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GASB Statement No. 34

GASB Statement No. 34 Overview Article
A Comment on Massachusetts Municipalities
A Commentary on Massachusetts School Districts
GASBS 34 Resume

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New Financial Reporting Model
By Mark D. Abrahams, CPA

The Governmental Accounting Standards Board (GASB) has issued GASB Statement No. 34, Basic Statements - and Management's Discussion and Analysis - for State and Local Governments, that will dramatically change financial reporting for all state and local governments including Massachusetts' cities and towns. The new financial reporting model will require the preparation of two new government-wide financial statements that use the accrual basis of accounting while maintaining the concept of fund-based statements. For the first time, governmental financial reports will have information about the full cost of providing services. Readers of governmental financial statements will have more and easier to understand information about the government. The new reporting model retains the current year fiscal accountability of the current model based on funds and adds operational accountability that focuses on long-term assets and liabilities and the change in net assets from one year to another.

The major impact on Massachusetts' municipalities is the inclusion of capital assets on the financial statements. The capital assets to be reported will include not only the items now (or should be) reported in the general fixed assets account group (i.e., land, buildings, equipment, improvements other than buildings), but also infrastructure assets (e.g., roads and sidewalks), whose reporting is optional under current GAAP. Capital assets will be brought onto the face of the financial statements (removed from the account group). Capital assets will be depreciated thereby impacting the results of operations. Capital assets, net of accumulated depreciation and debt, will affect the financial position or net assets of the government.

The original GASB position to report infrastructure on an historical cost basis has been modified to include higher level infrastructure accounting, 25 retroactive years, and options for preservation or condition assessment disclosures with the later more closely aligned with management systems. The infrastructure implementation date has also been deferred for four years after the reporting model implementation date. Smaller governments (revenues less than $10 million) do not need to report infrastructure retroactively.

The preliminary impact of this change on financial reporting follows. Two new government-wide accrual statements will be prepared to demonstrate operational accountability. These financial statements encompass both governmental and business-type activities (i.e. governmental and proprietary funds, but not fiduciary funds), as well as nonfiduciary component units.

  1. Statement of Net Assets. The basic government--wide statement of position will be the statement of net assets. The statement will use a net assets format (i.e., assets - liabilities = net assets) rather than the more traditional balance sheet format (i.e., assets = liabilities + equity). The "governmental activities" column will report all assets and liabilities related to governmen-tal fund activities, including assets and liabili-ties currently (or should be) reported in the two account groups.
  2. Statement of Activities. The other new basic government-wide accrual- financial statement is the statement of activities. This is the operating statement. The statement will use a net cost format. The statement first reports the total cost of a government's various functions or programs from all funding sources such as Public Works or Education. The statement then shows how a portion of the cost are financed by charges for services or by related grants and contri-butions. The difference between these two ele-ments is then reported as the net cost that must be financed through a government's own resources (e.g., taxes and non-program-related revenue).

Fund-based statements will continue to be presented to demonstrate fiscal accountability. Governmental funds will continue to be reported on the modified accrual basis for the general, special revenue, capital projects, and debt service funds. Enterprise funds will be reported on the accrual basis as "Business-type Activities" that meet one of three specific criteria with internal service funds consolidated into a summary column. Public purpose trust funds (i.e. stabilization and conservation trust funds) will be reclassified to special revenue funds and be reported on the modified accrual basis. A new type of fiduciary fund, the private purpose trust fund, will be established (i.e. public employee retirement systems) to report resources not available to support government programs. Public purpose trust funds will be reclassified as permanent funds and reported as governmental funds thus replacing both the expendable and nonexpendable trust funds found in current practice. Governmental funds reported on the modified accrual basis in the fund-based statements would be reconciled to the government-wide accrual statements on the face of the fund-based statements. The Department of Revenue will address specific reclassifications. The use of fiduciary funds will be limited to reporting resources that are not available to support government programs (i.e. agency and pension trust funds).

Any activity that charges a user fee may be reported as an enterprise fund. Activities must be reported as enterprise funds if (1) user fee revenues are restricted to pay debt service, (2) the government adopts a law to recover costs with fees, or (3) management sets a policy to recover operating and capital (depreciation or debt service) costs through fees. The difference between the new and old enterprise fund guidance is (1) policy - if it is the government's policy to recover costs through fees, then the activity is an enterprise fund (2) debt service is now included in the definition of capital cost recovery and (3) capital assets will now be an integral part of the financial statements.

The focus of fund reporting for the fund-based statements will be on major individual funds rather than on fund types, with nonmajor funds being reported in the aggregate for each category (i.e. governmental and proprietary). For this purpose, the general fund always will be considered to be a major fund. Other funds are "major" if the fund has at least 10 percent of the total assets, liabilities, revenues, or expenditures/expense of all funds within its category (i.e., governmental or enterprise) and the fund has at least 5 percent of the total of governmental and enterprise funds combined. These criteria are designed to serve as minimum standards. Governments would be free to classify other funds that did not meet these criteria as major funds if they believe presenting those funds in this manner would be of benefit to financial statement users. A reconciliation between government-wide accrual and fund-based modified accrual governmental funds financial statements on the face of the fund-based statements will also be required.

A Budget Comparison Statement will be reported as Required Supplemental Reporting with a reconciliation between the budgetary basis on the Budget Comparison and the government-wide accrual basis where the two bases differ on the face of the Budget Comparison will also be required. A Management Discussion and Analysis Section (MD&A) will also be prepared using narratives, charts and graphs to discuss the highlights of the financial statements, both government-wide and fund perspectives, and what has changed over the prior fiscal year. Notes will continue to be an integral part of the financial statements.

The new financial reporting model and infrastructure implementation dates (financial statements as of) will be as follows. For communities with total revenues (as of June 30, 1999):

Total Revenues Financial Reporting Model Infrastructure Reporting
Greater than $100 million June 30, 2002 June 30, 2006, retroactive 25 years
Between $10 and $99 million June 30, 2003 June 30, 2007, retroactive 25 years
Less than $10 million June 20, 2004 Prospectively from July 1, 1999

The Massachusetts Department of Revenue has projected that 25 Massachusetts communities will be required to implement the new model for FY 2002 statements, 187 communities for FY 2003 including all regional school districts, and 137 communities for FY 2004. The Department of Revenue will also be issuing implementation guidance in the forthcoming months.

GASB Statement No. 34 Overview Article
A Comment on Massachusetts Municipalities
A Commentary on Massachusetts School Districts

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