Handbook of

Governmental
Accounting
PUBLIC ADMINISTRATION AND PUBLIC POLICY

A Comprehensive Publication Program

EDITOR-IN-CHIEF

EVAN M. BERMAN
Distinguished University Professor
J. William Fulbright Distinguished Scholar
National Chengchi University
Taipei, Taiwan

Founding Editor

JACK RABIN

1. Public Administration as a Developing Discipline,

Robert T. Golembiewski
2. Comparative National Policies on Health Care, Milton I. Roemer, M.D.
3. Exclusionary Injustice: The Problem of Illegally Obtained Evidence,
Steven R. Schlesinger
5. Organization Development in Public Administration, edited by
Robert T. Golembiewski and William B. Eddy
7. Approaches to Planned Change, Robert T. Golembiewski
8. Program Evaluation at HEW, edited by James G. Abert
9. The States and the Metropolis, Patricia S. Florestano
and Vincent L. Marando
11. Changing Bureaucracies: Understanding the Organization before
Selecting the Approach, William A. Medina
12. Handbook on Public Budgeting and Financial Management, edited by
Jack Rabin and Thomas D. Lynch
15. Handbook on Public Personnel Administration and Labor Relations,
edited by Jack Rabin, Thomas Vocino, W. Bartley Hildreth,
and Gerald J. Miller
19. Handbook of Organization Management, edited by William B. Eddy
22. Politics and Administration: Woodrow Wilson and American Public
Administration, edited by Jack Rabin and James S. Bowman
23. Making and Managing Policy: Formulation, Analysis, Evaluation,
edited by G. Ronald Gilbert
25. Decision Making in the Public Sector, edited by Lloyd G. Nigro
26. Managing Administration, edited by Jack Rabin, Samuel Humes,
and Brian S. Morgan
27. Public Personnel Update, edited by Michael Cohen
and Robert T. Golembiewski
28. State and Local Government Administration, edited by Jack Rabin
and Don Dodd
29. Public Administration: A Bibliographic Guide to the Literature,
Howard E. McCurdy
31. Handbook of Information Resource Management, edited by Jack Rabin
and Edward M. Jackowski
32. Public Administration in Developed Democracies: A Comparative Study,
edited by Donald C. Rowat
33. The Politics of Terrorism: Third Edition, edited by Michael Stohl
34. Handbook on Human Services Administration, edited by Jack Rabin
and Marcia B. Steinhauer
36. Ethics for Bureaucrats: An Essay on Law and Values, Second Edition,
John A. Rohr
37. The Guide to the Foundations of Public Administration,
Daniel W. Martin
39. Terrorism and Emergency Management: Policy and Administration,
William L. Waugh, Jr.
40. Organizational Behavior and Public Management: Second Edition,
Michael L. Vasu, Debra W. Stewart, and G. David Garson
43. Government Financial Management Theory, Gerald J. Miller
46. Handbook of Public Budgeting, edited by Jack Rabin
49. Handbook of Court Administration and Management, edited by
Steven W. Hays and Cole Blease Graham, Jr.
50. Handbook of Comparative Public Budgeting and Financial Management,
edited by Thomas D. Lynch and Lawrence L. Martin
53. Encyclopedia of Policy Studies: Second Edition, edited by
Stuart S. Nagel
54. Handbook of Regulation and Administrative Law, edited by
David H. Rosenbloom and Richard D. Schwartz
55. Handbook of Bureaucracy, edited by Ali Farazmand
56. Handbook of Public Sector Labor Relations, edited by Jack Rabin,
Thomas Vocino, W. Bartley Hildreth, and Gerald J. Miller
57. Practical Public Management, Robert T. Golembiewski
58. Handbook of Public Personnel Administration, edited by Jack Rabin,
Thomas Vocino, W. Bartley Hildreth, and Gerald J. Miller
60. Handbook of Debt Management, edited by Gerald J. Miller
61. Public Administration and Law: Second Edition, David H. Rosenbloom
and Rosemary O’Leary
62. Handbook of Local Government Administration, edited by
John J. Gargan
63. Handbook of Administrative Communication, edited by
James L. Garnett and Alexander Kouzmin
64. Public Budgeting and Finance: Fourth Edition, edited by
Robert T. Golembiewski and Jack Rabin
67. Handbook of Public Finance, edited by Fred Thompson
and Mark T. Green
68. Organizational Behavior and Public Management: Third Edition,
Michael L. Vasu, Debra W. Stewart, and G. David Garson
69. Handbook of Economic Development, edited by Kuotsai Tom Liou
70. Handbook of Health Administration and Policy, edited by
Anne Osborne Kilpatrick and James A. Johnson
72. Handbook on Taxation, edited by W. Bartley Hildreth
and James A. Richardson
73. Handbook of Comparative Public Administration in the Asia-Pacific
Basin, edited by Hoi-kwok Wong and Hon S. Chan
74. Handbook of Global Environmental Policy and Administration, edited by
Dennis L. Soden and Brent S. Steel
75. Handbook of State Government Administration, edited by
John J. Gargan
76. Handbook of Global Legal Policy, edited by Stuart S. Nagel
78. Handbook of Global Economic Policy, edited by Stuart S. Nagel
79. Handbook of Strategic Management: Second Edition, edited by
Jack Rabin, Gerald J. Miller, and W. Bartley Hildreth
80. Handbook of Global International Policy, edited by Stuart S. Nagel
81. Handbook of Organizational Consultation: Second Edition, edited by
Robert T. Golembiewski
82. Handbook of Global Political Policy, edited by Stuart S. Nagel
83. Handbook of Global Technology Policy, edited by Stuart S. Nagel
84. Handbook of Criminal Justice Administration, edited by
M. A. DuPont-Morales, Michael K. Hooper, and Judy H. Schmidt
85. Labor Relations in the Public Sector: Third Edition, edited by
Richard C. Kearney
86. Handbook of Administrative Ethics: Second Edition, edited by
Terry L. Cooper
87. Handbook of Organizational Behavior: Second Edition, edited by
Robert T. Golembiewski
88. Handbook of Global Social Policy, edited by Stuart S. Nagel
and Amy Robb
89. Public Administration: A Comparative Perspective, Sixth Edition,
Ferrel Heady
90. Handbook of Public Quality Management, edited by Ronald J. Stupak
and Peter M. Leitner
91. Handbook of Public Management Practice and Reform, edited by
Kuotsai Tom Liou
93. Handbook of Crisis and Emergency Management, edited by
Ali Farazmand
94. Handbook of Comparative and Development Public Administration:
Second Edition, edited by Ali Farazmand
95. Financial Planning and Management in Public Organizations,
Alan Walter Steiss and Emeka O. Cyprian Nwagwu
96. Handbook of International Health Care Systems, edited by Khi V. Thai,
Edward T. Wimberley, and Sharon M. McManus
97. Handbook of Monetary Policy, edited by Jack Rabin
and Glenn L. Stevens
98. Handbook of Fiscal Policy, edited by Jack Rabin and Glenn L. Stevens
99. Public Administration: An Interdisciplinary Critical Analysis, edited by
Eran Vigoda
100. Ironies in Organizational Development: Second Edition, Revised
and Expanded, edited by Robert T. Golembiewski
101. Science and Technology of Terrorism and Counterterrorism, edited by
Tushar K. Ghosh, Mark A. Prelas, Dabir S. Viswanath,
and Sudarshan K. Loyalka
102. Strategic Management for Public and Nonprofit Organizations,
Alan Walter Steiss
103. Case Studies in Public Budgeting and Financial Management:
Second Edition, edited by Aman Khan and W. Bartley Hildreth
104. Handbook of Conflict Management, edited by William J. Pammer, Jr.
and Jerri Killian
105. Chaos Organization and Disaster Management, Alan Kirschenbaum
106. Handbook of Gay, Lesbian, Bisexual, and Transgender Administration
and Policy, edited by Wallace Swan
107. Public Productivity Handbook: Second Edition, edited by Marc Holzer
108. Handbook of Developmental Policy Studies, edited by
Gedeon M. Mudacumura, Desta Mebratu and M. Shamsul Haque
109. Bioterrorism in Medical and Healthcare Administration, Laure Paquette
110. International Public Policy and Management: Policy Learning Beyond
Regional, Cultural, and Political Boundaries, edited by David Levi-Faur
and Eran Vigoda-Gadot
111. Handbook of Public Information Systems, Second Edition, edited by
G. David Garson
112. Handbook of Public Sector Economics, edited by Donijo Robbins
113. Handbook of Public Administration and Policy in the European Union,
edited by M. Peter van der Hoek
114. Nonproliferation Issues for Weapons of Mass Destruction,
Mark A. Prelas and Michael S. Peck
115. Common Ground, Common Future: Moral Agency in Public
Administration, Professions, and Citizenship, Charles Garofalo
and Dean Geuras
116. Handbook of Organization Theory and Management: The Philosophical
Approach, Second Edition, edited by Thomas D. Lynch
and Peter L. Cruise
117. International Development Governance, edited by
Ahmed Shafiqul Huque and Habib Zafarullah
118. Sustainable Development Policy and Administration, edited by
Gedeon M. Mudacumura, Desta Mebratu, and M. Shamsul Haque
119. Public Financial Management, edited by Howard A. Frank
120. Handbook of Juvenile Justice: Theory and Practice, edited by
Barbara Sims and Pamela Preston
121. Emerging Infectious Diseases and the Threat to Occupational Health
in the U.S. and Canada, edited by William Charney
122. Handbook of Technology Management in Public Administration,
edited by David Greisler and Ronald J. Stupak
123. Handbook of Decision Making, edited by Göktuğ Morçöl
124. Handbook of Public Administration, Third Edition, edited by Jack Rabin,
W. Bartley Hildreth, and Gerald J. Miller
125. Handbook of Public Policy Analysis, edited by Frank Fischer,
Gerald J. Miller, and Mara S. Sidney
126. Elements of Effective Governance: Measurement, Accountability
and Participation, edited by Kathe Callahan
127. American Public Service: Radical Reform and the Merit System,
edited by James S. Bowman and Jonathan P. West
128. Handbook of Transportation Policy and Administration, edited by
Jeremy Plant
129. The Art and Practice of Court Administration, Alexander B. Aikman
130. Handbook of Globalization, Governance, and Public Administration,
edited by Ali Farazmand and Jack Pinkowski
131. Handbook of Globalization and the Environment, edited by Khi V. Thai,
Dianne Rahm, and Jerrell D. Coggburn
132. Personnel Management in Government: Politics and Process,
Sixth Edition, Norma M. Riccucci and Katherine C. Naff
133. Handbook of Police Administration, edited by Jim Ruiz
and Don Hummer
134. Handbook of Research Methods in Public Administration,
Second Edition, edited by Kaifeng Yang and Gerald J. Miller
135. Social and Economic Control of Alcohol: The 21st Amendment
in the 21st Century, edited by Carole L. Jurkiewicz
and Murphy J. Painter
136. Government Public Relations: A Reader, edited by Mordecai Lee
137. Handbook of Military Administration, edited by Jeffrey A. Weber
and Johan Eliasson
138. Disaster Management Handbook, edited by Jack Pinkowski
139. Homeland Security Handbook, edited by Jack Pinkowski
140. Health Capital and Sustainable Socioeconomic Development, edited by
Patricia A. Cholewka and Mitra M. Motlagh
141. Handbook of Administrative Reform: An International Perspective,
edited by Jerri Killian and Niklas Eklund
142. Government Budget Forecasting: Theory and Practice, edited by
Jinping Sun and Thomas D. Lynch
143. Handbook of Long-Term Care Administration and Policy, edited by
Cynthia Massie Mara and Laura Katz Olson
144. Handbook of Employee Benefits and Administration, edited by
Christopher G. Reddick and Jerrell D. Coggburn
145. Business Improvement Districts: Research, Theories, and Controversies,
edited by Göktuğ Morçöl, Lorlene Hoyt, Jack W. Meek,
and Ulf Zimmermann
146. International Handbook of Public Procurement, edited by Khi V. Thai
147. State and Local Pension Fund Management, Jun Peng
148. Contracting for Services in State and Local Government Agencies,
William Sims Curry
149. Understanding Research Methods: A Guide for the Public and Nonprofit
Manager, Donijo Robbins
150. Labor Relations in the Public Sector, Fourth Edition, Richard Kearney
151. Performance-Based Management Systems: Effective Implementation
and Maintenance, Patria de Lancer Julnes
152. Handbook of Governmental Accounting, edited by Frederic B. Bogui

Available Electronically

Principles and Practices of Public Administration, edited by

Jack Rabin, Robert F. Munzenrider, and Sherrie M. Bartell

PublicADMINISTRATIONnetBASE
Handbook of
Governmental
Accounting

Frederic B. Bogui

Boca Raton London New York

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To My Dearest Dr. Victoire M. Bogui
Contents

Preface............................................................................................................ xv
Acknowledgments........................................................................................xvii
About the Editor...........................................................................................xix
Contributors..................................................................................................xxi
1. The Growth of GAAP..............................................................................1
G. ROBerT SMITH, Jr.

2. Progressive Government Budgeting......................................................71

GeraLD J. MILLer aND DONIjO ROBBINs

3. Expenditures and Revenues in U.S. Governments..............................129

ZHIrONg ZHaO

4. Fund Accounting.................................................................................149
FreDerIc B. BOguI

5. The General Fund................................................................................ 161

ROBerT S. KraVcHuk

6. Debt Service Funds.............................................................................. 191

DWaYNe N. McSWaIN

7. Capital Projects Funds........................................................................215

BarBara CHaNeY

8. Proprietary Funds...............................................................................249
JOHN D. WONg, CarL D. EksTrOM, STepHeN COBerLeY, aND
VINceNT MILLer

9. Fiduciary Funds................................................................................... 317

JuN PeNg

xiii
xiv  Contents

10. Governmental Financial Reporting....................................................339

RaNDaLL L. KINNersLeY

11. Government-Wide Financial Benchmarks for State Governments......389

CraIg L. JOHNsON

12. Auditing Governmental Entities........................................................ 409

SuzaNNe LOWeNsOHN aND KrIsTeN ReILLY

13. Federal Accounting and Financial Reporting.....................................439

RIcHarD FONTeNrOse

14. International Public Sector Accounting Standards.............................491

Jesse HugHes

Index............................................................................................................ 519
Preface

It is in compliance with the earnest requests of colleagues and friends that I

have embarked on the task of editing a handbook of governmental accounting.
Practitioners in the private sector, public administrators, and students in colleges
and universities will find this handbook a useful reference. We hope our readers
from a diverse range of fields will use it to gain understanding and familiarity with
government accounting concepts.
Drawing on the expertise of a distinguished group of contributors, the hand-
book begins with in-depth discussions of the growth of Generally Accepted
Accounting Principles (GAAP), budgeting, revenues, and expenditures in U.S.
governments that highlight greater levels of accountability in government finance.
The book covers governmental funds, proprietary funds, fiduciary funds, financial
reporting, and the latest developments in auditing requirements for governmen-
tal entities. While the majority of the chapters relate to state and local govern-
ments in the United States, the book also provides insight into federal accounting
and international public sector accounting standards to introduce readers to the
broader scope of government accounting. This handbook is a complete manual to
a wide range of governmental accounting topics that fall under the Governmental
Accounting Standards Board (GASB) Statement 34 reporting model, and subse-
quent Statements, which have significantly changed governmental financial state-
ments presentation.
The chief objective of this handbook is to contribute to the readers’ appreciation
and understanding of governmental accounting. The handbook’s contents reflect
the increasing complexities in this dynamic field.
The contributing authors made it possible to bring this handbook to fruition.
As the editor, I have been enriched by their scholarship and technical skills, and to
each of the contributors I tender my great and sincere appreciation.

