with Accounting Today. "But in today's environment, it's at least something they have to consider."
In late 2023, GASB issued
"I think it's an interesting confluence that has come about with the effective date of Statement 102 that we issued a couple of years ago on concentration and constraint risk disclosures," said Black. "That is effective for 2025 financial statements."
For state and local governments, the federal government is a significant resource provider that has a concentration in some areas, such as local school districts.
"We didn't want all concentrations to be disclosed," said Black. "We only wanted it when it was a really big deal, when it was more imminent that something could happen, some kind of substantial impact."
Medicaid funding would also count, and
"Medicaid funding in particular is a really big part of state budgets, so the potential for them to be substantial at a state level at least exists and warrants consideration," said Black. "But then is something going on in the environment that heightens the risk that something bad might happen to that related to that concentration?"
Governments will have to consider if that's an event worthy of disclosing the risk of any concentration that they have.
GASB has prepared an update for its
'Subsequent Events' standard
Later this year, Black anticipates GASB will finalize the subsequent events standard it
"We had research that showed an omission rate of about 30% of things that when we look at subsequent time periods and things we know happened, primarily debt issuances that weren't disclosed that we thought probably should have been," said Black. "We figured we needed to do something to improve the guidance to get more consistent application of it. That's really what we've proposed here is to try to better describe what we always wanted to get out of that, not necessarily add to the guidance."
GASB will probably be tweaking some of the wording to emphasize significant disclosures such as debt-related events that should be disclosed if they happen after the year ends.
"We don't want scheduled debt payments, but other new issuances, other major things happening with debt, government combinations or disposals, and then changes within the reporting, the things we kind of prescribe, and then we have the kind of other things that might be essential," said Black. "Our hope is that we get more consistent application of that guidance."
Digital reporting
GASB is also continuing to work on a digital taxonomy of its standards, known as the Voluntary Digital Financial Reporting Project. It's for governments that choose to voluntarily report their financial information in a more modern, digitized way, as opposed to a typical PDF.
"Technology is changing how users consume that information," said Black. "Hopefully governments or software providers will allow for users to utilize this data structure rule we promulgate with this project to make sure the integrity of that data is maintained at least contextually."
GASB expects to have a proposal out in December, but not the full taxonomy. It will include the initial foundational decisions that the board has made about its approach to the overall taxonomy, as well as select statements and note disclosures with some examples using structured and unstructured data, so stakeholders can provide input.
Some examples include a statement of net position, a note disclosure on significant accounting policies, and management discussion and analysis. GASB is developing it inhouse, but it's also leveraging the expertise of its sister sister organization, the Financial Accounting Standards Board, which also has a digital taxonomy based on XBRL technology.
GASB has formed a
"The due process document will be a broader call for external input into our process, but this is another way that we're going to be getting external input from some preparers of financial reports, some auditors, different users and technologists," said Black.
The board has also formed a GAAP Structure Consultative Group.
"That's another of our pre-agenda research items," said Black. "Our GAAP is presented in two different ways. We have dual authoritative guidance. One is the original pronouncements, which is Statements 99, 100 and 101, and then we have a codification that has the same level of authority as the original pronouncements, where we take all those original pronouncements, put them together by topic, and mush them together; the FASB has more of a codification. They only have a single source. They don't have the original pronouncements anymore, so our research effort is really looking at, does it make sense for us to continue to have dual authoritative guidance, or would a single source be better? If so, how would we enact that? How can we improve it?"
The research is looking at this so that the board can make a decision, and the Consultative Group is trying to explore the options.
"It's trying to get external input as the staff thinks about, 'Well, what if we did this, or what if we did that, or what if we lost this?' and to get that input along the way into our research," said Black. "The Consultative Group is just a group that they can routinely go to, as opposed to going out in surveys or one-off interviews. They have a group of maybe 15 people that they can routinely go to and bounce ideas off of as they kind of continue their exploration."
Infrastructure assets
GASB has been
"That was a good amount for us, a lot of good feedback, and we're starting to work our way through that feedback," said Black.
He hopes to issue an exposure draft, with another round of due process on a document written more like a final standard in early 2026 with a final standard expected in early 2027.
Revenue and expense recognition
Another project involves
"That's a big one," said Black. "I would expect us to revisit the schedule for that one this fall. We're really trying to take our time with it and make sure we get it right, make it achieve its objectives, but do so in the simplest way possible, the most straightforwardly communicated way possible. I would expect an exposure draft sometime in mid- to late-2026, and then we'll see what kind of feedback we get and how we go from there."
