Government accounting standards board gasb

What Is Government Accounting Standards Board (GASB)?

The Governmental Accounting Standards Board (GASB) is an independent, private-sector organization that establishes accounting and financial reporting standards for U.S. state and local governments.⁹⁷ These standards are known as Generally Accepted Accounting Principles (GAAP) for governmental entities and are part of the broader field of financial accounting.⁹⁶ The mission of the GASB is to promote clear, consistent, transparent, and comparable financial reporting for state and local governments. This ensures that public officials, investors, taxpayers, and other users of financial reports have useful information to support decision-making, demonstrate accountability, and ensure proper stewardship of public funds.⁹³, ⁹⁴, ⁹⁵

History and Origin

The need for accounting standards for government entities has a long history, with formal processes for setting these standards in the United States beginning in the private sector.⁹² The Governmental Accounting Standards Board was officially established in June 1984.⁸⁹, ⁹⁰, ⁹¹ Before GASB's formation, various bodies, such as the National Committee on Municipal Accounting (established in 1934) and the National Council on Governmental Accounting (NCGA), contributed to the development of governmental accounting principles.⁸⁷, ⁸⁸

A significant milestone in the GASB's history was the issuance of Statement No. 34, "Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments," in 1999. Thi⁸⁵, ⁸⁶s statement dramatically changed how state and local governments reported their financials by introducing government-wide financial statements that included accrual accounting for infrastructure and other capital assets, and long-term liabilities—elements previously reported on a modified accrual basis in governmental funds. This ⁸², ⁸³, ⁸⁴move was aimed at mimicking private-sector financial reporting precepts to provide a more comprehensive overview of fiscal health and stewardship.

K⁸¹ey Takeaways

• The Governmental Accounting Standards Board (GASB) sets accounting and financial reporting standards for U.S. state and local governments.
• G⁸⁰ASB standards are part of Generally Accepted Accounting Principles (GAAP) for governmental entities.
• T⁷⁹he organization's goal is to ensure transparency, consistency, and comparability in governmental financial reports.
• T⁷⁸he Financial Accounting Foundation (FAF) oversees and funds the GASB.
• G⁷⁶, ⁷⁷ASB standards aim to help users of financial reports make informed decisions about government operations and assess accountability.

F⁷³, ⁷⁴, ⁷⁵ormula and Calculation

The Governmental Accounting Standards Board (GASB) primarily sets accounting and financial reporting standards rather than prescribing specific financial formulas that governments must calculate. However, certain GASB statements mandate the calculation and reporting of specific financial metrics. For example, GASB Statement No. 68 requires employers to calculate and report their net pension liability. This ⁷²liability is measured as:

$\text{Net Pension Liability} = \text{Total Pension Liability} - \text{Pension Plan's Fiduciary Net Position}$

Where:

• Total Pension Liability represents the present value of projected benefit payments to employees attributable to their past periods of service.
• ⁷¹Pension Plan's Fiduciary Net Position refers to the fair value of assets held in the pension plan that are restricted for providing benefits to plan members.

This⁷⁰ calculation requires actuarial valuations to be performed at least every two years. The n⁶⁹et pension liability helps inform stakeholders about the long-term obligations related to employee benefits and the financial health of pension plans.

Interpreting the GASB

Interpreting the impact and application of GASB standards involves understanding how they influence the financial statements of state and local governments. GASB aims to provide reliable, transparent, and comparable government financial data, which is crucial for assessing a government's fiscal health and accountability. When ⁶⁷, ⁶⁸examining a government's financial reports, an understanding of the specific GASB statements applied is vital because they dictate the recognition, measurement, and presentation of various financial elements. For instance, the implementation of GASB Statement No. 34 required governments to present both government-wide financial statements (using the accrual basis of accounting) and fund financial statements (often using a modified accrual basis). This ⁶⁵, ⁶⁶dual perspective provides users with both a long-term economic view and a short-term focus on available financial resources.

For ⁶⁴example, when reviewing a city's financial statements, the "Management's Discussion and Analysis" (MD&A) section, a requirement under GASB, offers a narrative overview and analysis of the financial performance. Under⁶², ⁶³standing the specific pronouncements, such as those related to capital assets or long-term liabilities, allows for a more nuanced interpretation of the financial data and the underlying financial position.

Hypothetical Example

Consider the City of Diversifia, a hypothetical municipality, and the impact of GASB Statement No. 87 on their financial reporting concerning leases. Before GASB 87, many government leases were treated as operating leases, meaning they were expensed as payments were made and did not appear on the government's balance sheet as liabilities.

With the adoption of GASB Statement No. 87, which became effective for fiscal years beginning after December 15, 2019, most leases, including those previously classified as operating leases, are now recognized as lease assets and lease liabilities on the government's statement of net position.

Scenario: The City of Diversifia enters a 10-year lease agreement for a new city hall building.

• Annual Lease Payment: $500,000
• Discount Rate (implicit in lease or government's incremental borrowing rate): 4%

Before GASB 87: The $500,000 annual payment would simply be reported as an operating expense each year. The obligation for future payments would only be disclosed in the notes to the financial statements.

After GASB 87: The City of Diversifia would need to recognize a lease asset and a corresponding lease liability on its financial statements at the inception of the lease. The initial measurement of the lease liability would be the present value of the future lease payments.

• Calculation of Lease Liability (simplified):
  Using a present value annuity formula for 10 years at a 4% discount rate, the present value of $500,000 annual payments would be approximately $4,055,448.