Frederic B. Bogui

xv
Acknowledgments

I am especially grateful to Terry Patton at Midwestern State University who pro-

vided many leads to find a number of contributors for this handbook.

I am also grateful to Prof. Gerald J. Miller at Arizona State University. Jerry is a

mentor and a supporter of this project.

I extend my thanks to Prof. Marc Holzer at Rutgers University. Dr. Holzer is the dean
of the School of Public Affairs and Administration at Rutgers University–Newark.

And I would like to remember the late Dr. Jack Rabin, founding editor of the
Public Administration and Public Policy series.

xvii
About the Editor

Frederic B. Bogui is a senior university lecturer of accounting and finance at New

Jersey Institute of Technology. His doctoral work at Rutgers University–Newark
focused on public finance. A management consultant, Dr. Bogui is a certified pub-
lic accountant (CPA) and a member of the American Institute of Certified Public
Accountants (AICPA) and the New Jersey Society of CPAs (NJSCPA).

xix
Contributors

Frederic B. Bogui, Ph.D., CPA Jesse Hughes, Ph.D., CPA, CIA,

School of Management CGFM
New Jersey Institute of Technology Professor Emeritus of Accounting
Newark, New Jersey Old Dominion University
Norfolk, Virginia
Barbara Chaney, Ph.D., CPA Craig L. Johnson, Ph.D.
School of Business Administration School of Public and Environmental
University of Montana Affairs
Missoula, Montana Indiana University
Bloomington, Indiana
Stephen Coberley, MPA Randall L. Kinnersley, Ph.D., CPA,
Certified Public Finance Officer CGFM
(CPFO) Department of Accounting
City of Wichita Gordon Ford College of Business
Wichita, Kansas Western Kentucky University
Bowling Green, Kentucky
Carl D. Ekstrom, Ph.D. Robert S. Kravchuk, Ph.D., CMA
School of Public Administration Department of Political Science
University of Nebraska at Omaha University of North
Omaha, Nebraska Carolina–Charlotte
Charlotte, North Carolina
Richard Fontenrose, CPA, CGFM Suzanne Lowensohn, Ph.D., CPA
Federal Accounting Standards College of Business
Advisory Board Colorado State University
Washington, DC Fort Collins, Colorado

xxi
xxii  Contributors

Dwayne N. McSwain, Ph.D., CPA Donijo Robbins, Ph.D.

Department of Accounting School of Public and Nonprofit
Jennings A. Jones College of Business Administration
Middle Tennessee State University Grand Valley State University
Murfreesboro, Tennessee Grand Rapids, Michigan

Gerald J. Miller, Ph.D.

G. Robert Smith, Jr., Ph.D., CPA,
School of Public Affairs
CGFM
Arizona State University
Department of Accounting
Phoenix, Arizona
Jennings A. Jones College of Business
Vincent Miller, MPA Middle Tennessee State University
Office of Institutional Research Murfreesboro, Tennessee
Wichita State University
Wichita, Kansas John D. Wong, J.D., Ph.D.
Jun Peng, Ph.D. Hugo Wall School of Urban and
School of Public Administration Public Affairs
and Policy Wichita State University
University of Arizona Wichita, Kansas
Tucson, Arizona
Zhirong Zhao, Ph.D.
Kristen Reilly, CPA Hubert H. Humphrey Institute of
College of Business Public Affairs
Colorado State University University of Minnesota
Fort Collins, Colorado Minneapolis, Minnesota
Chapter 1

The Growth of GAAP

G. Robert Smith, Jr.
Middle Tennessee State University, Jennings A. Jones College of Business,
Department of Accounting

Contents
1.1 GAAP: The Early Years.................................................................................2
1.2 The Growth of GAAP: The Middle Years......................................................3
1.3 The Growth of GAAP: The GASB................................................................7
1.3.1 The First Board................................................................................10
1.3.2 The GASB Gets Rolling...................................................................11
1.4 The 5-Year Review.......................................................................................22
1.5 The Original Board’s “Last Stand”..............................................................24
1.6 New Board, New Issues, New Standards....................................................27
1.7 A New Board—and a Whole New Ball Game............................................42
1.7.1 Changing of the Guard....................................................................42
1.7.2 The Preliminary to the Big Show.....................................................43
1.7.3 The New Reporting Model..............................................................44
1.7.4 Impact on the Funds Statements......................................................49
1.7.5 The Change in Focus.......................................................................52
1.7.6 The Government-Wide Financial Statements...................................54
1.7.7 Notes to the Financial Statements....................................................57
1.7.8 MD&A and Other RSI...................................................................58
1.8 More Recent GASB Standards....................................................................60
1.9 Conclusion..................................................................................................64

1
2 n Handbook of Governmental Accounting

1.1 GAAP: The Early Years

Seventy-five years ago, there were no generally accepted accounting principles
(GAAP)—at least as we know them today—in the United States. Some might say
the lack of GAAP was at least a contributing factor in the stock market crash of
1929. With the ensuing Great Depression and America’s attempts to recover from
it, some felt that it was time to get the accounting house in order.
Among the many efforts of the Franklin Delano Roosevelt administration to
help get the country on the road to recovery was designating a federal agency
to have the authority and responsibility to set GAAP. In the 1933 Securities
Act, this agency was the Federal Trade Commission. Having been around since
1914, this agency seemed to be a natural for this designation. However, it was
soon realized that another organization with broader powers was necessary. In the
1934 Securities Act, Congress created just such an organization: the Securities and
Exchange Commission (SEC).
Interestingly, the SEC did not immediately act on setting accounting stan-
dards. Instead, the agency adopted an approach of giving the authority to set these
standards (while retaining the responsibility) to the private sector. In existence at
this time was an organization known as the American Institute of Accountants
(AIA). This organization was already administering the certified public accoun-
tants examination as well as attempting to set auditing standards for the United
States. The SEC felt the AIA would be a natural organization for this new authority
for setting accounting standards. As a result, it fell to the AIA to get the ball rolling
on GAAP.
The history of GAAP can be summarized as shown in Figure 1.1. As you can
see, there were two sectors of the economy that required GAAP: the private sec-
tor (made up of publicly traded companies and other business entities) and the
public sector (consisting of state and local governments, or SLGs). As discussed
previously, the AIA assumed the authority for the private sector. It established the
Committee on Accounting Procedure (CAP) to establish GAAP. At the same time,
a government organization in Chicago, the Municipal Finance Officers Association
(MFOA), assumed the authority for the public sector. The MFOA created the
National Committee on Municipal Accounting (NCMA).
Rarely, if ever, did these two organizations—the CAP and NCMA—interact.
In theory, the CAP could have set accounting standards that applied to the public
sector, but it did not seem to do so. Also, the NCMA could have adopted the CAP
standards for the public sector, but the limited information available indicates that
this did not happen. Unfortunately, much of what the NCMA did has been lost
(for reasons that will be explained shortly). However, we do have a good record of
some of the organization’s bulletins that established early guidelines of the prin-
ciples of municipal accounting.
The Growth of GAAP n 3

Private Public
Sector Sector
Committee on 1934 National Committee
Accounting on Municipal
Procedure Accounting

National Committee on
1951 Governmental Accounting
Bulletin No. 14
Accounting Principles
1959
Board
1968 GAAFR 68

FASB 1973 National Council on

1975 Governmental
Accounting
1984 GASB
Other Influential Organizations
AAA ASB MFOA/GFOA NACUBO
IRS AIA/AICPA NASACT

Figure 1.1 Development of governmental and financial accounting standards.

1.2 The Growth of GAAP: The Middle Years

The CAP was in existence for 25 years. It eventually issued 51 accounting research
bulletins for the private sector. In 1959, some interesting name changes occurred
in the private sector accounting standard-setting process. The old AIA became the
American Institute of Certified Public Accountants (AICPA). The AICPA then
reconstituted the CAP as the Accounting Principles Board (APB).
A similar name change had occurred in the public sector 8 years earlier. In an
apparent effort to broaden the perspective of the NCMA, the MFOA changed its
name to the National Committee on Governmental Accounting (NCGA). Other
than changing “municipal” to “governmental,” little else seems to have changed. The
two organizations—APB and NCGA—went about setting their accounting stan-
dards pretty much the same way as the CAP and NCMA had done previously.
A very significant event occurred in the public sector in 1968: the MFOA
published the first edition of Governmental Accounting, Auditing, and Financial
Reporting. This volume, known both as the GAAFR and as the “Blue Book”
(because of its color), represented a milestone in GAAP process in the public sector.
As stated in the foreword, the GAAFR was
4 n Handbook of Governmental Accounting

… the eighteenth publication of the National Committee on

Governmental Accounting (NCGA), combines and revises the fol-
lowing publications: Municipal Accounting and Auditing (1951), and
A Standard Classification of Municipal Accounts (1953)…. There is now
presented in one volume most of the NCGA’s releases over the many
years of its existence, modified to meet the current needs. [GAAFR,
1968, iii]

Indeed, this “one volume” provided a compilation of GAAP for the public sector,
much as ARB #43 provided a restatement of all previously issued accounting research
bulletins (ARBs) of the CAP. In 14 chapters and 5 appendices, the GAAFR

NN Established the basic principles of governmental accounting

NN Outlined on how to use the various fund types and account groups
NN Described what the annual financial report should look like
NN Discussed how to audit governments

Just how broadly accepted this first edition of the Blue Book was can be seen in the
foreword of the second edition (published by the MFOA in 1980). It states that over
40,000 copies were printed and distributed in a 12-year period. The foreword also
notes that, “Unlike 1968 GAAFR, this text neither establishes nor authoritatively
interprets GAAP for governments.” This is a somewhat indirect way of indicating
that the 1968 edition was authoritative GAAP.
However, this authoritative level didn’t last long. In 1973, the MFOA made a
name change very similar to the one in 1954. The NCGA was reorganized, this
time changing only one word in its name—“Committee” to “Council.”
The first action of the newly renamed standard-setter was to issue NCGA
Interpretation No. 1, GAAFR and the AICPA Audit Guide. This interpretation was
necessitated by a challenge to the 1968 GAAFR by the AICPA Audit Guide, Audits
of State and Local Governmental Units (ASLGU), issued by the AICPA in 1974. In
this Audit Guide, the legal compliance principle of governmental accounting stated
the following:

A governmental accounting system should incorporate such account-

ing information in its records as necessary to make it possible to both
(a) show compliance with all legal provisions and (b) present fairly the
financial position and results of operations of the respective funds and
financial position of the self-balancing account groups of the govern-
mental unit in conformity with generally accepted accounting prin-
ciples. Where these two objectives are in conflict, generally accepted
accounting principles take precedence in financial reporting. [ASLGU,
1974, pp. 12–13, emphasis added]
The Growth of GAAP n 5

This position was in direct conflict with the Accounting Prin­ciples and Legal
Provisions laid out in the 1968 GAAFR: “If there is a conflict between legal pro-
visions and generally accepted accounting principles applicable to governmental
units, legal provisions must take precedence” [GAAFR, 1968, p. 4, emphasis added].
NCGA Interpretation 1 (NCGAI 1) resolved this conflict by establishing a balance
between the 1968 GAAFR and the 1974 ASLGU. It restated the principle to read

A governmental accounting system must make it possible both (a) to present

fairly and with full disclosure the financial position and results of opera-
tions of the funds and account groups of the governmental unit in confor-
mity with generally accepted accounting principles; and (b) to determine
and demonstrate compliance with finance-related legal and contractual
provisions. [Adapted from NCGA Statement 1, emphasis added]

Thus was resolved the first—but not the last—conflict between accounting stan-
dard-setters and audit standard-setters.
Obviously, the NCGA didn’t stop with Interpretation 1. NCGA Statement 1,
Governmental Accounting and Financial Reporting Principles (NCGAS 1), followed
a few years later (issued in March 1979 and effective for fiscal years ending after
June 30, 1980). This first standard restated the principles in the 1968 GAAFR and
replaced all the predecessor governmental accounting standards issued in the pub-
lic sector, including NCGAI 1. It is the reason why copies of many of these previous
standards have been lost. No one saw the need to keep standards that were no lon-
ger in effect. In fact, when the Governmental Accounting Standards Board (GASB)
issued its first Original Pronouncements volume (in 1991, after the GASB had been
in existence for 7 years), the oldest standard in it was NCGAS 1. In a conversation
with a GASB staff member, I asked where the “old stuff” was—the things that
came before NCGAS 1. The staff member responded that since NCGAS 1 replaced
all that came before, no one would care except an academic. To which, with arms
outstretched, I responded, “So?” With a chuckle, the staff member just shook his
head and walked away.
Another contribution of NCGAS 1 was the Financial Reporting Pyramid, shown
in Figure 1.2. This pyramid graphically demonstrated what an annual report of a
government should look like. It also showed how detailed the information would
be. The most detailed information is at bottom of the pyramid—the accounting
system. From this starting point, as we head up the pyramid, the information gets
more and more summarized, but all of it comes from the accounting system. The
next level is the schedules. Government annual reports may contain many sched-
ules, depending on the type of report being prepared. The next level is the individual
fund and account group statements. These statements were essential to prepare the
statements found on the upper levels, but governments rarely included the individ-
ual fund statements in their annual reports as they provided no more information
6 n Handbook of Governmental Accounting

Condensed
Summary Data

GP
Combined Statements,

FS
Notes, and
Required Supplementary
Information
FR

Combining Statements
CA

Individual Fund and Account Group Statements

Schedules

Transaction Data
(the accounting system)

Figure 1.2 The Financial Reporting Pyramid. (Used with permission of the
Financial Accounting Foundation.)

than what was found in the combining statements. Combining statements were
necessary any time a government had more than one fund of any fund type (special
revenue funds, capital projects funds, debt service funds, enterprise funds, internal
service funds, pension trust funds, nonexpendable trust funds, expendable trust
funds, and agency funds). Only the General Fund would not have a combining
statement since only one General Fund is allowed per government. The next step
up the pyramid was the General Purpose Financial Statements (GPFS). The GPFS
presented the combined statements (in which each fund type made up a column in
the report), the notes to the financial statements, and required supplementary infor-
mation. Finally, the top of the pyramid was to contain condensed summary data,
but this portion of the pyramid was never defined by the NCGA or, later, by the
GASB. The GPFS represented the minimum financial statements a government
could prepare for external use. However, governments were encouraged to prepare a
Comprehensive Annual Financial Report (CAFR). The CAFR included the GPFS
and went as far down the pyramid as was necessary for full disclosure. Normally,
the CAFR would include the GPFS, combining statements, account group state-
ments, and some schedules.
Statement 1 was followed by six more standards and 10 additional interpreta-
tions. The standards addressed a variety of issues, including the following:

NN Grant, entitlement, and shared revenue accounting (Statement 2)

NN Defining the governmental reporting entity (Statement 3)
The Growth of GAAP n 7

NN Accounting and reporting for claims and judgments and compensated

absences (Statement 4)
NN Accounting and reporting for leases (Statement 5)
NN Accounting and reporting for pensions (Statement 6)
NN Accounting and reporting for component units (Statement 7)

By the very of definition of the documents, these same issues were addressed in
the interpretations, only in greater detail. Of the 10 interpretations issued by the
NCGA, five affected NCGAS 1, one affected Statement 3, one affected Statement 4,
and two affected Statement 6. Only one interpretation (#5) did not directly address
an existing standard. Rather, it made the examples in the 1968 GAAFR illustra-
tions of the principles in NCGAS 1 as long as the examples were consistent with
this standard.
The NCGA went out of business in 1984, when the Governmental Accounting
Standards Board (GASB) was created. Fortunately, most of its standards and inter-
pretations are still available to us in the Original Pronouncements volume published
annually by the GASB. As can be seen by the shading in this volume, most of these
GAAP documents have been affected or superceded by newer GASB pronounce-
ments. These documents are the topic of the last big section in this chapter.

