The Governmental Accounting Standards Board is wrapping up a year in which it has been simultaneously returning to basics and promulgating specifics - both of which include projects of long-term significance to government financial operations.

The basics - two aspects of the board's conceptual framework - probe the philosophical underpinnings of standards past, present and future. The board already has heard comments on its proposal on the communication of financial information, especially through recognition in financial statements, disclosure in notes, and presentation of required and unrequired supplementary information.

A final concepts statement may be issued early in 2005.

With that part of the conceptual framework project nearing completion, the board is already turning to focus on concepts in the elements of financial statements.

"Believe it or not, GASB has operated for 20 years without having a concepts statement on the elements of financial statements," GASB Chairman Robert H. Attmore said. "This gets down to issues as basic as defining elements as assets, liabilities, revenue, expenses and so forth. This could become controversial. Because of the unique and distinguishing characteristics of governments, we may wind up with definitions we haven't seen previously."

Attmore said that the board may decide to pursue a flow-of-resources approach to focus on a government's statement of activities and management performance. Such an approach would be new to accounting. If the board goes in that direction, the conceptual framework would not be centered on definitions of assets and liabilities.

GASB technical director David Bean noted that the discussions are still at an exploratory stage.

"This approach that we are exploring - and it's just exploration at this time - is a plowing of new ground from a conceptual framework standpoint," Bean said.

Termination benefits

On a more immediately practical level, the board has been working toward the completion of various projects.

One project is relatively small, but important in that it is the last piece of the multifaceted efforts on post-employment benefits. It centers on termination benefits - that is, the incentives for an employee to leave a workforce or compensation for involuntary removal of the employee. GASB feels that these benefits are, in a sense, unearned. The accounting for them, therefore, would be different from the accounting for other post-employment benefits. With final deliberations underway, the board at press time hoped to issue an exposure draft by the end of 2004, with a final statement possible by the middle of 2005.

Earlier this year GASB issued a statement on "other post-employment benefits," i.e. other than pensions. While the standard has not yet gone into effect, governments should already be preparing to gather the required information.

"The implementation dates for the statement are still a couple of years out, so some folks may not be paying as much attention to it as they should," Attmore warned. "It will have a major impact on most governments because they're going to have to change from pay-as-you-go for actual health care benefits to retirees to a system of accruing expenses similarly to the way pensions are handled. They should be thinking about and planning for how they are going to implement it. It would not be a bad idea to start doing some strategic planning."

GASB is working out the final details of a preliminary views document on pollution remediation obligations. These liabilities, which can reach critical levels, are not currently reflected in most government financial statements. The project aims to establish rules on the recognition and measurement of liabilities relating to the cleanup of brownfields, Superfund sites and other contaminated areas.

The document is likely to reflect an expected cash-flow technique that is new to GASB accounting but similar to techniques promulgated by the Financial Accounting Standards Board. The approach would have governments estimate the likelihood of various outcomes and quantify their impacts, rather than use an estimate of the value of the most probable liability. An outcome with a 40 percent probability of occurring would be reported at 40 percent of the estimated liability.

Under current standards, any contamination with a less than 50 percent probability of mandated remediation would not need to be reported. Any such change, therefore, could add substantial liabilities to a government's books.

The board hopes that comments on the preliminary views document will guide them in a decision as to how to account for extremely unlikely outcomes.

Beyond plain-vanilla

The board's project on derivatives and hedging is bound to stir up controversy. Discussions have been focusing on the development of a context-based approach that would report investment-related derivatives at fair value and debt-related derivatives at historical cost. The board hopes to reach a tentative conclusion on the recognition approach by the end of 2004. Depending on discussions, the board may issue a proposed standard, possibly by the middle of 2005, or it may decide to first issue some kind of discussion document for public comment.

"This is a tough area," Attmore said. "As governments get a little less risk-averse and more willing to go beyond the plain-vanilla derivative, there are concerns that there are significant additional risks."

By the end of the year, the board may also be ready to issue a final statement on how to treat changes to restrictions of net assets that result from legislation.

"Enabling legislation" is that which gives an entity the right to collect revenues whose use is restricted by law - at least until subsequent legislation changes the restriction. The board has tentatively decided that despite the mutability of legislation, restricted net assets should indeed be considered restricted.

The board is in the final stages of researching a possible change to fund balance reporting. Deliberations would begin in early 2005.

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