• Financial Statement Impact:

  • Statement of Net Position: A "Right-of-Use" lease asset of approximately $4,055,448 and a lease liability of $4,055,448 would be recognized.
  • Statement of Activities: Instead of an operating expense, there would be amortization expense on the lease asset and interest expense on the lease liability over the lease term. The total expense recognized annually might be similar to the previous operating lease expense over the lease term, but its composition and timing of recognition would differ, providing greater transparency about the government's long-term obligations.

This example illustrates how GASB pronouncements, such as GASB 87, alter the presentation of a government's financial position, providing users with a more comprehensive view of its assets and liabilities.

Practical Applications

The standards set by the Governmental Accounting Standards Board have wide-ranging practical applications across state and local government finance, influencing how financial information is prepared, audited, and used. These applications include:

• Financial Reporting for Governments: GASB standards dictate the structure and content of government financial reports, including the Comprehensive Annual Financial Report (CAFR). This ensures consistency and comparability in reports from different governmental entities, aiding stakeholders in assessing fiscal health.
• ⁶⁰, ⁶¹Public Accountability: By establishing clear rules for reporting, GASB enhances public accountability for the use of taxpayer money. This allows citizens, oversight bodies, and other interested parties to understand how public resources are managed.
• ⁵⁸, ⁵⁹Bond Markets and Credit Ratings: Investors and credit rating agencies rely heavily on GASB-compliant financial statements to evaluate the financial health and creditworthiness of state and local governments before issuing municipal bonds. Changes in GASB standards, like those related to pension liabilities, can significantly impact how these entities view a government's ability to meet its obligations.
• ⁵⁶, ⁵⁷Budgeting and Financial Planning: While GASB primarily focuses on financial reporting, the information produced according to its standards informs a government's budgeting and long-term financial planning processes. For instance, new requirements for reporting pension liabilities under GASB Statements No. 67 and No. 68 have highlighted the true extent of these obligations, prompting some governments to re-evaluate their funding strategies. Resea⁵⁴, ⁵⁵rch by the Center for State and Local Government Excellence, for example, highlights how governments have increased pension contributions significantly upon applying GASB 67/68.
• ⁵³Auditing and Compliance: Independent auditors use GASB standards as the benchmark for auditing government financial statements, ensuring compliance with GAAP.

L⁵¹, ⁵²imitations and Criticisms

Despite its crucial role, the Governmental Accounting Standards Board (GASB) and its pronouncements have faced limitations and criticisms. One significant area of contention has been the complexity and cost associated with implementing new GASB standards. For i⁵⁰nstance, GASB Statement No. 34's requirement for full-accrual accounting on capital investments, including infrastructure like sidewalks and streets, was met with resistance from some finance officers who viewed it as a costly and burdensome extrapolation of private-sector techniques to the public sector. Criti⁴⁹cs argued that calculating depreciation for assets without a secondary market or clear revenue generation, such as public infrastructure, was difficult and potentially arbitrary.

Anot⁴⁸her point of critique revolves around the dual financial reporting model mandated by GASB, which requires state and local governments to maintain two sets of books: government-wide statements using a long-term accrual perspective and governmental fund statements using a short-term, modified accrual perspective. Some ⁴⁷argue that this dual approach can be confusing and conceptually inconsistent, with some critics advocating for the abandonment of the modified accrual basis. Conce⁴⁵, ⁴⁶rns have also been raised about the scope of GASB's authority, particularly when it has attempted to set standards in non-financial or future financial areas, leading to disagreements among stakeholders. For e⁴³, ⁴⁴xample, a 2012 study commissioned by the Financial Accounting Foundation found broad support for GASB setting historical financial standards but controversy over its attempts to set standards for performance and forward-looking statements.

Furt⁴²hermore, the impact of GASB standards on reported pension liabilities has been a significant point of discussion. While standards like GASB 67 and 68 aimed to provide a more realistic picture of pension obligations by requiring recognition of unfunded liabilities on balance sheets, concerns have been voiced about the immediate perceived increase in reported debt, even if these liabilities are long-term and not immediately due.

G³⁹, ⁴⁰, ⁴¹ASB vs. Financial Accounting Standards Board (FASB)

The Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) are both independent, private-sector organizations overseen by the Financial Accounting Foundation (FAF). Howev³⁵, ³⁶, ³⁷, ³⁸er, their primary distinction lies in their jurisdiction and the specific entities they serve.

Wh¹⁵ile both boards strive to enhance the quality of financial reporting, their standards are tailored to the distinct needs and objectives of their respective audiences.

F¹³, ¹⁴AQs

What is the primary purpose of GASB?

The primary purpose of the Governmental Accounting Standards Board (GASB) is to establish and improve accounting and financial reporting standards for U.S. state and local governments. This ¹²ensures that financial reports are clear, consistent, transparent, and comparable, providing useful information to citizens, investors, and public officials.

¹¹Is GASB a government entity?

No, the Governmental Accounting Standards Board (GASB) is a private, non-governmental organization. It op¹⁰erates under the oversight of the Financial Accounting Foundation (FAF), which is also a private, not-for-profit organization.

⁸, ⁹Who must follow GASB standards?

State and local governments in the United States must follow the standards set by the Governmental Accounting Standards Board (GASB). This includes entities such as cities, counties, school districts, public universities, and other special-purpose governments.

⁵, ⁶, ⁷How do GASB standards impact taxpayers?

GASB standards enhance the transparency and accountability of state and local governments, allowing taxpayers to better understand how public funds are being used and managed. By re³, ⁴quiring comprehensive and comparable financial reports, GASB helps taxpayers and other stakeholders assess a government's financial health and stewardship of resources.¹, ²