1.3 The Growth of GAAP: The GASB

The year 1984 was a banner year for two reasons. First, the successor organization to
the NCGA—the GASB—was established. Of lesser importance, but still interest-
ing from a timing perspective, the MFOA became the GFOA: the Governmental
Finance Officers Association of the United States and Canada. Clearly, the former
event was more important than the latter, but it was still an interesting year.
When it was established, the GASB was substantially different from its FASB
counterpart in the private sector. Keep in mind that the FASB had been established
in 1973, so the Financial Accounting Foundation (FAF) had a good model to use
in setting up the GASB. Still, the differences are remarkable. These differences
are summarized in Figure 1.3.
In addition to these differences, the GASB members were paid substantially less
than their FASB counterparts. This difference was due in no small part to where
the members came from: the public sector versus the private sector. The staffs of
the two boards were quite different. The FASB has more than 50 staff members,
whereas the GASB staff at the time was less than 15.
To better understand the operation of the GASB, I highly encourage you to
visit their Web site, www.gasb.org. This Web site provides much information about
the Board, its publications, calendar, and other important activities of the GASB.
Of interest may be a document called Facts about GASB, which can be found at
8 n Handbook of Governmental Accounting

GASB FASB

Number of members 5 7

Status of members (full-time/part-time) 2/3 7/0

Full-time chairman Yes Yes

Full-time vice-chairman No Yes

Full-time director of research No Yes

Figure 1.3 Differences in organization of the GASB and FASB.

www.gasb.org/facts/index.html. This document provides information on the

GASB’s mission, the Board’s structure, and the current members of the Board.
This chapter is devoted to the development of GAAP in the public sector. As such,
we will only discuss the final pronouncements of the GASB. However, it is important
to understand the GASB’s process for developing a new accounting standard.
A project starts by getting on the GASB agenda. Depending on the complexity
of the issue, one or more documents may be issued by the Board before the final
standard is issued. If an issue is sufficiently complex, the Board may appoint a task
force to study the issue before any documents are published. Once the task force
completes its work, the GASB may ask for a greater variety of opinions by issuing
a discussion memorandum (DM). Other documents may include an Invitation to
Comment (ITC) or a Preliminary Views (PV) document or both. Once sufficient
discussion has been launched, the Board may hold one or more public hearings
on the topic. The GASB staff analyzes the oral and written comments and makes
one or more recommendations to the Board. Several meetings may take place as
the Board reviews the comments and papers written by the staff. Eventually, an
exposure draft (ED) will be issued that shows where the Board intends to go on the
issue, but many changes can still take place. The staff and Board have further meet-
ings to analyze comments on the ED, and then the final document is prepared.
That final document can take several forms. It may be a Statement of Govern­
mental Accounting Standards (referred to here as GASBS). A statement provides
the actual accounting standard and the vote of the Board on that standard. If
members of the Board vote against the standard, the dissenting opinions are also
included in the statement.
The document could also become a Statement of Governmental Accounting
Concepts. To date, the Board has issued four concept statements:

NN No. 1, Objectives of Financial Reporting

NN No. 2, Service Efforts and Accomplishments Reporting
The Growth of GAAP n 9

NN No. 3, Communication Methods in General Purpose External Financial Reports

That Contain Basic Financial Statements
NN No. 4, Elements of Financial Statements

The third form of document is an interpretation. These documents provide addi-

tional practical information about a particular standard. The GASB has issued only
six of these in the 20 years of its existence. Similar to a standard, interpretations
provide information on the standard, effective date, and the vote of the Board.
Two other documents that may be issued are Technical Bulletins (TBs) and
Question-and-Answer Reports (Q&A; also known as Implementation Guides).
These publications are staff documents in that they do not require a vote of the
Board before they are issued. However, as a practical matter, the Board reviews all
documents before they are issued to the public. These two do not contain a vote
count of the Board or dissenting opinions.
Naturally, no standard-setting body can exist on its own. It must have support-
ers—financially and conceptually—in order to exist. Without financial support,
the Board simply cannot exist. And, if organizations do not agree to implement
GASB standards (remember, these standards are not law and cannot be enforced
that way), there would be little point in having the GASB. The same organizations
that supported the GFOA continued to support the GASB. Some of these organiza-
tions are the following:

NN GFOA: The predecessor organizations of the GASB were established by the

GFOA.
NN National Association of State Auditors, Controllers, and Treasurers (NAS­
ACT): This organization has been very influential with the GASB. It is
interesting that all the GASB chairmen have been affiliated with state audit
organizations prior to taking the chairman position.
NN American Institute of Certified Public Accountants (AICPA): After all, the
members of this organization—the certified public accountants (CPAs)—are
predominantly the ones that do the audits of SLGs. The AICPA has a signifi-
cant interest in the types of standards issued by the GASB.
NN Auditing Standards Board (ASB): Although now replaced in the private sec-
tor by the Public Company Accounting Oversight Board, the ASB has played
a significant role in influencing accounting standard-setting.
NN National Association of College and University Business Officers (NACUBO):
The FASB, GASB, and predecessor organizations have focused primarily on
businesses or SLGs. NACUBO took up the slack to assist colleges and uni-
versities in developing their own unique set of financial statements. While the
GASB and FASB have the final say, NACUBO has had a major impact on the
development of accounting standards for higher education.
NN American Accounting Association (AAA): Made up largely of academics,
members of this organization have done much in the way of research for the
10 n Handbook of Governmental Accounting

GASB, although the GASB now has its own research staff. Still, members con-
tribute ideas to the GASB and serve on various task forces and committees.
NN Internal Revenue Service (IRS): While its influence has been stronger in the
private sector, one need look no further than the accounting rules for inven-
tory to see the impact of the IRS on accounting standards.
Of course, there are many other organizations that support the GASB that are not
mentioned here. Any professional organization that represents constituents of the
GASB would have an interest in the Board’s activities.

1.3.1 The First Board

The first five men appointed to the GASB were the following:
NN Chairman, James F. Antonio, former Missouri State Auditor.
NN Vice Chairman and Director of Research, Martin Ives, who had served on
the NCGA. Mr. Ives had worked with the State of New York for many years
as the First Deputy Comptroller for New York City from 1976 to 1983, when
he helped reestablish the city’s accounting systems after its financial troubles
of the 1970s and early 1980s.
NN Philip L. Defliese, the former national governmental partner for Coopers
& Lybrand.
NN W. Gary Harmer, who, similar to Ives, had served on the NCGA and was the for-
mer Chief Financial Officer of the Salt Lake City Independent School District.
NN Elmer B. Staats, who served for 15 years as the Comptroller General of the
United States.
None of these names were new to governmental accounting. As you can see, all five
men had accounting or auditing experience at various levels of government. Now
that public sector standard-setting was finally independent of its governments,
some interesting things would likely develop. Also, it is interesting to note that
only Mr. Antonio and Mr. Ives were to work at the Board full time. The other three
gentlemen were to be part-time members.
When the GASB was organized under the auspices of the FAF, an interesting
relationship developed between this new board and the FASB, which had already
been in existence for 11 years. When looking at the organization chart in Figure 1.4,
it would appear that the two boards are equal. However, in the differences pointed
out earlier (see Figure 1.3), this equality was not there. Still, the AICPA in setting
the GAAP hierarchy placed the pronouncements of the GASB at level one and the
pronouncements of the FASB at level two. This linking of the two boards would
cause some confusion later.
I have always thought it interesting to compare the first standards issued by
each board. When the FASB was first created in 1973, its first standard was titled
Disclosure of Foreign Currency Translation Information. On the other hand, the
The Growth of GAAP n 11

FAF

FASAC FASB GASB GASAC

FASB GASB
Staff Staff

Figure 1.4 Organization of the Financial Accounting Foundation.

GASB’s first standard was titled Authoritative Status of NCGA Pronouncements and
AICPA Audit Guide. Unlike the FASB, the GASB formally adopted its predeces-
sors’ standards. The FASB didn’t do this. Instead, the FASB left it to the AICPA
in its professional standards to establish a hierarchy of GAAP—just one for the
private sector rather than the public sector hierarchy mentioned previously. This
hierarchy left in place the pronouncements of the earlier standard-setting boards:
the Committee on Accounting Procedure and the Accounting Principles Board.
As you might expect, over time, much of what was in GASB Statement No. 1
(GASBS 1) has been amended or superceded. Four of the seven NCGA standards
have been superceded entirely, as have five of the ten interpretations still in force
when the GASB was created. For the AICPA pronouncements, three of its four
SOPs have been superceded, and the Industry Audit Guide that was in effect at the
time has long since been abandoned (the 1974 edition was in effect at the time). Of
the remaining standards and interpretations, all have been heavily amended by later
GASB pronouncements.

1.3.2 The GASB Gets Rolling

In the same year that the Board issued GASBS 1, it also issued its first Technical
Bulletin (TB). TB 94-1 was very similar to GASBS 1: Purpose and Scope of GASB
Technical Bulletins and Procedures for Issuance. Clearly, all this bulletin did is explain
why the GASB would issue a TB and what procedures would be followed to issue
one. It would be 3 years before another TB would be issued.
The next official pronouncement of the Board was not another standard, but
its first interpretation of an earlier standard or interpretation. Interpretation docu-
ments have a unique mission. They are used to explain particular points in previ-
ous pronouncements. They cannot be used to amend previous pronouncements;
an amendment requires the issuance of a new standard. After this interpretation, it
would be almost 11 years before the GASB would issue its next one.
GASB Interpretation No. 1 (GASBI 1) was titled Demand Bonds Issued by State
and Local Governmental Entities, and was an interpretation of NCGA Statement
No. 1 and NCGA Interpretation No. 9. Think of a demand bond as being the
12 n Handbook of Governmental Accounting

opposite of a callable bond. Recall that a callable bond is one in which an issuer
can instruct bondholders to redeem their bonds, usually with a premium involved.
With a demand bond, the bondholder can demand payment from the issuer. The
aforementioned interpretation provided guidance on how demand bonds should be
classified in the financial statements of the issuer: either as current liabilities or long-
term debt. Naturally, the government would prefer to classify the bonds as long-term
debt. To do so, all the following conditions have to be met for an event in which the
bondholder has (or may) demand payment:

NN Before the financial statements are issued, the issuer must have an agreement to
convert the bonds into some other form of long-term obligation, if not resold.
NN The agreement does not expire within one year of the balance sheet date.
NN The agreement cannot be canceled by a third party during the year.
NN The third party is financially capable of honoring the agreement.

Failure to meet all these requirements would result in the demand bonds being
reported as a current (or fund) liability.
More than a year would pass before the GASB would issue its next official doc-
ument. In fact, 1985 was the only year of the GASB’s existence in which it did not
issue at least one pronouncement of any type: Standard, Interpretation, Technical
Bulletin, or Concept Statement. However, that does not mean the Board was inac-
tive. Much of 1985 was consumed with work on the GASB’s most far-reaching
project addressing perceived problems with the overall governmental reporting
model. In 1985, the first discussion memorandum (DM) dealing with issue was
published. This document would later develop into GASBS 11 (to be discussed
shortly).
GASBS 2, Financial Reporting of Deferred Compensation Plans Adopted Under
the Provisions of Internal Revenue Code Section 457, was the next standard issued
by the Board. This standard laid out the requirements for accounting and report-
ing of deferred compensation plans. It made very clear that the assets of the plan
remained the property of the government until paid to the participants. Thus, the
assets were subject to the claims of the general creditors of the government. No one
thought much about this issue until the bankruptcy of Orange County, California,
in the early 1990s. When this government was forced to declare bankruptcy, many
of its creditors were worried if they would be paid. Then, it was noticed that the
so-called 457 Plans had substantial assets, which could be used to settle these
claims. Obviously, such a settlement would cause considerable unrest among the
participants of the plan, retirees who stood to lose a substantial part of their retire-
ment assets. So much unrest was caused that the federal government changed the
law concerning these plans, which required the GASB to issue another standard
(GASBS 32, issued in 1997) to reflect the new federal law. The change in the law
required that the assets be held in trust for the participants and their beneficiaries.
The Growth of GAAP n 13

All plans had to adopt this new format by January 1, 1999. GASBS 32 rescinded
GASBS 2, and provided new accounting and reporting guidance for these plans.
Whereas GASBS 2 had the plans reported as an agency fund, GASBS 43 required
reporting as an expendable trust fund (the same as a private purpose trust fund
under GASBS 34) if the government continued to have a fiduciary relationship
with the fund. As a result of the new federal law, however, many governments
transferred the fiduciary responsibility to a third party, thus eliminating the plan
from its annual report.*
The first GASB pronouncement issued as a result of a fiscal crisis was GASBS 3,
Deposits with Financial Institutions, Investments (including Repurchase Agreements),
and Reverse Repurchase Agreements, issued in 1986. This standard was a direct
result of several investment failures in the early 1980s, including the failure of
ESM Government Securities, Inc., in March 1985. In that failure, SLGs lost money
because of improper securities transactions by brokerage firms. GASBS 3 sought to
help alleviate such problems in the future by requiring certain deposit and invest-
ment disclosures.
Much of GASBS 3 had been amended by either GASBS 31, Accounting and
Reporting for Certain Investments and for External Investment Pools, issued by the Board
in 1997 (as part of the reaction to the problems in Orange County), or by GASBS 40,
Deposit and Investment Risk Disclosures, issued by the Board in 2003. Because of the
close relationship between these three standards, many of the provisions are discussed
in this section (other provisions of GASBS 31 will be discussed in Section 1.6).
GASBS 3 largely dealt with custodial issues related to deposits and investments.
The standard contained guidance on how to report such deposits and investments
in one of three categories of custodial risk—from the most secure to the least
secure. The categories were based on who held the collateral for the deposits and
investments and in whose name the collateral was carried. These categories are
summarized is Figure 1.5.
Since categories one and two were considered quite secure and most govern-
ments reported the greatest majority of their deposits and investments in one of
these two categories, GASBS 40 amended GASBS 3 by requiring governments to
report only those deposits and investments held in the third category at the end of
the fiscal year.†
Other disclosures required by GASBS 3—and not eliminated by GASBS
40—include the following:

* No retiree lost money in the Orange County bankruptcy. The law was still changed to avoid
the problem in the future. The bankruptcy also caused the GASB to issue other pronounce-
ments (discussed later) addressing investment issues of SLGs.
† There was some discussion about reporting categories of investments and deposits during the
year, but this idea was not adopted by the Board.
14 n Handbook of Governmental Accounting

Category Deposits Investments

1 Insured or collateralized with Insured or registered, or

securities held by the entity or securities held by the entity
by its agent in the entity’s or its agent in the entity’s
name. name.

2 Collateralized with securities Uninsured or unregistered,

held by the pledging financial with securities held by the
institution’s trust department counterparty’s trust
or agent in the entity’s name. department or agent in the
entity’s name.

