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What Is GASB?

The Governmental Accounting Standards Board (GASB) is an independent, private-sector organization responsible for establishing and improving accounting standards and financial reporting for state and local governments in the United States. Established in 1984, the GASB plays a crucial role in the realm of public finance by setting the Generally Accepted Accounting Principles (GAAP) that these governmental entities must follow. Its primary goal is to ensure that financial information provided by state and local governments is useful for users of financial reports, enabling informed decisions about the allocation of resources and assessing governmental accountability²⁸.

History and Origin

The need for standardized governmental accounting had been recognized for decades, with various efforts preceding the GASB's formation. Prior to 1984, the National Council on Governmental Accounting (NCGA), an entity associated with the Government Finance Officers Association (GFOA), was responsible for setting these standards²⁷. However, recognizing a growing need for a more authoritative and independent body, the Governmental Accounting Standards Board was established by the Financial Accounting Foundation (FAF) in 1984²⁴, ²⁵, ²⁶. This establishment marked a significant milestone, providing a dedicated and independent framework for developing financial reporting standards tailored specifically to the unique environment of state and local governments²³. The move aimed to bring greater consistency and transparency to public sector financial statements.

Key Takeaways

• The GASB is an independent, private-sector organization that sets accounting and financial reporting standards for U.S. state and local governments.
• It establishes the Generally Accepted Accounting Principles (GAAP) for these entities, promoting transparency and comparability in their financial statements.
• The GASB's standards cover a wide range of governmental financial activities, from basic financial statements to specific areas like pensions and infrastructure²¹, ²².
• Its pronouncements are vital for taxpayers, investors, and oversight bodies to understand a government's financial health and performance.
• The GASB operates under the oversight of the Financial Accounting Foundation (FAF), which also oversees the Financial Accounting Standards Board (FASB).

Interpreting the GASB

Interpreting GASB standards involves understanding the specific requirements they impose on state and local governmental entities. Unlike private sector accounting, governmental accounting has unique characteristics due to its focus on accountability for public funds and its diverse range of activities, including governmental funds, proprietary funds, and fiduciary funds. Each GASB Statement issued aims to address a particular area of financial reporting, providing guidance on how transactions should be recognized, measured, and presented in the financial statements. For instance, GASB Statement No. 34, issued in 1999, fundamentally revised the financial reporting model by requiring government-wide financial statements prepared on a full accrual accounting basis, similar to those used by businesses²⁰. This provides a comprehensive "big picture" of a government's financial position, including long-term assets and liabilities.

Hypothetical Example

Consider a hypothetical city, "Riverton," that enters into a new agreement for the use of its municipal sports arena. Prior to a new GASB standard on leases, such arrangements might have been accounted for as simple operating expenses. However, with the implementation of GASB Statement No. 87, "Leases," Riverton now must evaluate if the arrangement conveys control of the right to use the underlying asset (the arena) for a period of time in exchange for consideration¹⁸, ¹⁹.

If the agreement meets the definition of a lease under GASB 87, Riverton, as the lessor, would recognize a lease receivable and a deferred inflow of resources at the commencement of the lease term. The lease receivable would be measured at the present value of lease payments. Let's say the present value of lease payments over the 10-year non-cancelable term is $10,000,000. Riverton would now reflect this lease receivable on its balance sheet as an asset, and the deferred inflow of resources, which is amortized over the lease term and recognized as revenue on the income statement. This change means Riverton's financial statements provide a more complete picture of its long-term assets and future revenue streams related to the arena, rather than just showing periodic cash receipts.

Practical Applications

GASB standards are applied extensively across all U.S. state and local governmental entities, including states, counties, cities, towns, school districts, public utilities, and public employee retirement systems. These standards dictate how various financial transactions, from routine operations to complex capital projects and post-employment benefits, are to be reported. For example, GASB Statement No. 68 mandates how state and local governments must account for their pension debt and liabilities, requiring these obligations to be recognized on the balance sheet, which was a significant shift in transparency¹⁷. Similarly, GASB Statement No. 96 addresses subscription-based information technology arrangements (SBITAs), providing guidance on how governments should recognize and measure these arrangements, which are increasingly common¹⁶. These pronouncements directly impact how governments present their financial health to taxpayers, bondholders, and other stakeholders, fostering greater accountability in public financial management. The Government Finance Officers Association (GFOA) provides extensive resources and guidance to help governments implement these complex GASB standards¹⁴, ¹⁵.

Limitations and Criticisms

While the GASB strives to enhance transparency and accountability in governmental financial reporting, it has faced criticisms and acknowledged limitations. One long-standing point of contention revolves around the "dual presentation" requirement, where governments must present both government-wide financial statements (using full accrual accounting) and governmental fund financial statements (using a modified accrual basis)¹², ¹³. Critics argue that this creates unnecessary complexity and can be confusing for users, as the modified accrual basis, often used for budgeting, may not fully capture long-term liabilities or the true financial condition of a government¹¹. For instance, under modified accrual, pension contributions might be reported rather than the full pension costs incurred, potentially obscuring significant unfunded obligations¹⁰. Some assert that the GASB's approach to governmental funds maintains an "archaic, shortsighted, and conceptually groundless" focus, making government accounting less reliable and understandable than it could be⁹. Despite these critiques, the GASB continues to deliberate and evolve its standards to meet the changing needs of governmental financial reporting⁸.

GASB vs. FASB

The Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) are both independent organizations that establish accounting standards in the United States, but they cater to different sectors. The key distinction lies in the entities they regulate. The GASB sets the Generally Accepted Accounting Principles (GAAP) specifically for U.S. state and local governments⁶, ⁷. This includes a wide array of public entities, such as states, cities, counties, school districts, and public hospitals.

In contrast, the FASB is responsible for setting GAAP for public and private companies, as well as not-for-profit organizations⁵. While both boards operate under the oversight of the Financial Accounting Foundation (FAF) and follow a similar due process for developing standards, their specific pronouncements often differ to reflect the unique objectives and environments of their respective constituents³, ⁴. The GASB focuses on accountability and fiscal stewardship for public resources, whereas the FASB's standards are geared towards providing useful information for investors and creditors of business entities. Although some concepts might overlap, the detailed application and specific reporting requirements, such as those related to fund accounting in government, often diverge significantly. Entities must understand which board's standards apply to their audit and financial reporting.

FAQs

Q: Why are there separate accounting standards for governments?
A: Governmental entities have unique characteristics and objectives compared to private businesses. They focus on providing services to citizens, often without a profit motive, and are accountable for public funds. Therefore, specialized financial reporting standards are necessary to reflect these differences and ensure transparency in public finance.

Q: Who uses GASB financial statements?
A: A wide range of users rely on GASB-compliant financial statements. This includes citizens, taxpayers, legislative and oversight bodies, bondholders, creditors, and grant providers. They use the information to assess a government's financial condition, evaluate its performance, and make decisions about resource allocation.

Q: How does the GASB ensure its standards are relevant?
A: The GASB follows an extensive and open due process that encourages broad participation from stakeholders, including preparers, auditors, and users of governmental financial reports. This process typically involves research, public hearings, exposure drafts, and comment periods before a final standard is issued, helping to ensure the standards are relevant and address current needs.

Q: Does GASB have enforcement authority?
A: The GASB itself does not have direct enforcement authority. However, compliance with GASB standards is generally required by state laws, bond covenants, and auditing requirements for state and local governments. An independent audit by certified public accountants verifies adherence to these standards¹, ².