July 1999 Issue

GASB Approves Significant Change in Government Financial Reporting

By unanimous vote, the Governmental Accounting Standards Board (GASB) gave the go-ahead on June 10 to issue its most comprehensive governmental accounting rule. GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis--for State and Local Governments, will significantly change the way state and local governments report their finances to the public.

Under the new rule, citizens, the media, bond raters, creditors, legislators, and others with an interest in public finance will have more and easier-to-understand information about the government in question. For the first time, a government's financial reports will have information about the full cost of providing services to its citizens. Also for the first time, information about the government's infrastructure assets--bridges, roads, storm sewers--will be available. An additional feature of financial reports presented under the new standard is management's narrative analysis of the government's financial performance.

"This is the most significant change to occur in the history of governmental financial reporting," GASB Chair Tom L. Allen said. "Never before has the public been able to get a comprehensive overview of a state or local government's finances in one place. This new financial reporting system will give citizens a clearer picture of what a government is doing with the taxes it collects: Are current revenues paying for current services, or will the services be paid for by the next generation? How much is invested in roads and bridges? Are taxes subsidizing the local public pool or are swimmers' fees covering operating costs? The new financial statements could help to answer these questions."

State and local governments invest approximately $140­$150 billion annually in construction, improvement, and rehabilitation of capital assets, including infrastructure assets, but until now the information about these investments was unclear.

"Right now, government financial reports focus on the funds of government, which are intended to provide some information about various activities or sources of revenue," Allen said. "But the number of funds can run anywhere from two to two hundred or more, making it difficult at times to pull the information together and make sense out of it. Financial reports prepared under the new system will not only improve information provided for major funds but, most importantly, also will provide financial information from a total government perspective--an entirely new concept in public finance."

The new reporting system will affect a broad spectrum of the public. Allen said the system will provide a better reading of the financial health of a government's economy. Such a reading will help companies planning to relocate to another state, policy makers weighing the effects of their actions, investors looking for better information, and taxpayers assessing their elected officials' actions.

According to Allen, an important aspect of the new standard is the requirement to provide information about infrastructure assets. Asserting that the current system does not give the complete picture of the government, he gave the following example.

"If a state decided to issue bonds specifically to finance improvements to its in-state highway system, the current financial statements would show the debt, but not the corresponding assets," he said. "Does the debt on the state's books mean that it is less well off? No, because the state used the proceeds from the bond sale to make an investment. But that investment currently does not appear on the state's books. Our new reporting system will make financial reports more complete."

The new GASB standard will take effect for larger governments in fiscal years beginning after June 15, 2001. Medium-sized governments have until fiscal years beginning after June 15, 2002, and smaller governments until fiscal years beginning after June 15, 2003.

GASB is the private sector organization formed in 1984 that sets financial accounting and reporting standards for state and local governments. Its seven members are drawn from the board's diverse constituency, including preparers and auditors of state and local government financial statements, users of those statements, and members of academia.

More details about the new financial reporting system can be found on the GASB website, www.rutgers.edu/Accounting/raw/gasb/. For copies of the new standard, call the GASB Order Department at (800) 748-0659. *