3 Uncollateralized, including Uninsured or unregistered,

balances collateralized with with securities held by the
securities held by the pledging counterparty, its trust
financial institution, its trust department, or agent, but
department, or its agent, but not in the entity’s name.
not in the entity’s name.

Figure 1.5 Categories of deposits and investments.

NN Brief description of the types of investments the government is allowed

to purchase
NN Significant violations during the period of legal and contractual provisions
for deposits and investments
NN Types of investments held during the period but not held at year-end
NN Certain reverse repurchase agreement disclosures

Also, GASBS 3 required reporting the carrying value and market value of depos-
its and investments. GASBS 31, Accounting and Financial Reporting for Certain
Investments and for External Investment Pools, issued in 1997 (and discussed later in
Section 1.6), dropped the requirement to report carrying value and changed mar-
ket value to fair value. New disclosures required by GASBS 40 include the credit
risk—bond ratings—of certain investments; concentration of investments when
the amount in one issue exceeds 5% of the value of the portfolio; not aggregating
dissimilar investments (such as Treasury bonds and strips); focusing the disclosure
of risk on the primary government unless the governmental activities, business-
type activities, individual major funds, nonmajor funds in the aggregate, or fidu-
ciary fund types have greater exposure to risk; reporting interest rate risk by any
one of five methods; disclosing investments that are highly susceptible to changes
in interest rates; and reporting foreign currency risks.
The next standard issued by the GASB was not so much a declaration of new
accounting and reporting policies, but one that directed SLGs to not follow a recent
The Growth of GAAP n 15

FASB standard. Recall that the GAAP hierarchy in force at this time required
SLGs to first follow GASB standards and then apply FASB standards if the GASB
had not yet ruled on a topic. In late 1985, the FASB had issued its Statement No. 87,
Employers’ Accounting for Pensions, and made it applicable to all employers including
SLGs. GASBS 4, Applicability of FASB Statement No. 87, “Employers’ Accounting
for Pensions,” to State and Local Government Employers, issued in 1986, reversed
this requirement directing SLGs to wait until it published its own guidance on the
topic. Thus, GASBS 4 became the first of the so-called “negative standards” in that
it instructed SLGs to ignore a standard issued by the FASB.* GASBS 5, Disclosure
of Pension Information by Public Employee Retirement Systems and State and Local
Government Employers, issued 2 months after GASBS 4, provided the guidance
mentioned in that standard. It has since been superceded by a number of GASB
standards and thus is no longer in effect.
There is one other interesting point about GASBS 5 that makes it different
from the previous four standards: there was a dissenting vote. It was cast by the
chairman, James Antonio. He believed that the measurement focus of the standard
was different from the measurement focus of governmental accounting and should
reflect the approach used by governments for funding purposes. This would not be
the last time a member of the Board dissented on a standard.
GASBS 6, Accounting and Financial Reporting for Special Assessments, issued
in early 1987, was the first accounting standard to do away with a fund: special
assessment fund. These funds had been in use for a number of years (they were
included in the 1968 edition of GAAFR). The standard eliminated the fund from
external financial reporting, although governments could continue to use them for
internal purposes. However, special assessments continue to be an important part
of government operations. Those related to capital projects are accounted for in a
capital projects fund during the construction phase. If debt is issued to finance the
project, collection of the appropriate special assessments will occur in a debt service
fund, unless the government is not obligated on the debt in any manner; in that
case, an agency fund may be used. When no debt is involved or for a service spe­
cial assessment, the transaction is accounted for in the General Fund or in a special
revenue fund.
However, this standard went further than just changing financial reporting for
special assessments. As noted earlier, if the government is not obligated in any man-
ner on a debt, the debt need not be included in the notes to the financial statements.
So, what determines whether a government is obligated in any manner on a debt
issue? GASBS 6 provides this guidance in paragraph 16:

* One should remember that GASB and FASB have been colocated in the same building
throughout their joint history. As a result, you would think they could talk to one another and
avoid problems such as this one.
16 n Handbook of Governmental Accounting

NN The government is obligated to honor deficiencies to the extent that lien fore-
closure proceeds are insufficient.
NN The government is required to establish a reserve, guarantee, or sinking fund
with other resources.
NN The government is required to cover delinquencies with other resources until
foreclosure proceeds are received.
NN The government must purchase all properties (“sold” for delinquent assess-
ments) that were not sold at a public auction.
NN The government is authorized to establish a reserve, guarantee, or sinking
fund, and it establishes such a fund. (If a fund is not established, the consid-
erations in subparagraphs g and h may nevertheless provide evidence that the
government is obligated in some manner.)
NN The government may establish a separate fund with other resources for the
purpose of purchasing or redeeming special assessment debt, and it estab-
lishes such a fund. (If a fund is not established, the considerations in sub-
paragraphs g and h may nevertheless provide evidence that the government is
obligated in some manner.)
NN The government explicitly indicates by contract (such as the bond agreement
or offering statement) that in the event of default, it may cover delinquencies,
although it has no legal obligation to do so.
NN Legal decisions within the state or previous actions by the government related
to defaults on other special assessment projects make it probable that the gov-
ernment will assume responsibility for the debt in the event of default.

This information has proved invaluable when trying to determine whether a gov-
ernment needs to include a debt issue in its annual report. About the same time
GASBS 6 was published, the GASB staff issued only its second TB, TB 87-1,
Applying Paragraph 68 of GASB Statement 3. Obviously, this TB addressed a very
specific issue—one particular paragraph in an earlier GASB standard. The ques-
tions posed in the document addressed clarification provided on the categories of
risk for financial reporting.
The next standard issued by the original Board was GASBS 7, Advance Refunding
Resulting in Defeasance of Debt, also issued in 1987. This standard addressed many
of the same issues raised in FASB Statement No. 76, Extinguishment of Debt, issued
four years earlier. Although the GASB statement didn’t adopt the FASB rule as its
own, there is a definite influence of the older Board’s standard in this one.
Essentially, the GASB realized that SLGs were taking advantage of lower inter-
est rates in the mid-1980s to refinance old higher interest rate debt with lower
interest rate debt. The accounting for these activities varied widely, so the statement
standardized the process. GASBS 7 allows for two types of defeasances, or early
refunding, in which the old bond issue does not allow for an immediate call (if the
call provision was in the bond covenant, there would be no need for a defeasance).
The two types were legal defeasance and in-substance defeasance. The difference is
The Growth of GAAP n 17

that if the covenant of the old bond issue allows for a refunding, then the refunding
is a legal defeasance. If the old bond covenant is silent on the issue, then the refund-
ing is an in-substance defeasance.
There is no accounting difference in the two types of refunding. In either case,
when a new bond issue is to be used to finance the defeasance, the issue is recorded
as an other financing source (and the new debt is recorded in the General Long-
Term Liability list). Then, when the proceeds are used to pay the escrow agent, the
payment is recorded as an other financing use (and the old debt is removed from
the General Long-Term Liability list). Should the government use its own resources
in the refunding, that payment would be recorded as a debt service expenditure.
Once the payments are made to the escrow agent, the agent is restricted on the
types of investments that may be made with the money:

NN Direct obligations of the U.S. government

NN Obligations backed by the U.S. government
NN Securities backed by U.S. government obligations

For, you see, only the U.S. government issues bonds that are considered risk free. In
fact, a further restriction is placed on the bonds that they cannot be callable, as that
would not guarantee the interest flow from the investment. If the escrow agent were
to make the wrong investments, then a defeasance would not occur, and a whole
host of other problems would be initiated.
What then is the difference between a legal defeasance and an in-substance
one? The answer lies in the required disclosures. For both types of defeasances,
there are three basic disclosures:

NN A general description of the transaction including the debt issues involved

and why the refunding was undertaken
NN The difference between cash flows required to service the old debt and the
new debt issued to finance the refunding
NN The economic gain or loss from the transaction

An economic gain occurs when the present value of the cash flows of the new debt
is less than the present value of the cash flows required for the old debt. An eco-
nomic loss occurs if the opposite conditions are true. If done properly, a defeasance
should always result in an economic gain.
The difference in the disclosures for the two defeasances lies in the fourth dis-
closure required only for an in-substance defeasance. Since the old bond issue did
not specifically allow for a refunding, the amount of old debt still outstanding
at the end of the accounting period must be disclosed. This disclosure continues
until the old issue is completely retired.
In late 1987, the FASB issued another of its all-encompassing standards—one
that effected both the private and public sectors. This time, it was Statement No. 93,
Recognition of Depreciation by Not-for-Profit Organizations. This statement required
18 n Handbook of Governmental Accounting

that certain organizations, including nonprofit organizations and colleges and uni-
versities, begin to recognize depreciation on capital assets where no requirement
had existed previously. As was the case with the pension issue, the GASB disagreed
with the FASB’s position and instructed the nonprofit organizations that used its
accounting model to not implement FASB Statement No. 93. GASBS 8 has since
been superceded by GASBS 35, which is discussed later in this chapter.
It wasn’t too long until a similar event occurred again. This time the issue was
funds flow reporting. Also in 1987, the FASB had issued its Statement No. 95, The
Statement of Cash Flows, which replaced the Statement of Changes in Financial
Position as the funds flow statement for private sector entities. This latter statement
had been adopted in NCGA Statement 1, and was still applicable to certain public
sector entities. Hence, these governmental entities were confused as to whether
they should prepare the new Statement of Cash Flows (SCF) or the old Statement
of Changes in Financial Position.
The position of the GASB was not immediately apparent. In its bimonthly news-
letter, The Action Report (now called The GASB Report), the Board reported that it
intended to come out with its own standard for funds flow reporting. Two months
later in the next publication, the Board announced that it would allow govern-
ments to use either the FASB format of the SCF or the old Statement of Changes in
Financial Position provided all the disclosures required by the older statement are
still met. Then, in the next publication of The Action Report, the Board announced
its final position: it would be issuing its own standard.
That standard became GASBS 9, Reporting Cash Flows of Proprietary and
Nonexpendable Trust Funds and Governmental Entities that Use Proprietary Fund
Accounting, issued by the Board in late 1989. We will not discuss the preparation of
this statement here as it is accomplished in the proprietary funds chapter. However,
we do want to point out some similarities and differences between the FASB cash
flow model and the one adopted by the GASB.
Figure 1.6 summarizes the formats required for the SCF for the GASB and
FASB, respectively. What is not apparent from the exhibit is a more subtle similar-
ity. When the FASB was debating the format of the SCF, the Board considered
requiring the direct method of preparing the Operating Activities section. Due to
strong opposition during the exposure draft phase of the standard-development
process, the FASB opted to allow the use of either the direct method or the indirect
method. However, it should be pointed out that, in the standard, the FASB still
indicated that the direct method was the preferred format. Unfortunately, very few
private sector entities use the direct method. In one study done several years ago,
researchers found that only 4 of the top 600 companies in the United States used
the direct method. Since the FASB elected to allow either method, the GASB took
a similar position.
From Figure 1.6, a few other similarities are apparent. Both formats have an
Operating Activities section and an Investing Section. However, as will become
apparent in a moment, these sections are similar in title only. When preparing the
The Growth of GAAP n 19

GASB Model FASB Model

Operating Activities Operating Activities

Noncapital Financing Activities

Financing Activities
Capital and Related Financing Activities

Investing Activities Investing Activities

Reconciliation of Operating Income Reconciliation of Net Income to Cash

to Cash Flows from Operating Activities Flows from Operating Activities

Noncash Transactions Noncash Transactions

Figure 1.6 Comparison of Statement of Cash Flow formats.

statement using the direct method, both formats require a separate reconciliation
of income to cash flows from operating activities. Finally, both formats require the
presentation of noncash transactions. Despite these apparent similarities, there are
many underlying differences between the formats.
The most obvious difference in the two formats is the number of sections: the
GASB model has four sections, while the FASB model has three sections. As pointed
out here, some of these sections have the same name, but not the same content.
Both formats have an Operating Activities section. When prepared using the direct
method, both report gross cash receipts from customers and other sources, and
cash payments to employees and suppliers. However, the FASB model includes cash
received from interest and dividends and cash paid for interest in this section. The
GASB requires that cash received from interest and dividends be reported in the
Investing Activities section (where the investments that generated these cash flows
are reported). Also, the GASB requires that cash paid for interest be reported as
either in Noncapital Financing Activities section or Capital and Related Financing
Activities section, depending on the nature of the borrowing.
The FASB model uses a single Financing Activities section for all debt and
equity financing of the entity. Obviously, equity financing (issuing and retiring
stock) is not an issue for governments, but the GASB felt it was important to have
two financing sections in its format. These two sections are used to highlight the
different purposes of financing in its business-type activities that prepare the SCF.
The Noncapital Financing Activities section is used for the receipt or repayment
of debt and other financing sources and uses (such as taxes or transfers from or
20 n Handbook of Governmental Accounting

to other funds) that are not related to the acquisition of capital assets. This type
of financing should be infrequent in a fund, but the GASB wanted it reported
separately from the capital financing transactions reported in the next section in
the format. Any interest payments on these debt issues or interfund loans are also
recorded in this section.
The Capital and Related Financing Activities section has two important parts.
First, this section reports receipts of debt and transfers or loans from other funds
that are to be used to finance the acquisition of capital assets. Also included here
will be the subsequent repayment of this debt and, possibly, payments to other
funds for loans, including appropriate interest payments. The second part of the
section reports the cash payments for the acquisition of capital assets and then
the cash receipts for the subsequent sale of these assets at or near the end of their
useful lives. These latter transactions would be reported in the Investing Activities
section of the FASB model.
The final section of each SCF model is the Investing Activities section. The
FASB uses this section to report all long-term investments, whether the invest-
ments be for capital assets or for debt and equity investments of the entity. As noted
previously, the GASB reports capital asset transactions in the Capital and Related
Financing Activities section, leaving this section for only its debt and equity invest-
ment transactions. This section would also include cash receipts for interest and
dividends earned on these investments.
When preparing the SCF using the direct method, both the GASB and
FASB models require a presentation of reconciling income to cash flows from
operating activities. If the indirect method is used, these schedules become the
Operating Activities section of the report. Note, however, that the GASB uses oper-
ating income, whereas the FASB uses net income when preparing this section. By
using operating income, the GASB excludes automatically cash receipts and pay-
ments of interest. The format also avoids deducting gains and adding losses from
the sales of capital assets and other investments required in the FASB model.
The final section required in both formats is the reporting of noncash transac-
tions, or the investing and financing transactions that do not require the use of
cash. For example, issuing debt to acquire a capital asset or signing a capital lease
would be reported in this section. The FASB allows the information to be reported
either on the face of the SCF or in the notes to financial statements. The GASB felt
that the information was too important to be relegated to the notes; hence, GASBS
requires that the information be reported on the face of the statement.*
Scarcely 2 months after Statement No. 9 was issued, the GASB followed it
up with #10. This standard was different from the others. Generally, standards go

