Potential Expansion of Major Fund Reporting

Prior to GASB Statement No. 34, a state or local government’s basic financial statements presented data exclusively by fund type. Financial statement users who wanted information on individual funds (other than the General Fund) had to look to the financial subsection of the comprehensive annual financial report (CAFR) to obtain individual fund data, which meant such information was unavailable in the case of governments that did not prepare a CAFR. Further, financial statement auditors typically provide only “in-relation-to” coverage, rather than full audit coverage, for combining and individual fund financial statements. That is, auditors offer no opinion on the fair presentation of the fund financial statements as such, but only on the fairness of their presentation “in relation to” the basic financial statements, based solely on the audit of the latter.

The fact that separate funds are established in the first place is evidence that audited individual fund data must be important to at least some financial statement users. As a practical matter, however, most governments have too many funds to make it feasible to include audited information on all of them within the basic financial statements. Therefore, as a compromise, GASB Statement No. 34 required that individual fund data be reported in the basic financial statements, but only for a government’s major funds. As a result, individual fund data automatically became available for the most significant governmental and enterprise funds, even if a government did not prepare a CAFR. Furthermore, the inclusion of individual fund data as part of the basic financial statements raised the level of audit coverage for the individual funds thus included (which are audited as separate financial statements in their own right).

GASB Statement No. 34 expressly permits governments to classify any governmental or enterprise fund as a major fund. It also mandates that individual governmental or enterprise funds be reported as major funds if they meet a specified quantitative threshold (the "10 percent" and "5 percent" rules). In practice, it is uncommon for debt service funds to meet this threshold, meaning they most often are not included as major funds in the basic financial statements. Financial statement users with a special interest in debt service funds see this outcome as a deficiency and have drawn attention to it. Some have even  argued that individual debt service funds should automatically be classified as major funds, as is now the case for the General Fund. Such a change would ensure the availability of information in individual debt service funds even if a government did not issue a CAFR. At the same time it would raise the level of audit assurance significantly for individual debt service funds.

Potential Reclassification of Fund Financial Statements

GASB Statement No. 34 requires a government’s basic financial statements to include both government-wide financial statements and fund financial statements, with both being of equal rank. That is, fund financial statements are not supporting schedules for the government-wide financial statements, but rather full-fledged financial statements in their own right. While few would not recognize the importance of fund data for many financial statement users, some have argued that fund financial statements should be presented as required supplementary information (RSI) rather than as part of the basic financial statements. Such a change, they argue, would be no different from the change in budgetary reporting that took place as a result of GASB Statement No. 34. That is, prior to that statement, budgetary comparisons had to be presented as part of the basic financial statements, whereas GASB Statement No. 34 reclassified budgetary comparisons as RSI (although it did leave governments the option of continuing to report budgetary comparisons as basic financial statements if they wished to do so).

GASB Statement No. 34 took the position that to be fully accountable in its general purpose external financial reporting, a government needed to demonstrate both operational accountability and fiscal accountability. That pronouncement went on to explain that fund financial reporting was particularly useful for accomplishing the latter objective. RSI, by definition, is not part of the basic financial statements, meaning that failure to provide RSI would not prevent a government from receiving an unmodified opinion on the fair presentation of its basic financial statements. Likewise, as explained earlier, RSI is unaudited, meaning that auditors do not test the data, nor do they offer an opinion on its fair presentation. These factors raise serious questions as to whether fund financial statements presented as RSI would be sufficient to achieve the GASB’s objective of ensuring that state and local government financial statements demonstrate fiscal as well as operational accountability.

Potential Modifications to The Current Financial Resources Measurement Focus

Governmental funds have traditionally employed their own unique current financial resources measurement focus, which focuses on near-term inflows and outflows of spendable resources. Consistent with that measurement focus, the governmental fund balance sheet traditionally has excluded most long-term liabilities (for example, unmatured bonds and notes) and most assets that are not available to liquidate near-term liabilities (for example, capital assets).

Some have argued that the current financial resources measurement focus, in its current form, lacks conceptual consistency in theory and application because it reports certain assets that are not available to liquidate near-term liabilities (for example, the long-term portion of receivables) and certain liabilities that will not be liquidated in the near term (for example, tax anticipation notes). In response to these criticisms, the GASB issued a preliminary views (PV) document that proposed a modified form of the current financial resources measurement focus that would eliminate these perceived inconsistencies (near term financial resources measurement focus).

This issue will be discussed again in the context of the GASB review of Statement No. 34. Some may argue that they could only support the continued inclusion of governmental fund financial statements within the basic financial statements if changes along these lines were made.

Potential Limitation on The Presentation of Budgetary Comparisons

GASB Statement No. 34 required that budgetary comparisons for the general fund and major special revenue funds be provided as RSI, but maintained the option of presenting them instead as a basic financial statement. The Government Finance Officers Association (GFOA) specifically addressed this latter option in its 2000 Best Practice, “Locating Budget-to-Actual Comparisons within the Basic Financial Statements.” In that Best Practice, the GFOA observed that:

Adherence to the budget is of paramount importance to the majority of a government’s stakeholders. Indeed, most of a government’s key decisions are based in one form or another upon the budget. Given the importance attached to the budget, it is essential that stakeholders be provided reasonable assurance that a government has maintained budgetary compliance. Until GASB Statement No. 34, this assurance has been provided by the inclusion of the budget to actual comparison statement within the audited financial statements. Although under generally accepted auditing standards (GAAS) auditors are required to consider the effect of material instances of non-compliance, the GFOA believes that placing budgetary information in the unaudited RSI significantly weakens this important control.

Accordingly, the GFOA Best Practice went on to recommend that “all state and local governments present mandated budgetary comparisons as part of their audited basic financial statements.” Despite this recommendation, only a minority of the governments that participate in the GFOA’s Certificate of Achievement for Excellence in Financial Reporting Program report their budgetary comparison for the general fund and major special revenue funds as a basic financial statement.

A number of respondents to the due-process documents that led to GASB Statement No. 34 criticized the Board for allowing governments the option of voluntarily presenting the budgetary comparison as a basic financial statement rather than as RSI. Given the relatively small number of governments that have taken advantage of this option, it appears quite likely that these critics will renew their efforts to eliminate the budgetary comparison from the basic financial statements.

Other Potential Issues

n addition to the items already discussed, it is clear that a number of other issues will likely be raised in the course of the Board’s upcoming re-examination of GASB Statement No. 34:

• MD&A. GASB Statement No. 34 directs governments to include within management’s discussion and analysis (MD&A) a description of any currently known facts, decisions, or conditions that are expected to have a significant effect on net position or results of operations. In practice, the practical application of this guidance has remained unclear to many. Also, a number of critics complain of needless repetition between MD&A and other required disclosures.
• Government-wide statement of activities. There are some arguments that the format of the government-wide statement of activities is difficult for many financial statement users to understand and that it is not conducive to modeling or trend analysis.
• Extraordinary and special items. Questions have been raised regarding the usefulness of reporting extraordinary items and special items.
• Government-wide statement of cash flows. Some maintain that a complete set of government-wide financial statements should include a statement of cash flows.
• Operating vs. non-operating revenues and expenses. Proprietary funds distinguish operating revenues and expenses from non-operating items. Many have expressed a desire for an authoritative definition of operating revenues and expenses. Others question the usefulness of making this distinction at all.
• Segment reporting. Some have questioned whether the level of detail required for segment data in the notes to the financial statements is sufficient for the needs of its intended users.