Severe financial stress and probable dissolution disclosures
In March, GASB began
"Our existing going concern literature really combines two things, and it was written largely for the private sector," said Black. "It mirrors a lot of what the FASB's going concern literature says, which is, are you going to continue to exist as the same legal entity, or are you maybe not, as a result of financial stress? We have both those concepts embedded in the description of going concern uncertainty. In the private sector environment, maybe that makes sense. In the government environment, that doesn't always make sense, because governments often legally can't go out of business. They legally can't declare bankruptcy, even though they might be in that kind of financial stress that if they could, they would. What we're trying to do in this project is keep both those same concepts, because we think they're both important, but separate them, even though it will be in one standard."
Probable dissolution is continuing to exist as the same legal entity 12 months from the financial statements. Severe financial stress is being near or at the point of insolvency.
"You may be in both situations, but you can also just be in one or the other," said Black.
Preparers will need to exercise their judgment to apply the guidance. "There's still a lot of judgment involved in our proposal that preparers will have to undertake," said Black. "Then if you find yourself in either of those, then we would have some disclosures that would be required about it."
So far, GASB has only received about seven or eight comments on the preliminary views proposal ahead of the June 30 deadline. Black expects to have an exposure draft out in probably the middle of 2026, with the final standard anticipated in mid-2027.
He doesn't see a correlation between the proposal and any dire predictions for the economy.
"We are really undertaking the project largely to try to improve the guidance because of the inconsistency we saw," said Black. "Some people were essentially saying, 'Well, if you can't legally go out of business, I just don't have to think about going concern.' Others looked at it and were trying to apply their own judgment, saying, 'Well, it's a government, so it can't legally go out of business, but it's in really bad financial shape, so I'm going to have these disclosures.'"
The board is also planning to hold a series of public forums in the third quarter on its project on severe financial stress and probable dissolution disclosures to hear input from preparers, auditors and users.
"In the past, we've had public hearings and user forums, and the public hearings were preparers or auditors, and one person that provided a comment letter would come and talk to the board about the things they wanted to add or elaborate on, maybe from their comment letter, and give the board a chance to ask them questions," said Black. "With the users, we tended to have a number of them in the room, and we would answer some questions and try to talk to them. We're trying to change that up a little bit and see if we can get even better input by having a series of public forums where we have a few preparers, a few auditors and a few users all in the room."
GAAP use study
Earlier this year, the board released a
"This was classified as another research activity," said Black. "It was never going to change GAAP in any way, but it was important information, which we hadn't really done since 2008, on the environment for the board to understand how many state and local governments in the U.S. use GAAP."
The use of GAAP is driven by the states, Black noted. "There can be no federal kind of requirement for state or local governments to use GAAP," he said. "States or sovereign entities have the ability to make that determination for themselves and for the local governments within their jurisdiction.
The research found that all 50 states use GAAP in their financial reports, along with 74% of counties in the U.S. and 71% of towns or cities.
"One of the objectives of this report was to figure out what the key drivers are of what encourages a government to use GAAP or maybe not, and to develop a model that we can update every couple of years or so, as opposed to having to wait that long, so we can see trends more quickly," said Black.
Use of GAAP seems to be driven by the size of the state or local government. "The larger the government, the more likely they are to use GAAP," said Black.
One reason for that is the public debt markets that are often used by larger governments.
"Studies have shown that borrowing costs are lower for governments that use GAAP than those that don't," said Black. "I think that encourages larger governments to use GAAP. What you see is some states just mandate GAAP being used for all governments in their jurisdiction, but many states require GAAP, but only for governments above a certain size. That threshold tends to be pretty low."
Smaller municipalities may be using an alternative like cash basis accounting.
Accountant shortage
GASB has been dealing with the accountant shortage, which affects both the public and private sectors.
"It's definitely a problem in our sector," said Black. "I would argue it probably is more acute in our sector than others. If you think about accounting industries and professions, the Big Four are going to pay more. They're going to get the accountants they need. … Governments tend to not pay overly well, so I think they're feeling it as bad or worse than others."
He pointed to a
"What they really honed in on was that accounting and financial reporting aren't valued as much in the public sector as they are in, say, the corporate sector," said Black. "Anytime they maybe even can increase the budget, they're more likely to add a police officer or a firefighter than they are an accountant, so the accounting just tends to be not as valued as the other services the governments are providing. Therefore it exacerbates what they're willing to pay, not really wanting to pay audit firms quite as much. Audit firms tend to want to focus on other sectors."
He acknowledged that anytime GASB changes GAAP, it's asking governments to use their resources on something they otherwise wouldn't have.
"We've really set a high bar for us to undertake a project," said Black. "It has to be, in our view, a significant improvement in the financial report, and a significant benefit to justify the cost that we know we're going to place on governments as a result."