* Interestingly, GASBS 9 does not require placing the noncash transactions on the face of the
SCF. However, it is apparent from the Basis for Conclusions in the back of the standard that
such placement was the GASB’s intent. This intention was put into practice with the Q&A
that was issued for this standard.
The Growth of GAAP n 21

into effect a few months to one year after issuance. Of standards 2 through 9, the
longest period until implementation was 11 months; the shortest period was upon
issuance. Statement No. 10 went into effect in two different time periods. For pub-
lic entity risk pools, the standard went into effect within 8 months; for all other
entities, the standard would not go into effect for over 4 years! The reason for the
delay had to do with Statement No. 11, which we will review shortly.
The purpose of GASBS 10, Accounting and Financial Reporting for Risk Financing
and Related Insurance Issues, was to address what had fairly recently become a very
hot topic in governmental accounting and reporting: self-insurance. In earlier years,
governments insured virtually all risks of loss with commercial insurance. Then,
the United States became a much more litigious society, thus driving up the cost of
commercial insurance. Many governments began to finance all losses up to a cer-
tain point, and then bought commercial insurance to cover only catastrophic losses.
This self-financing became known as self-insurance, or to some as “no insurance.”
In fact, that is what it was. Governments had no insurance until the catastrophic
insurance policies kicked in (think of a policy with a $1 to $5 million deductible).
But why two implementation dates? The answer lies with another statement
the GASB was planning on issuing soon. That statement, which became No. 11,
was going to make some radical changes in the way governmental funds reported
expenditures. Since much of GASBS 10 addresses expenditures and the simultane-
ous recognition of liabilities, the GASBS 10 needed to go into effect at near the
same time as GASBS 11 and some other standards the GASB would be issuing.
However, public entity risk pools use proprietary fund accounting. Therefore, wait-
ing for GASBS 11 was not essential to insurance accounting in these entities, and
the standard could be implemented immediately.
What did GASBS 10 bring to the GAAP table? First, it reaffirmed the use
of FASB Statement No. 5, Accounting for Contingencies, in accounting for insur-
ance claims: if the claim is reasonably probable and the amount can be reasonably
estimated, the claim—and related expense or expenditures and liability—should
be recognized. Second, it provided rules on how to account for self-insured risk
management transactions. Third, it provided guidance on how to account for
risk management. The standard gives governments the option of accounting for risk
management in individual funds or consolidating the accounting into a single fund.
If a government elects to consolidate the accounting into a single fund, it must be
either the General Fund or an Internal Service Fund (ISF). If the General Fund
is used, only expenditures for claims paid for from current financial resources are
recognized in it. Other claims were to be recorded in what was then the General
Long-Term Debt Account Group (under GASBS 34, discussed in Section 1.7.3,
this account group becomes merely the General Long-Term Liability list). If an
ISF is used, all claims are recognized as expenses of the fund. However, the fund
is allowed to build reserves for large self-insurance losses, an option not available
if the General Fund is used. For this reason, many recommended using an ISF over
the General Fund when accounting for risk management.
22 n Handbook of Governmental Accounting

This standard has been modified twice. GASB Statement No. 30, Risk Financing
Omnibus, made some slight changes to the standard.* It provides some additional
note disclosures and required supplementary information for public entity risk
pools and some additional disclosure requirements for entities other than pools.
GASB Interpretation No. 4, Accounting and Financial Reporting for Capitalization
Contributions to Public Entity Risk Pools, requires that contributions made to pro-
vide initial capitalization for public entity risk pools should be treated as prepaid
insurance in the fund making the payment and amortized over the period that the
pool will provide insurance coverage.

1.4 The 5-Year Review

It was decided when the GASB was established in 1984 that, after 5 years, there
would be a review of its operations to determine if the Board was a success. If so,
recommendations were to be made for its continuance. The review board made a
total of 35 recommendations on the structure and operation of the GASB in its
final report (issued on November 30, 1989). Although a complete copy of this
review was unavailable at the time this chapter was written, the more significant
aspects of it are well known and are reviewed here.
You may remember that in 1989, the FASB consisted of seven, full-time Board
members who were quite well compensated for their work (the actual amount
isn’t known, but it is believed to have been in the $300,000 range). Meanwhile,
over at the GASB, the Board had only two full time members—the Chairman
(Mr. Antonio) and Vice Chairman/Director of Research (Mr. Ives)—and three
part-time members. One recommendation of the review panel was to make all five
members full time. However, because of the cost involved, it was decided that the
financial supporters of the GASB (at this time, all funding came from CPA firms,
state and local governments [SLGs], and other organizations that relied on gov-
ernmental accounting standards) could not, or would not, support such an orga-
nization. But, a realignment was made. The position of Vice Chairman/Director
of Research was divided into two positions. The Board member position of Vice
Chairman became a part-time appointment (although Mr. Ives continued to serve
as a full-time Vice Chairman until he left the Board in June 1994). The newly cre-
ated position of Director of Research became a full-time staff position. The first
person to fill that position was David R. Bean, who continues to serve 18 years after
his appointment in the fall of 1990.
Another recommendation of the review board dealt with compensation for the
Board members. The full-time members were not paid nearly as well as their FASB

* It is interesting to note that every time a GASB pronouncement contains the word “ominbus,”
it means that the pronouncement is fixing errors in an earlier standard.
The Growth of GAAP n 23

counterparts, and the part-time members’ salaries were, obviously, even less. The
review board recommended that the full-time compensation be raised to the same
level as the FASB. However, just as the organizations that support the GASB would
not agree to a full-time Board, they would not support paying the Board members
at the same rate as their FASB counterparts. Many in government felt that the
Board members’ pay should be consistent with large government salaries for finan-
cial personnel, not private sector financial personnel.
The third recommendation was to establish an Emerging Issues Task Force
(EITF), similar to the one the FASB has, to handle hot topic issues. The GASB
briefly considered such a plan, but no action was ever taken. Currently, the
GASB has no plans to establish an EITF.
The fourth recommendation was to have a conceptual framework for SLG
accounting and reporting, similar to the one in the private sector. By 1989, the
GASB had issued only one concepts statement, Objectives of Financial Reporting, in
1987. Five years after the review board’s recommendations, another entitled Service
Efforts and Accomplishments was issued (in 1994), which examines the possibility of
nonfinancial reporting. To date, no accounting standards have been issued based
on this concepts statement.
The fifth recommendation of the review board, and one that was immediately
acted upon, was regarding the apparent inability of the FASB and GASB to coor-
dinate some of their standards. The review board felt, as did many others, that the
GASB issuing standards directing its constituents not to follow certain FASB stan-
dards did not look very professional. Of course, the problem was caused by some
colleges and universities, hospitals, and nonprofit organizations following GASB
standards, and others following FASB standards. In the opinion of the review
board, there was a simple solution: put all these organizations under the same stan-
dard-setting body—the FASB. The FAF put this resolution to a vote. At the time,
the FAF consisted of 15 members: 12 from the private sector and 3 from the public
sector. As you might suspect, that was the result of the vote—12 to 3 in favor of
moving the entities under the FASB.
Reaction to this vote by the public sector was immediate. Many of the support-
ers of the GASB met to discuss this action. The result of this meeting was a strongly
worded letter to the FAF indicating the displeasure of these organizations to the vote.
There is some speculation that the letter included a threat to reestablish the NCGA
and not follow GASB or FASB standards. Regardless of the actual content of the let-
ter, the FAF did reconsider its position and voted to reverse its original position.*

* In the years since the review board’s recommendations, there have been other suggestions on
how to improve accounting and reporting for hospitals and colleges and universities. One
suggestion was to put all colleges and universities under the GASB and all hospitals under the
FASB. However, no action has ever been taken on this proposal or other similar ones.
24 n Handbook of Governmental Accounting

What, then, was the result of the 5-year review? The Board’s make-up was
substantially altered to one full-time member (the Chairman) and four part-time
members. A full-time Director of Research position was established and separated
from a Board member’s responsibility. This change made the staff a little more
independent from the Board. Finally, the necessity of the GASB was recognized,
and the review board recommended that it continue to set accounting standards
for the public sector.
However, there was still one sticking point from the 5-year review: how to more
appropriately handle conflicts between the GASB and FASB on certain accounting
issues and avoid the GASB having to issue negative standards. Clearly, the problem
lay in the GAAP hierarchy that placed the FASB second to the GASB in issuing
standards for the public sector. In what became known as the jurisdictional agree-
ment, the hierarchy was changed to remove the FASB from the GASB GAAP hier-
archy. The change in hierarchy was made formal by the Auditing Standards Board
(ASB) in its Statement on Auditing Standards No. 69, The Meaning of “Present
Fairly” in the Auditor’s Report (issued in January 1992). A comparison of the old and
new hierarchies of GAAP is shown in Figure 1.7.
Clearly, the most significant change in the hierarchy is at the second level. The
FASB statements and interpretations have been dropped from the hierarchy unless
they are formally adopted by the GASB in one of its publications. This change
solved the problem of negative standards.

1.5 The Original Board’s “Last Stand”

The implementation of the review board’s recommendations had little impact on
the ongoing actions of the GASB. However, the five members of the Board had
been originally appointed for 5-year terms. Those terms expired in 1989, but with
the ongoing review, were extended another year. Thus, the standard issued in late
1989 (GASBS 10) and the three issued in early 1990 were the last ones of the origi-
nal Board.
The last three standards of the original Board were all issued in May 1990. The
timing was very important. In June, two of the original members would be leaving.
Thus, the vote on these new standards might be different with the new members. Of
the three, GASB Statement No. 11, Measurement Focus and Basis of Accounting—
Governmental Fund Operating Statements, was the most important. This statement
had entered the Board’s agenda in 1985, and it represented the culmination of
much of the Board’s work since then. Indeed, it is the only standard to ever have
had two exposure drafts (EDs). The first ED looked at changing the measurement
focus and basis of accounting for all governmental fund financial statements. It was
considered unwieldy by many of the constituents of the Board, so a second ED was
issued that scaled back the project to address only the governmental fund operating
statements—or only half the reporting model. The final statement represented a
The Growth of GAAP n 25

“Old” Hierarchy “New” Hierarchy

1984–1991 1992–present

1. GASB Statements and a. GASB Statements and

Interpretations Interpretations
AICPA and FASB pronouncements
adopted by GASB in GASB
Statements and Interpretations

2. FASB Statements and b. GASB Technical Bulletins

Interpretations (including
AICPA Audit Guides and
predecessor pronouncements still
Accounting Guides and SOPs if (1)
in effect)
made applicable to SLGs by the
AICPA and (2) cleared by the GASB

3. Pronouncements of other “expert c. GASB Emerging Issues Task Force

bodies” that follow due process consensus positions [to date there
is no GASB EITF]
AcSEC Practice Bulletins [none
have ever applied to SLGs]

4. Widely recognized practices or d. GASB staff Implementation Guides

pronouncements that represent [also known as Q&As]
prevalent practice or
Widely recognized and prevalent
knowledgeable application of
SLG accounting practices
other GAAP pronouncements to
specific circumstances

5. All not in levels 1–4 e. All not in levels a–d

Figure 1.7 Comparison of old and new GAAP hierarchies.

major restructuring of governmental accounting as we know it. However, it had a

very interesting effective date.
All standards include an effective date. As mentioned in the discussion on GASBS
10, this date is usually soon after the issuance of the statement. GASBS 10 was the
first standard to differ from this practice; GASBS 11 was the second. Paragraph 100
(the effective date paragraph) of GASBS 11 makes for interesting reading:

The requirements of this Statement are effective for financial state-

ments for periods beginning after June 15, 1994. Early application is not
permitted because of the need for simultaneous implementation with
GASB pronouncements on [1] financial reporting, [2] capital report-
ing, [3] pension accounting, [4] risk financing and insurance, and
[5] the types of nonrecurring projects and activities that have long‑term
26 n Handbook of Governmental Accounting

economic benefit and for which debt meets the definition of general
long-term capital debt. Transition requirements for this Statement will
be established by a future Statement on financial reporting. [emphasis
and [#] added]

The standard could not be implemented for 4 years after the standard was issued.
Why? Because at least four other standards (#4 from the list—GASBS 10—had
been issued) had to be issued before this standard could go into effect. By June
1993—one year before implementation was to have started—none of these addi-
tional standards had been issued.
The Board must have been worried, and the Board members had changed sub-
stantially. By June 1993, only Mr. Antonio and Mr. Ives remained from the original
Board—Mr. Defliese and Mr. Staats had left the Board in 1990. The three part-
time members were all new:

NN Dr. Robert J. Freeman had come on the Board in 1990, replacing one of the
original Board members.
NN Mr. Anthony Mandolini also came on the Board in 1990. He left in June
1992, and was replaced by Mr. Edward M. Klasny.
NN Ms. Barbara A. Henderson who replaced Mr. Harmer came on the Board
in 1991.

As a result of the Board’s concerns, a preliminary views document was issued to

examine a narrower project on balance sheet issues and other related issues that
needed to be addressed prior to implementing GASBS 11. Most of the respondents
to this document preferred to delay the effective date of GASBS 11 until all the
issues could be addressed. From these responses came an ED proposing this delay,
which resulted in GASBS 17.
GASB Statement No. 17, Measurement Focus and Basis of Accounting—Govern­
mental Fund Operating Statements: Amendment of the Effective Dates of GASB
Statement No. 11 and Related Statements, indefinitely delayed the implementation
of GASBS 11 until all the necessary statements related to the reporting project set
out in that statement could be completed. The statement also implemented the
fund portion of GASBS 10 (delayed in that standard until the implementation
of GASBS 11) and indefinitely delayed certain aspects of GASBS 13 that relied on
GASBS 11.
The political implications of GASBS 17 are as interesting as the standard itself.
Recall that three of the original Board members had left by the time GASBS 17 was
issued. The vote to issue GASBS 17 was 3 to 2, with the new part-time members
voting to delay and the two remaining Board members dissenting with GASBS 17.
As noted earlier, whenever a Board member votes against a standard, a dissent is
written as part of the document explaining the dissent. Mr. Antonio and Mr. Ives
wrote just such a dissent. The dissent runs 792 words, whereas the “Standards”
The Growth of GAAP n 27

portion of GASBS 17 runs only 459 words, that is, the dissent is over 300 words
longer than the actual document. Obviously, Mr. Antonio and Mr. Ives did not
care much for the delay in implementing GASBS 11.
Compared to GASBS 11, the issues in GASB Statement No. 12, Disclosure
of Information on Postemployment Benefits Other Than Pension Benefits by State
and Local Government Employers, and GASB Statement No. 13, Accounting for
Operating Leases with Scheduled Rent Increases, were not as contentious. GASBS 12
was an interim statement, pending completion of a larger project on accounting
and reporting for other postemployment benefits.* Essentially, these benefits are
accounted for on a pay-as-you-go basis. The standard requires making disclosures
on a general description of the benefits provided, who is covered, the legal require-
ments for providing the benefits, a description of the accounting policies for the
benefits, and the dollar amount of benefits paid.
GASBS 13 was even narrower in focus. This standard examined only leases that
had lower lease payments in the early years of the lease than in the later years. If the
difference in lease payments reflected economic factors or a specific time pattern
related to the lease, lease revenue is recognized in accordance with the lease agree-
ment. However, if the difference in lease payments resulted from an inducement to
get the lessee to agree to the terms, then the revenue is recognized in equal install-
ments over the term of the lease.
GASBS 13 marked the end of the original board. As noted earlier in the discus-
sion on GASBS 11, when Statement Nos. 11, 12, and 13 came out in 1990, they
marked the last standards of the five original members of the GASB. It was defi-
nitely the end of an era. Of the 13 standards published by the original Board, only
on two occasions was a dissenting vote cast:

NN Mr. Antonio dissented on GASBS 5

NN Mr. Defliese dissented on GASBS 9

As we have already seen in the discussion on GASBS 11, that was about to change
in a big way.

1.6 New Board, New Issues, New Standards

It would be over one year before the GASB issued another standard. By that
time, only one of the original three part-time members of the Board remained:
Mr. Harmer. The two new members were Dr. Freeman and Mr. Mandolini, the
same two members who voted no to GASBS 14.

