The Governmental Accounting Standards Board's agenda for 2006 will rank among its most ambitious ever.Within the first few months of the year, it may have six or more projects underway, with exposure drafts going out the door as comment letters are coming in.
As 2005 came to a close, the board was receiving the last comments on an exposure draft on sales and pledges of receivables and future revenues. And as 2006 opened, the board was preparing to issue an ED on pollution remediation obligations. By February, the board expected to issue an ED of a technical bulletin on accounting for Medicare Part D prescription drug subsidies.
A month later, the board hopes to issue a preliminary views document on one of accountancy's slipperiest issues: derivatives and hedging. In April, it will take up yet another tough one: intangible assets.
Explaining the radical mix of projects on the GASB platter, Chairman Robert H. Attmore emphasized that projects are generally added to GASB's agenda through a formal process involving constituent suggestions and technical questions, and recommendations from the Governmental Accounting Standards Advisory Council.
"We hope our ability to execute both our strategic plan and technical plan is letting our constituents know about our commitment to improving financial reporting and government accountability," Attmore said. "We think we're going to keep busy this year.'
Even as it wades through some of accounting's most deeply complex issues, the board continues deliberation on its Conceptual Framework's treatment of the fundamental elements of financial statements.
Attmore said that progress on the Conceptual Framework has been at a hesitant pace because the board is exploring an unprecedented approach. It is striving to define the basic elements of financial statements - assets, liabilities, revenues and expenses - based on each element's inherent characteristics. Other standard-setters, Attmore said, have defined a primary element, then derived others accordingly.
"I have hopes that it will all hang together, but until we get through all the pieces, it will be difficult to say with certainty," Attmore said.
GASB plans to keep the Conceptual Framework ball rolling by starting deliberations on recognition and measurement attributes while the ED on elements is out for comment.
Attmore said that the board is moving fast on the Medicare project in order to help governments understand how to account for federal payments for prescription drugs under Medicare Part D, which goes into effect this year. Governments will need to know how to handle the accounting for these drug subsidies. Depending on the comments on the ED, Attmore hopes to have a final technical bulletin out by June.
The board also plans to update its Comprehensive Implementation Guide by June, with a document published by September. These periodic updated guides normally go through a limited due process, but do not involve an exposure process.
The project on fund balance reporting, however, came about not so much by constituents expressing difficulties, but by GASB research finding constituents interpreting fund balance elements differently. Each tended to think that they were working with the correct interpretation, but the results were inconsistent. The board expects to issue either a PV document or an invitation to comment by July.
"This project will be our attempt to eliminate some of the confusion and the variety of approaches, so that when users of financial statements look at the different elements of a fund balance, such as 'reserved' and 'designated,' they'll have a common understanding of what those terms mean, and that will provide comparability between governments, which doesn't necessarily exist right now," Attmore said.
The ED on sales and pledges of receivables and future revenues included a tentative decision that revenue from sales of future revenue sources, including taxes and securitizations, generally should be deferred. The board has recognized that it may have to re-examine Statement 14, The Financial Reporting Entity, for situations in which a government pledges its revenues as security for the debt of a discretely presented component unit.
If all these projects move along according to schedule - and much will depend on the results of GASB's wide-reaching due process and exposure cycles - the board will begin in October to deliberate the recognition and measurement attributes section of its Conceptual Framework. The board wants to develop recognition criteria for what information should be reported in state and local government financial statements and when it should be reported. A second objective is to consider the measurement attributes that conceptually should be used in statements.
Governments and derivatives
Attmore said that he expects the project on derivatives and hedging to be difficult, due to nuances that differentiate the issue from the controversial standard that was issued by the Financial Accounting Standards Board.
"We've gotten a lot of feedback that derivatives accounting doesn't work as well as it should or could," Attmore said. "There are nuances involved in the government area because we're dealing with a tax-exempt market. The most common form of derivatives in governments is the interest rate swap, which has to be structured different from the private sector. You wind up with different indexes as part of the derivative - one tax-exempt, one taxable - and that brings into play concerns regarding basis risk that don't exist in the corporate world."
Governments are not currently required to report the value of derivatives on the face of their financial statements, though certain disclosures are required in footnotes. Tentative decisions indicate that GASB is likely to require that derivatives be reported at fair value on the balance sheet.
The board also has tentatively decided that if derivatives are effective at hedging specific risks, then deferral accounting should be applied. The remaining questions are when it should be applied, and what happens if the hedge becomes ineffective.
"It's not an easy issue because of the inherent complexity of the transactions," Attmore said. "The objective is to come up with something that can be understood and applied in a cost-effective manner."
Attmore said that the project on intangible assets could also be tricky. Board research has found wide disparities in how and whether intangibles are recorded, how they are defined, measured, written off, etc. Until recently, intangible assets were often unrecorded assets, but under the reporting model established in Statement 34, capital assets are expected to include intangible assets.
In late summer, the board expects to begin deliberations on a project on economic condition reporting. The board will be considering whether new financial information or indicators are needed by users of financial statements to assess the economic health of governmental entities.