Therefore, the number of projects on GASB's agenda is much smaller than it was five years ago. "That's been a conscious effort," said Black. "We still want to improve the standards when there's a real big need to or when we can simplify them."
The volume of note disclosures has also been a problem. "One of the things we often hear is note disclosures are too long, many pages, but when we did research on that, our research said everybody agrees they're too long, but everybody has their favorite notes, so there were no obvious removals," said Black.
GASB began looking at its conceptual framework and in 2022 released
"We've said either a breadth or depth of users should use it in a way that has a meaningful impact on their decision-making or accountability assessments," said Black.
GASB talks to users and surveys them about how they would use a potential item it's thinking about requiring as a disclosure, and then takes that information and uses its judgment on whether it might seem to have a meaningful enough impact to rise to that level.
For existing note disclosures, GASB has committed to reexamining them through the lens of Concepts Statement 7. Over the next 18 months, the board plans to talk to users about all the existing note disclosure requirements related to its pension and other post-employment benefits standards and how they're being used, and make a determination on perhaps removing some of those that aren't deemed essential.
Materiality is an important part of that. Black noted that every standard has a materiality box saying it shouldn't be applied where it's not material.
"Oftentimes governments aren't using materiality, and they're spending a lot of time accounting for things that just may not be material," said Black. "I think that this is inherent and makes sense from a government accountant perspective. I get it that we're stewards of public funds and taxpayer money. All of it counts. That's really important, but at some point you're being inefficient with taxpayer money if you're overcomplicating the accounting by applying standards to immaterial items that, in the end, don't have any impact on decision-making, and you're raising your cost of compliance beyond what the board considered."
For every statement, GASB goes through a cost benefit analysis, and it's trying to focus its stakeholders on applying materiality as well. The board is working with the Government Finance Officers Association on an education effort on the use of materiality for government preparers to minimize some of the burden of financial reporting on state and local governments.
The board also plans to do research on the impact of its pension and other post-employment benefit standards.
"How are the users using each of those individual and pension OPEB note disclosures so that we can see if each of them rise to that level of essentiality" said Black. "Are there duplicative ones? If some users are using disclosure A to evaluate liquidity of pension plans, and some users are using disclosure X for liquidity efficient plans, could we just require one and not both, and everybody's getting liquidity? Those are the kinds of things we'll have to think about."
Cybersecurity risk disclosures
GASB has also been doing research on cybersecurity risk disclosures.
"Our advisory council has this as the highest-rated issue," said Black. "Our research started out with how big an issue this is. I don't think it took very long to get to this is a big issue for state and local governments, and it's a prevalent cybersecurity risk. Then the research is focused on what role, if any, does the external financial report have in disclosing or including information related to cybersecurity risks? You see on all sides the users do want information on this, but at the same time, they don't want to put targets on state and local governments' back. So we're trying to figure out is if there's a role. Maybe the external financial report isn't the place for cybersecurity risk disclosures, and that's going to have to come through some other channel, but that's what our research is focused on."
Over the next six months to a year, GASB may make a decision about whether or not to tackle cybersecurity risk disclosures, and what role it wants to play.
The threat of ransomware attacks has raised worries in state and local governments. "Those in the bond investment community want to know, the best they can, how prepared the governments are for that," said Black.
Amid the expanding number of hacks, he has been seeing a shift in the past year, with less of a focus on prevention and more on restoration and recovery.
"How quickly can I recover from a cyberattack and be back up to providing services, and not necessarily worried all about prevention?" said Black. "It could be that maybe the disclosures go down a path like that. If cyber attackers attack a water treatment plant or the E911 system, or the camera red lights in a jurisdiction, how quickly can the government get the red lights back up, get the 911 system back up, get the water treatment plant back up? That may be more important than them preventing the attack. If they can really quickly recover, it may not matter as much."
Video and podcast series
GASB is planning an educational video series on the elements of financial statements for elected officials.
"We're excited about that," said Black. "Let's improve the value of the financial report for governments. The report is big and it's pretty technical, and written for technical people. City council members and county commissioners and state legislatures are not accountants, they're not technical people. Yet they're a user of this report, so we are developing a series of videos that break down all the different parts of the report. They're not going to be kind of talking heady videos, but rather, they're going to bring up an example of this part of the report we're talking about, have a whiteboard and telling, in more layman's terms, what's the purpose of this report. As an elected official, how might I use this report?"
He hopes to eventually have a series of perhaps 10 videos of five minutes each covering different parts of the report.
GASB has also been producing more episodes of its podcast series, "
GASB will be providing much more information about its projects through these vehicles.