* This project has now been completed by GASBS 43 and 45. As these standards have not yet
gone into effect at the time of this writing, they are excluded from this analysis of current
public sector GAAP.
28 n Handbook of Governmental Accounting

This statement marked a major change in the way governments reported many
of their activities. Prior to GASBS 14, if there was any question about whether an
activity should be included in the report of a government, it was usually omitted
from the report. With the advent of GASBS 14, the position changed 180°; now
if there is any doubt, the activity is usually included in the report. Also, prior to
this standard, all activities were reported as funds of the government. GASBS 14
expanded the reports of governments to present discretely presented and blended
component units, thus greatly expanding the concept of the reporting entity.
The concept of reporting entity came up with NCGA Statements 3 and 7, which
defined the reporting entity and gave us component units, respectively. However,
GASBS 14 radically changed the way we looked at these elements. But, we are,
to some extent, getting ahead of ourselves. There are some terms that need to be
defined:

NN Primary government—state or local (county or city) governments. It also

includes special purpose governments (such as an independent school dis-
trict) that have a separately elected governing body, is legally separate, and is
fiscally independent of other state or local governments.
NN Potential component unit (PCU)—legally separate organization that may have
a relationship with a primary government. The relationship may be defined
by financial accountability or by its nature and significance. Excluding the
potential component unit from the reporting entity would cause the financial
report to be misleading or incomplete.
NN Reporting entity—the primary government and its component units.
However, if a component unit issues a separate report, it is the primary gov-
ernment of that reporting entity.

Now, imagine that a governmental entity prepares an annual report—they do that,

you know. The entity takes the role of the primary government in that report. The
report contains all the government’s funds. About that, there should be no ques-
tion—or, at least there won’t be by the time you finish reading this book. However,
the report needs to reflect the reporting entity—not just the primary government.
Therefore, the government must examine these PCUs to determine if they should
be part of the reporting entity.
The best place to start is fiscal dependency. Recall that in our definition of a pri-
mary government, entities that are fiscally independent of other SLGs are primary
governments. However, if this entity—the PCU—has to go to another government
to get approval (1) for the PCU’s budget, or (2) for the PCU’s rates or charges, or
(3) for the PCU to issue debt, then the PCU is fiscally dependent on that other
government. Since fiscal dependency exists, the PCU becomes a component unit.
Beyond fiscal dependency, things get a little murkier but not impossible to
understand. If fiscal dependency exists, the PCU is a component unit of the primary
government. However, if the fiscal dependency tests don’t apply, then we must look
The Growth of GAAP n 29

for other indicators. The starting point is the relationship between the governing
body of the primary government and the PCU. If the primary government appoints
a voting majority of the PCU’s governing body or the primary government estab-
lished and can abolish the PCU’s governing body, we have passed a major test.
However, this appointment power is not enough. The primary government must
also have the ability to impose its will on the PCU or could receive financial ben-
efits or burdens from the PCU for the PCU to become a component unit.
How does the primary government determine whether it can impose its will on
the PCU? There are several tests:*

NN The primary government can remove members of the PCU’s governing body.
NN The primary government can veto, overrule, or modify decisions of the PCU’s
governing body.
NN The primary government can appoint, hire, reassign, or dismiss members of
the PCU’s management.

If the primary government has the appointment power and any of the powers iden-
tified here, then the PCU is a component unit.
What happens, though, if the primary government has none of these three pow-
ers? Can the PCU still be a component unit? Yes, so long as the primary government
can receive a financial benefit or burden from the PCU, along with the aforemen-
tioned appointment power. If the primary government can legally access the PCU’s
resources, that constitutes the possibility of receiving a benefit. If the primary gov-
ernment is legally obligated in some manner on debt issued by the PCU, that offers
the possibility of receiving a burden should the PCU default on the debt. Finally, if
the primary government must finance deficits or provide financial support for the
PCU, there is the possibility of receiving a burden from the PCU. If any of these
three conditions exist, the PCU is a component unit of the primary government.
Once all the component units have been determined, it is necessary to include
them in the financial report of the reporting entity. This presentation can be made
in two ways: discrete presentation or blended presentation. Blended presentation
means that the component unit appears in the annual report as if it were another
fund. This method of presentation is allowed only if the governing bodies of the
primary government and the component unit are substantially the same, or if
the component unit provides services entirely (or almost entirely) to the primary
government. If neither of these conditions are met, then discrete presentation is
required.

* In this area, GASBS 14 does an odd thing. Two of the five abilities identified in the standard
would make the PCU fiscally dependent on the primary government. If either of those condi-
tions exist, having appointment authority over the PCU’s governing body would not matter.
Therefore, those conditions are omitted from this discussion.
30 n Handbook of Governmental Accounting

The requirements of this standard were affected by GASBS 34, but not as much
as some other standards.
GASB Statement No. 15, Governmental College and University Accounting and
Financial Reporting Models, issued in October 1991, was very important when it
came out, although it is much less so now. The purpose of the standard was to
make resolute the accounting and reporting models that public sector colleges and
universities could use. There was evidently some fear that some colleges and univer-
sities might be using the FASB model, which would not be allowed under the juris-
dictional agreement. The standard clarified that either the AICPA College Guide
model or the governmental model could be used. This standard was later replaced by
GASB Statement No. 35, Basic Financial Statements—and Management’s Discussion
and Analysis—for Colleges and Universities. This standard is discussed later.
This last standard saw another change in the membership of the Board.
Mr. Harmer, who had been the only temporary member of the Board carried
forward from the original Board, left and was replaced by Barbara Henderson.
Ms. Henderson had been serving as the Finance Director of Fullerton, California,
up until that time. She went on to serve a total of 9 years on the Board.
Before the end of 1991, the GASB issued a totally new document. This one
is popularly called a Q&A or an Implementation Guide. Whatever short title you
want to use, though, the document was definitely a new type of publication from
the Board. The complete title of this one was Guide to Implementation of GASB
Statement 3 on Deposits with Financial Institutions, Investments (including Repurchase
Agreements), and Reverse Repurchase Agreements; it was issued in December 1991.
Also, on the title page of the document, but separated from the main title by several
inches, are the words “Questions and Answers.”
One of the truly strange things about this document is when it was published:
5 years, almost to the day, since the effective date of GASBS 3. That difference begs
the question, really unanswered by the Q&A: “Hey guys, what took you so long?”
The first question in the Q&A addresses why the Board issued GASBS 3, but not
why it issued this Q&A. You must read the introductory material fairly closely to
see that the Board sought to “codify” the technical questions received by the GASB
staff on a regular basis. In order to have a good Q&A, the staff needs good questions
to include in it. These items are not something the people who work at the GASB
make up. They are actual technical inquiries received at the GASB on a daily basis.
Not all inquiries are included in the Q&A, but they do provide the foundation for
it. From these questions, the staff can also find other interesting items to include
in the Q&A, which are usually found in the appendices. Also, by publishing the
technical questions and answers in the document, it raises the responses to level “d”
GAAP. Until that happens, the answers to technical questions have no standing.
This first Q&A was quite lengthy, consisting of 121 questions and 4 appendices.
The questions are divided into 12 different broad sections, many with subtopics.
The Growth of GAAP n 31

Some of the sections are (1) Concept of credit risk categories, (2) The meaning of
the categories: Are deposits safe or unsafe, (3) Scope of Statement 3, and (4) Specific
issues of deposits with financial institutions, to name just a few. In the introductory
section of the document, the Board promises that this won’t be the last Q&A.
True to its word, before the GASB issues another standard it issues another
Q&A. This one is called Guide to Implementation of GASB Statement 9 on Reporting
Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities
That Use Proprietary Fund Accounting, issued in June 1992. This one is much more
timely than the last Q&A, being published only 2.5 years after the effective date of
GASBS 9. This document is not quite as long as its predecessor; it contains only 75
questions. Given that the GASB requires preparing the Statement of Cash Flows
using the direct method when implementing GASBS 34, this is still very much an
important document and one that should be referred to often.
After this Q&A was issued, another change in the Board occurred. Mr. Man­
dolini, who had come on the Board in 1990, left after 2 years (the length of his
appointment) and was replaced by Mr. Ed Klasny, former governmental audit part-
ner of what was then Ernst and Whinney (now Ernst & Young). Mr. Klasny would
go on to serve a total of 10 years on the Board.
The only standard issued by the Board in 1992 was No. 16, Accounting for
Compensated Absences, issued in November of that year. This standard addresses
a topic near and dear to the hearts of all employees: vacation leave and sick leave.
Very few employees are ever worried about the accounting for these absences, only
that they have a right to them.
Employees earn the right to vacation leave and sick leave based on a past trans-
action: their employment. It is up to the employer to do the accounting. For vaca-
tion leave, an accrual must be made for leave that is earned and for which the
employee will receive benefits through paid time off (before retirement) or by cash
payment at termination or retirement.
Unlike vacation leave, sick leave has one other requirement beyond just doing
the work to earn it: to take sick leave an employee must be sick! Therefore, the
accounting rules are slightly different, too. Here, an accrual must be made only
if the employee will receive at the time of separation or retirement cash payments
for sick leave not taken. The accruals are made at the end of the year as adjusting
entries, and reflect the pay and benefits in effect at that time.
The year 1993 was a big one for the GASB. We have already mentioned GASBS
17 in our discussion of GASBS 11. That was only one of seven standards issued that
year, along with another Q&A. After GASBS 17, the next standard out dealt with
new rules for accounting for landfills: Accounting for Municipal Solid Waste Landfill
Closure and Postclosure Care Costs (which came out in August). This standard was
in reaction to new Environmental Protection Agency (EPA) rules on the operation
of landfills and what had to be done to those landfills after they were closed. The
32 n Handbook of Governmental Accounting

EPA gave many guidelines for operation of the sites, by requiring cells to be con-
structed in a certain way and used in certain ways during the life of the landfill.
Once the landfill was closed, the EPA provided guidance on the capping of the cells
(the closure costs) and the monitoring of the site to ensure there was no leakage into
groundwater or the escape of methane gas into the air for 30 years after the closure
of the cell (postclosure care costs).
Figure 1.8 helps to show how to account for the costs of operating a landfill, if
an enterprise fund is used. If a government uses a governmental fund to account
for the landfill operation, expenditures would be recorded only for the amount
actually paid from current financial resources; other amounts would be recorded
in the General Long-Term Liabilities list. All the actual costs incurred during the
preparation of the site and the estimated costs of postclosure care are accounted
for during the life of the landfill. The postclosure care costs include the equipment

Cash Disbursements—Before Opening, During Active Life,

at Closure, and During Postclosure Care

Expenses—All Related
to Active Life

Opening Closure End

Active
Preparation Postclosure Care
Life

Method:
1. All expected costs of closure and postclosure care are estimated at the outset–
the beginning of the Active Life—and are reestimated annually.
2. The useful capacity (cubic feet) of the MSWLF also is estimated initially and
revised when appropriate).
3. During each year of Active Life the ratable portion of the total estimated cost
of closure and postclosure care—based on the percentage (%) of total MSWLF
capacity used that period—is recorded:
Expenditure/Expense
Liability
4. Related cash disbursements are recorded:
Liability
Cash

Figure 1.8 Accounting for landfills. (Adapted with permission from Robert J.
Freeman and Craig D. Shoulders, Governmental Accounting, Reporting, and
Auditing: Update, Texas Tech University, Lubbock, 1994.)
The Growth of GAAP n 33

necessary to monitor the site during the postclosure time period, the cost of final
capping, and cost of monitoring and maintaining the site during the postclosure
care period. As the landfill fills up, accruals are made for estimated costs based on
current cost projections. Should these projections change later, appropriate adjust-
ments have to be made.
The third standard that came out in 1993 was a relatively minor one with a very
narrow focus, although you wouldn’t know it from the title: Governmental College
and University Omnibus Statement (GASBS 19, issued in September). Usually, when
the GASB uses the word “omnibus” in a standard, it tends to be a broad standard
that fixes error in previous standards. This one applied to Pell grant accounting and
handling risk financing activities. It has since been superceded by GASBS 35.
GASBS 20, Accounting and Financial Reporting for Proprietary Funds and Other
Governmental Entities That Use Proprietary Fund Accounting, was also issued in
September. This standard was one of the more curious standards issued by the
GASB. It came about as a result of some proprietary funds—notably utilities—
wanting to follow more of the FASB’s pronouncements. There was a perception
by these utilities that such an option would make their financial statements more
comparable to those in the private sector and enable them to compete better in the
bond market (this belief has never been proved).
To allow these activities to follow more FASB standards, the GASB decided to
give them two options:

1. The activities could follow all pronouncements of the FASB and predeces-
sor organizations (the Committee on Accounting Procedure [Accounting
Research Bulletins] and the Accounting Principles Board [Opinions]) issued
up to November 30, 1989, as long as those standards did not conflict with
GASB standards.
2. The activities could follow all the pronouncements in option #1 plus those
issued by the FASB after November 30, 1989, as long as those standards did
not conflict with GASB standards.

The last provision in both options keeps these activities from departing from gov-
ernmental GAAP. For instance, they could not implement FASBS 95, Statement of
Cash Flows, as that would conflict with GASBS 9. Another thing to keep in mind
for governments considering option #2 is that it applies to all pronouncements from
the FASB, not just the standards but also interpretations, TBs, Q&As, and guid-
ance issued by the Emerging Issues Task Force (EITF).
Another curious aspect of this standard is what it says to disclose, or more
accurately, what it doesn’t say about disclosure. If you examine almost any standard
issued by the GASB, there will usually be a section near the end describing the
disclosure requirements. This section is missing from this standard. As a result,
34 n Handbook of Governmental Accounting

many governments made the election between option #1 and option #2 but did not
disclose it. This lack of guidance was fixed in GASBS 34.*
GASBS 21, Accounting for Escheat Property, issued in October, was the fifth
standard of 1993. The standard defines “escheat” as the “revision of property to a
governmental entity in the absence of legal claimants or heirs” (paragraph 1). In
most states, escheat occurs after a certain length of time when property—usually
bank deposits—is unclaimed or has no activity. Most states have a stated time
period for inactivity. In Tennessee, the period is 5 years.
Once the property is claimed by the government, the government must decide
what fund is going to account for the property. This fund is known as the ultimate
fund. Once assigned to the ultimate fund, there are two options on how the prop-
erty may be used:

NN It may be used in the operation of the government (immediately or after the

passage of a certain length of time; in some states, this period is 10 years).
NN It may be held in perpetuity for a possible future claim (although the earnings
from the property could be used to support government operations).

In Tennessee, the second option applies. The lia-

bility exists in perpetuity in the General Fund, but T wo Alabama CPAs approached me
about GASBS 22. Both wanted to
know if they had to implement the stan-
the earnings from the property can be appropri- dard. I pointed out to them that anytime
ated by the State Legislature for general govern- a standard says this “should be done”
what that really means is “you will do
ment operations.
it.” Neither liked the response, but both
GASBS 22, Accounting for Taxpayer-Assessed Tax understood it.
Revenues, was somewhat controversial when it came Some months later I saw both of them
out in December. The basic impact of the standard at another meeting. I asked them how the
implementation had gone. One responded
was to put revenue recognition for sales tax reve- that it had not gone well. I asked why not.
nues and income tax revenues on the same footing He said it took three meetings of the city
as property tax revenues. Before this standard was council to convince them that while rev-
enues had gone up, they didn’t have any
issued, these revenues were almost always recog- more money to spend.
nized on a cash basis, although some governments I looked at the other for his response.
had begun to recognize them using the availability He said he had no trouble at all. I asked
how that happened, and he responded
criterion used for property taxes. GASBS 22 made that he decided the amount wasn’t mea-
this process required.† The controversy caused by surable. Therefore, nothing had to be
this standard was that governments would now accrued. I looked at him as if to say, but
you know better than that. He just smiled.
recognize more revenues, but wouldn’t necessar- I then said, “Well, you are the one that
ily have the cash to support them. Many finance signed the audit—not me!”

* When asked why that section was left out of the standard, a member of the GASB staff
responded that everyone should know they have to disclose significant accounting policies,
and this choice qualifies as one of those. The evidence of reporting between 1993 and 1999
(when GASBS 34 was published) would indicate otherwise.
† A popular expression about this standard is that it had the same impact as raising the speed
limit from 55 to 65—it placed what a lot of people were already doing within the law.
The Growth of GAAP n 35

directors were opposed to this recognition. However, the controversy was short-
lived. The standard was superceded by GASBS 33 that came out 5 years later.
GASBS 23, Accounting and Financial Reporting for Refundings of Debt Reported
by Proprietary Activities, issued in December, was the last standard of 1993. It was
as controversial as GASBS 22 but for different reasons. This standard changed the
way we had been accounting for advance refundings of debt by proprietary funds.*
Prior to these new rules, an advance refunding had been accounted for in the same
manner as one in the private sector. That is, the entry on an advance refunding
would look something similar to this:

Old debt issue 400,000

Unamortized bond premium (old issue) 25,000

Extraordinary loss on early retirement of debt 95,000

Unamortized bond premium (new issue) 20,000

New bond issue 500,000

An extraordinary loss would occur generally when the refunding was properly
completed.
GASBS 23 changes this entry by eliminating the extraordinary loss and replacing
it with a deferral account. This deferral is then amortized as a component of interest
expense over the shorter of the remaining life of the old bonds or the life of the new
bonds. The deferral is reported as a contra account to the new bond issue liability.
Many respondents to the exposure draft (ED) were opposed to the standard,
because it would make refundings in proprietary funds different from their coun-
terparts in the private sector. However, the GASB felt there were fundamental dif-
ferences on why to complete a refunding in the private sector than in the public
sector. Obviously, the Board believed this was a change for the better.
While we will discuss GASBS 34 shortly, one comment about it as the standard
relates to advance refundings needs to be made now. Although the rules for account-
ing for advance refundings in governmental funds remain the same, when govern-
ment-wide statements are prepared, those refundings have to be restated to match
the GASBS 23 reporting requirements. This change applies to all refundings done
in the year of GASBS 34 implementation and after—it is not a retroactive change.
The last document issued in 1993 was the Board’s third Q&A, Guide to
Implementation of GASB Statement 10 on Accounting and Financial Reporting for
Risk Financing and Related Insurance Issues. I know what you must be thinking:
GASBS 10 came out in 1989, so why did it take more than 4 years to come out with

* The governmental funds already have a standard on this issue—No. 7, which had been issued
in 1987.
36 n Handbook of Governmental Accounting

this Q&A? The answer lies in the effective date of GASBS 10. Most of the standard
was to go into effect at the same time as GASBS 11. Since GASBS 17 indefinitely
delayed GASBS 11, it also called for the implementation of GASBS 10.
This Q&A was the longest one up to that time, containing 110 questions and
answers in 86 pages (the Q&A for #3 had 76 pages, while #9 had 58 pages). This
Q&A is a little different from the other two as it has two broad sections: one for
public entity risk pools (PERPs) and another for entities other than pools. Within
these two sections are similar categories including (1) definition and scope, (2) rec-
ognition and measurement, and (3) disclosures.
Not as many documents were published in 1994 as in 1993, but it was still
a banner year for the GASB with four major standards and another Q&A. The
first standard of the year, Accounting and Financial Reporting for Certain Grants
and Other Financial Assistance (issued in June), addressed three issues: pass-through
grants, food stamps, and on-behalf payments of salaries and benefits.
First, what is a pass-through grant? It is a grant issued by a higher government
(such as the state or federal government) that passes through a local government on
its way to the agency or organization that will actually spend the money. Some
of the terminology in this process can be a little confusing. The recipient govern-
ment is known as the primary recipient, whereas the agency or organization that
will spend the money is the secondary recipient. One might think that the agency
for whom the money is primarily intended would be the primary recipient, but it
doesn’t work that way.
Prior to the issuance of this standard, most governments accounted for pass-
through grants in an agency fund as the money was just coming in and going right
back out. Using an agency fund made sense. However, it did limit the control over
the money. To tighten this control and other internal controls over the funding,
this standard requires that the funding be recognized as an intergovernmental rev-
enue when it is received, and as an expenditure when it is disbursed. Although it is
not widely used, some governments report the expenditure as an intergovernmen-
tal expenditure rather than including it as one of the other current (or operating)
expenditure classifications. Most governments set up a special revenue fund (SRF)
to account for these grants.
There are still certain circumstances when an SRF may not be necessary. If a
government has no administrative or direct financial involvement in the program,
they can still use an agency fund. Examples of administrative involvement include
(these come from paragraph 5 of the standard):

NN Monitoring secondary recipients for compliance with program requirements

NN Determining eligibility of the secondary recipients to participate in the pro-
gram, regardless of who (the primary government or the grantor) sets the
eligibility requirements
NN Having discretion in how the money is allocated
The Growth of GAAP n 37

State/Local Actual Cash Flow Retirement

Government System
In-substance
Cash Flows
School
Board
Revenue Expenditure/Expense

Figure 1.9 On-behalf payments.

Financial involvement would be having to provide financing because of matching

requirements or being liable for disallowed costs.
The second issue in the standard is food stamps and applies only to state govern-
ments. An expenditure is recognized when the food stamps are distributed (or, for
states using electronic benefits transfer system, when the beneficiary uses the ben-
efit) with corresponding revenue recognized at the same time. For states still using
paper food stamps, the stamps on hand at the end of the month would be reported
as an asset (although not cash and cash equivalents, but as a separate account) with
an offsetting deferred revenue liability.
The third issue in the standard addressed on-behalf payment of salaries and
benefits. This process is summarized in Figure 1.9. The payments would typically
be paid by one government for another government. For example, in some states,
schools may receive a substantial amount of funding from a higher government (the
state or a city or county government). Rather than transferring the money to the
school and then having the school transfer the money to the retirement system,
the higher government may make a direct payment to the retirement system. Prior
to this standard, this payment received no accounting in the school board. Now,
the school board must recognize simultaneously the revenue and expenditure or
expense when the transfer is made.
GASBS 24 was the last standard on which Vice Chairman Martin Ives worked.
Mr. Ives was one of the last two original members of the Board—the other being
Chairman James Antonio. Both men had served since the Board was created in
1984. Under the rules that were effective at the time, Mr. Ives could have served
another 5-year term but elected not to do so.* He was replaced by Mr. Tom Allen,
former State Auditor of Utah.

* The rules on terms of both GASB and FASB members have since been changed. FASB mem-
bers can serve a maximum of 14 years (the equivalent of two 7-year terms); GASB members
can serve a maximum of 10 years (the equivalent of two 5-year terms). For example, when
Mr. Paul Reilly was first appointed to the Board in 1995, it was for a 4-year term. He was
then reappointed to a 5-year term. In 2004, at the conclusion of that last term, he was reap-
pointed for one more year. He was replaced in the summer of 2005.
38 n Handbook of Governmental Accounting

The next three standards issued by the Board came out at the same time
(November), as all dealt with a similar issue: pensions. These standards were

NN No. 25, Financial Reporting for Defined Benefit Pension Plans and Note
Disclosures for Defined Contribution Plans
NN No. 26, Financial Reporting for Postemployment Healthcare Plans Administered
by Defined Benefit Pension Plans
NN No. 27, Accounting for Pensions by State and Local Governmental Employers

As a group, these standards replaced GASBS 5 in providing the rules for account-
ing and reporting of pensions and pension funds. Although issued in November
1994, GASBS 25 and 26 were not effective until fiscal years ending after June 15,
1997 (GASBS 27 was effective the year after that), almost 3 years in the future. The
long lead time was designed to allow governments to determine how to implement
the complexities of the standards.
Obviously, GASBS 25 lays down the rules for the
financial reporting—statements and disclosures—of W hen GASBS 25 required
pension plans to mark all
their investments to fair value, the
defined benefit pension plans. Prior to this standard, effect in Alabama was most inter-
pension plans followed the financial statement require- esting. One of the largest, single
ments of proprietary funds, except that they were exempt investments of the Retirement
System of Alabama (RSA) is in the
from preparing the Statement of Cash Flows. Also, pen- Robert Trent Jones Golf Trail, a
sion plans didn’t use the fund equity accounts found in collection of 11 golf course com-
proprietary funds. Instead, they used fund balance (sim- plexes around the state. I had a
conversation with one of their
ilar to governmental funds), although they did report accountants on how they were
revenues and expenses. going to establish a fair value on
The publishing of GASBS 25 saw the development this particular investment. The
accountant told me that they
of two new financial statements specifically designed for were going to use a discounted
pensions: Statement of Plan Net Assets and Statement cash flow model. I then com-
of Changes in Plan Net Assets. The GASB sought to mented that using such a model
would require (1) guessing the
get away from fund balance in the pension plans. When
cash flows, (2) guessing the num-
government officials see those two words, they usually ber of years the cash flows would
think of money that is available for expenditure—not last, and (3) guessing the appro-
the case in a pension plan. Fund balance was replaced by priate discount rate. I will never
forget his response, given in a real
net assets. At the same time, the Board sought to remove Alabama drawl: “Yeah, but we’re
the concepts of revenues, expenses, and net income from real good at guessing!”
pensions to eliminate the idea that these were any type
of business activities. Revenues were replaced by addi-
tions, expenses by deductions, and net income by change in net assets. These new
financial statements are shown later in the text. In addition to the financial state-
ments, the Board required two schedules (reported as Required Supplementary
Information) in which actuarial information about pension funds is reported.
These schedules are also demonstrated later in the text.
The Growth of GAAP n 39

Another interesting requirement in GASBS 25 was that pension plans had to

report all their investments at fair value. Although the FASB had issued a fair value
requirement for investments in the private sector, the GASB had not addressed this
issue until now. Of course, this requirement only applied to pension plans. The
requirement would not be made applicable to SLGs until later.
GASBS 26 was an interim standard. It provided guidance on accounting for
a very specific type of postemployment benefit plan. This standard has since been
superceded by two new GASB standards dealing with most other postemployment
benefit (OPEB) plans:

NN GASBS 43, Financial Reporting for Postemployment Benefit Plans Other Than
Pension Plans
NN GASBS 45, Accounting and Financial Reporting by Employers for Postemployment
Benefits Other Than Pensions

You will note that these two standards are similar to GASBS 25 and 27, respec-
tively, in that one is for plans and the other is for employers. GASBS 43 and 45
replace not only GASBS 26, but also GASBS 12. As these standards will not have
gone into effect at the time this chapter was written, they are not discussed here.
Finally, GASBS 27 provided guidance on the reporting of pension-related expen-
ditures or expenses (depending on the fund type), liabilities, assets, and note disclo-
sures for the governments participating in pension plans. Naturally, if a government
ran its own pension plan, it would implement GASBS 25 and 27 at the same time.
However, many governments participate in plans run by others. For example, in
Alabama, there is the Retirement System of Alabama, or RSA. All state employees
are required to participate in this plan. Local governments can elect to participate
in the plan. Thus, GASBS 25 applies to RSA, whereas GASBS 27 applies to the
state government and any local governments participating in RSA’s various pension
programs.
Another GASB Q&A was issued in 1994: Guide to Implementation of GASB
Statement 14 on the Financial Reporting Entity. Recall that this standard had
been issued in 1991, but it did not go into effect until fiscal years ending after
December 15, 1993 (which would be in 1994 for most governments). Thus, this
Q&A was probably more timely than its predecessors. As with the previous Q&As,
the document is filled with technical questions posed to the GASB staff and their
answers. This one contained the most questions to date, at 151. GASBS 14 contin-
ues to be a standard of great interest. The passing of over 14 years since the issuance
of GASBS 14 has not lessened the interest in this standard. I regularly receive ques-
tions on whether certain entities should be a part of the reporting entity.
GASBS 28, Accounting and Financial Reporting for Securities Lending Trans­
actions, was one of only two standards issued by the Board in 1995. This standard
was the first one to deal specifically with an issue that arose in California a few
40 n Handbook of Governmental Accounting

years before. The finance and investment personnel of Orange County, California,
had been very active in those years. Some of their investments proved to be quite
creative—and risky—and brought the county to near financial disaster. To avoid
these problems in the future, the GASB began issuing standards to avert some of
the problems faced by Orange County.
This standard examined a very interesting practice in which a government loans
some of its investment portfolio to a securities dealer in return for collateral. The
collateral was then invested, earning interest and dividends for the government.
When the securities lending transaction was complete, the collateral was returned
to the broker for the government’s investments. As long as all the transactions were
well timed, there would be no problems. Unfortunately for Orange County, their
investment personnel were a bit more creative. The investment term of the collateral
didn’t always match that of the lending transaction, requiring other actions on the
part of the investment personnel to complete the transaction.
To avoid such problems, GASBS 28 provides several new reporting require-
ments. Keep in mind that the investments loaned by the government are still assets
of the government. The standard requires that the collateral, usually in the form
of cash but could also be securities or letters of credit, be recorded as an asset on
the books of the government with a corresponding and offsetting liability. The
standard also requires disclosure of whether the maturities of the investments made
with the collateral generally match. Other disclosures required by the standard
include the following:

NN The source of legal or contractual authorization for the use of the securities
lending transactions
NN Violations of those provisions during the year
NN General information about the transaction such as the types of securities lent
and collateral received
NN Whether the government has the ability to pledge or sell the collateral with-
out the default of the borrow (broker)

GASBS 28 marked the end of an era for the Board. It was the last standard
on which Mr. Antonio worked. In the summer of 1995, he left the Board, hav-
ing served 11 distinguished years as its Chairman. Mr. Antonio had served longer
than any other Board member. Mr. Allen, who had been earlier appointed to the
Board as Mr. Ives’ replacement, replaced Mr. Antonio as Chairman. At this time,
Mr. Reilly was appointed to the Board to fill the remaining 4 years of Mr. Allen’s
appointment as a member. However, in the time line we are using for the Board’s
history, this does not mark a major shift in the makeup of the Board. That event
will come shortly.
The mid-1990s appear to be slow years for the GASB. If one just considers
the number of standards published, no other single year compares to 1993 when
seven standards were issued. As has already been mentioned, only two standards
The Growth of GAAP n 41

were published in 1995. The next 3 years were as slow or slower in the number of
standards published: one in 1996 (GASBS 30, which was discussed with GASBS 10
earlier in this chapter), two in 1997, and one again in 1998. However, this lack of
new standards should not be seen as indicators of Board inactivity. These years were
probably the busiest the Board has ever seen.
The other standard that came out in 1995 was No. 29, The Use of Not‑for‑Profit
Accounting and Financial Reporting Principles by Governmental Entities. This standard
removed some confusion as to whether certain governmental entities should be fol-
lowing FASBS 116, Accounting for Contributions Received and Contributions Made,
and FASBS 117, Financial Statements of Not-for-Profit Organizations. Essentially,
these standards apply only to the nonprofit organizations that practice in the private
sector and would not apply to those that operate in the public—or governmental—
sector. GASBS 29 also made clear that proprietary activities could not adopt these
standards via the GASBS 20 rules as that standard applies only to FASB standards
issued for business entities, not those limited to not-for-profit entities.
There was one other document published in 1995. For this, first time since 1984,
the GASB issued an interpretation: No. 2, Disclosure of Conduit Debt Obligations.
Conduit debt represents limited-obligation debt typically issued to provide financing
for a third party that is not part of the government’s reporting entity. This debt is often
used to acquire land or construct buildings to be used as a means to attract businesses
to industrial parks. The debt bears the name of the government in order to get more
favorable interest rates, but the government has no obligation on the debt. Instead, it
will be repaid through leases or other arrangements with the parties benefitting from
land or other capital assets. The government is required to disclose a description of the
transaction, the aggregate amount of debt outstanding at the balance sheet date, and
the fact that the government is not obligated in any manner on the debt.
As was already noted, 1996 was a very slow year for the Board. In addition to
the one standard already discussed, the Board issued another interpretation: No. 3,
Financial Reporting for Reverse Repurchase Agreements. Clearly, this interpretation,
as most do, had a very narrow focus. It looks only at this investment transaction
and discusses how to report them when a government pools money from several
funds for investment purposes: the investment, along with its income and costs,
should be reported in the funds where the risk of loss is found and based on the
equity of each fund in the pool.
In 1997, the Board had three major documents published: two standards and
another Q&A. The Q&A, Guide to Implementation of GASB Statements 25, 26,
and 27 on Pension Reporting and Disclosure by State and Local Government Plans and
Employers, addressed issues related to the previously discussed pension standards.
One of the two standards, GASBS 32 was already discussed earlier in this chapter.
The other standard issued in this year was GASBS 31, Accounting and Financial
Reporting for Certain Investments and for External Investment Pools. It was, without
a doubt, the most far-reaching of the two standards. As with GASBS 28 and 32,
it was issued in at least partial reaction to the crises in Orange County, but it also
42 n Handbook of Governmental Accounting

addressed issues similar to those addressed in FASBS 115, Accounting for Certain
Investments in Debt and Equity Securities, issued by that Board in 1993. It also
applied some of the requirements from GASBS 25. However, the requirements
were not as broad. Whereas GASBS 25 had required pension plans to mark all their
investments to fair value, GASBS 31 was limited to some certificates of deposit and
other debt and equity investments of the government. The standard requires that
all applicable investments be marked to fair value and the change in fair value be
reported as a component of interest (or investment) income on the operating state-
ment of the funds with the investments.

1.7 A New Board—and a Whole New Ball Game

GASBS 32 was the first standard issued by a Board made up of seven members, not the
five-member boards that had issued the first 31 standards. Increasing the Board size to
seven members was a major change for the FAF and the GASB. Of course, the FASB
had seven members since its founding. In the mid-1990s, it was felt that membership
in the FAF needed to be broadened, with the Securities and Exchange Commission
(SEC) taking a more active role and more membership from the public sector.*

1.7.1 Changing of the Guard

At the same time (see previous section), it was felt that membership in the GASB
should be broadened. Although I doubt that it is in the GASB’s charter, its mem-
bers do seem to represent certain constituencies. For the GASB’s first 11 years,
Mr. Antonio—former State Auditor for Missouri—was its Chairman. He was
replaced as Chairman in 1995 by Mr. Allen, former State Auditor for Utah. When
Mr. Allen left the Board in 2004, his replacement was Mr. Robert H. Attmore,
formerly the State Auditor of New York. Other members of the original Board
included two representatives from local governments (Mr. Ives and Mr. Harmer),
a representative from the auditor community (Mr. Defliese), and Mr. Staats, who,
having served as the Comptroller of the United States, was something of the outlier
of the group, having not been directly affiliated with local governments.
When the original board began to break up in 1990, Dr. Freeman became
the first academic member (essentially replacing Mr. Staats). Dr. Freeman served
10 years and was replaced in 2000 by Dr. William W. Holder of the University of
Southern California—the second academic to serve on the Board. Mr. Mandolini,
who came on the Board with Dr. Freeman, replaced Mr. Defliese. Mr. Mandolini
would be replaced 2 years later by Mr. Klasny, who was in turn replaced by
* Curiously, the SEC’s definition of public sector and the standard definition are not the same.
The standard definition is, of course, state and local governments. The SEC’s definition was
people with interests in publicly traded companies or in the stock markets. You should know
that this is the private sector.
The Growth of GAAP n 43

Mr. James M. Williams in 2002. All these men—Defliese, Mandolini, Klasny, and
Williams—had been very active in the auditor community. Also, in an interesting
coincidence, both Mr. Klasny (Ernst & Whinney) and Mr. Williams (Ernst &
Young) had been members of the same CPA firm, albeit at different times in that
firm’s history.
As was noted earlier, Mr. Harmer (who was the other representative of local
governments) was replaced by Ms. Henderson. She, in turn, was replaced by
Mr. Richard C. Tracy (former Director of Audits for the City of Portland, Oregon)
in 1999. Mr. Ives had been replaced by Mr. Allen in 1994, and when Mr. Allen was
elevated to Chairman in 1995, Mr. Reilly (former finance director from Madison,
Wisconsin) was appointed to fill the remaining 4 years of Mr. Allen’s term as board
member. When Mr. Reilly left the Board in 2005, he was replaced by Marcia
Taylor, the assistant municipal manager of Mt. Lebanon, PA.
In broadening the GASB membership in 1997, two new members were added:

NN Dr. Cynthia B. Green, formerly with the Citizens Budget Commission (a

watchdog organization devoted to influencing constructive change in the
governments of New York City and New York State). Dr. Green represented
“users” of government financial statements on the GASB and is the first mem-
ber not to hold a CPA license. (Dr. Green was replaced in 2007 by Girard
Miller, formerly with Janus Group.)
NN Mr. Edward J. Mazur, formerly the State Comptroller of Virginia. Although
he has held a number of other posts, Mr. Mazur was seen as representing the
comptroller community. (Mr. Mazur was replaced in 2007 by Jan I. Sylvis,
the State of Tennessee Chief of Accountants.)

Now the Board had seven members who represented an ever-increasing spectrum
of constituents.

1.7.2 The Preliminary to the Big Show

Given the new makeup of the Board, it was only natural then for the output to
slacken. As mentioned before, only one standard was issued in 1998, but it was a big
one: GASBS 33, Accounting and Financial Reporting for Nonexchange Transactions.
Actually, the timing of this standard was quite interesting. It gave us recognition
rules for various nonexchange transactions—rules that would really go into effect
once the next standard was issued. Still, it has had some interesting impacts on
financial statements.
In one sense, GASBS 33 gave us some “new names for old friends.” By this
I mean that income taxes and sales taxes became “derived tax revenues.” Also,
property taxes became “imposed nonexchange revenues,” and grants became either
“government-mandated nonexchange transactions” or “voluntary nonexchange
transactions.” But the standard brought us much more than just name changes.
44 n Handbook of Governmental Accounting

Figure 1.10, which is adapted from Appendix C in the standard, nicely summarizes
the new recognition rules.
The other major document issued in 1998 was another Q&A, Guide to
Implementation of GASB Statement 31 on Accounting and Financial Reporting for
Certain Investments and for External Investment Pools. This document came out in
April, and did much to clarify the guidance in GASBS 31.
There was also one technical bulletin (TB) issued in 1998, Disclosures about
Year 2000 Issues, issued in October. We haven’t discussed TBs very much as they
tend to be very narrow focused documents, and they are staff documents (similar
to Q&As). This one is noteworthy because it was the first effort by the GASB to
address the so-called Y2K problem. In this TB, the GASB called on governments to
disclose in the notes to their financial statements the efforts they were undertaking
to avoid a Y2K problem. Unfortunately, because the disclosure was in the notes,
the AICPA threatened to issue qualified opinions on financial statements with that
disclosure. So, a second TB came out in 1999 amending the first one, moving the
information from the notes to required supplementary information (RSI), which
require much less in the way of auditing than do notes. As we all know by now, Y2K
didn’t turn out to be much of an issue, and both TBs were superceded in 2000 with
another TB that rescinded the disclosure requirements.

1.7.3 The New Reporting Model

With the aforementioned great change in Board membership occurring in the late
1990s, it would only be natural for the output of the Board to slow down some.
However, that does not mean that they were inactive. Since the Board’s inception
in 1984, they had been working—in one form or another—on a new reporting
model for state and local governments (SLGs). The development of this new model
can be seen in the time line in Figure 1.11. As you can see, the first discussion
memorandum (DM) on the measurement focus and basis of accounting (MFBA)
was issued in the year following the establishment of the Board. This DM formed
the foundation for both EDs and the subsequent issuance of GASBS 11.
After the Board issued GASBS 17 in 1993, indefinitely delaying the implemen-
tation of GASBS 11, they immediately went to work on the replacement document
for it. The first document, the reporting model Invitation to Comment (ITC) was
issued a year after GASBS 17. Based on what the Board learned from this document,
where several different reporting models had been proposed, the Preliminary Views
(PV) document was issued in the next year. The PV then served as the foundation
for the ED for what became GASBS 34. Notice that it was nearly two-and-one-
half years after the issuance of the ED that the final standard was issued. During
this time, the membership of the Board expanded to seven members. There had to
be a learning curve involved in getting the new members up to speed on what the
Board had done so far. Also, the addition of two more voices to the mix increased
the discussion on what the final standard would look like.
The Growth of GAAP n 45

Classes Recognition

Derived tax revenues Assets*

Period in which underlying exchange has occurred
Examples: sales taxes,
or when resources are received, whichever is first.
personal and corporate
income taxes, motor fuel Revenues
taxes, and similar taxes Period when underlying exchange has occurred.
on earnings or (Report advance receipts as deferred revenues.)
consumption When modified accrual accounting is used,
resources should be “available.”

Imposed nonexchange Assets*

revenues Period when an enforceable legal claim has arisen
or when resources are received, whichever is first.
Examples: property
taxes, most fines and Revenues
forfeitures Period when resources are required to be used or
first period that use is permitted (for example, for
property taxes, the period for which levied). When
modified accrual accounting is used, resources
should be “available.”

Government-mandated Assets* and liabilities

nonexchange transactions Period when all eligibility requirements have been
met or (for asset recognition) when resources are
Examples: federal
received, whichever is first.
government mandates
on state and local Revenues and expenses or expenditures
governments Period when all eligibility requirements have been
met. (Report advance receipts or payments for use
Voluntary nonexchange
in the following period as deferred revenues or
transactions
advances, respectively. However, when a provider
Examples: certain grants precludes the sale, disbursement, or consumption
and entitlements, most of resources for a specified number of years, until a
donations specified event has occurred, or permanently [for
example, permanent and term endowments],
report revenues and expenses or expenditures
when the resources are, respectively, received or
paid and report resulting net assets, equity, or fund
balance as restricted.) When modified accrual
accounting is used, resources should be “available.”

* If there are purpose restrictions, report restricted net assets (or equity or fund
balance) or, for governmental funds, a reservation of fund balance.

Figure 1.10 Classes and timing of recognition of nonexchange transactions.

(Used with permission of the Financial Accounting Foundation.)
46 n Handbook of Governmental Accounting

2/15/85 MFBA DM

12/15/87 1st MFBA ED

8/14/89 2nd MFBA ED

5/1/90 GASBS 11

6/1/93 GASBS 17
6/30/94 Reporting Model ITC
6/30/95 Reporting Model PV

1/31/97 Reporting Model ED

6/30/99 The Final Standard

Figure 1.11 Time line for the new reporting model.

The year 1999 was, perhaps, the most momentous ever in the development of
GAAP. It saw the publishing of the GASB’s two most far-reaching standards:

NN No. 34, Basic Financial Statements—and Management’s Discussion and Anal­

ysis—for State and Local Governments (June)
NN No. 35, Basic Financial Statements—and Management’s Discussion and Anal­
ysis—for Colleges and Universities (November)

While the details of GASBS 34 are discussed later, we want to discuss some of the
broader concepts here.
When you compare the length of these two standards, the difference is star-
tling. In the Original Pronouncements volume published annually by the GASB,
No. 34 occupies 202 pages, while No. 35 takes up only 31 pages. In CPE classes I
have taught where both local government and college and university personnel have
been present, the latter were always thrilled when they saw the difference in size.
However, the air quickly left their balloon when I pointed out that paragraph 5 of
their statement said that they had to implement No. 34. Essentially, that means
they had two standards to implement, not just one.
The Growth of GAAP n 47

Management’s
Discussion and
Analysis

Government-wide Fund Financial

Financial Statements Statements

Notes to the Financial Statements

Required Supplementary Information

(other than MD&A)

Figure 1.12 The new reporting model: minimum requirements for general
purpose external financial reporting. (Used with permission of the Financial
Accounting Foundation.)

The GASB provided a good summary of what the standards address in their
diagram of the minimum requirements for general purpose external financial state-
ments. I like to call it the new reporting model, as shown in Figure 1.12. If you
compare this drawing to the Financial Reporting Pyramid in Figure 1.2, you must
understand that the new model does not replace the entire pyramid. Rather, it
replaces the top two layers and brings part of the third layer into the general pur-
pose financial statements.
Still, it is a good summary of the minimum report. At the top is Management’s
Discussion and Analysis (MD&A). Although this is required supplementary infor-
mation, it is placed at the beginning of the financial section of the report (just
after the auditor’s opinion). The next box represents the basic financial statements,
including (1) the government-wide financial statements, (2) the fund financial state-
ments, and (3) the notes to the financial statements. The last box is the required
supplementary information other than MD&A.
Although the GASB’s graphic is a good one, I have always liked the pyramid
from Figure 1.2. Therefore, I combined the two into my own adaptation of the
new reporting model. It is shown in Figure 1.13. I believe this graphic captures the
essence of GASBS 34 in the more traditional pyramid model. As did the pyramid,
it starts with the most detailed information in the accounting system. From this
data, the individual fund statements and schedules are on the next level. As we shall
see shortly, from these individual fund statements, the government prepares the
48 n Handbook of Governmental Accounting

MD&A

Government-

ME
Wide

FR
Financial Statements

BF
S
FR
Major Fund & CU
CA

Financial Statements
Notes
Other RSI
Nonmajor Fund Combining Financial
Statements
Individual Fund Financial Statements
& Schedules

Transaction Data
(the accounting system)

CAFR--Comprehensive Annual Financial Report

BFS--Basic Financial Statements
MEFR--Minimum External Financial Reporting

Figure 1.13 The new financial reporting pyramid. (Copyright G. Robert Smith, Jr.)

major fund statements and the nonmajor fund combining statements. The nonma-
jor fund statements must be prepared first as the total column then becomes a
separate column in the major funds statements.
Once these statements are prepared, the govern-
ment-wide financial statements can be prepared. W
henever I teach CPE courses, I like to
point out that there are three “lies”
in Figure 1.12. The first is the three-dimen-
Then, finally, the MD&A is written. Within the
sional (3-D) elements that were unneces-
new pyramid, we can see the basic financial state- sarily added to the figure. On a piece of
ments (described previously as part of the GASB’s paper, you can’t plot three dimensions—
graphic). To the basic financial statements are only two. I like to joke that if you want a
3-D graphic, why not make it like those on
added the MD&A and other RSI to form the some birthday cards that when you open
minimum external financial reporting (MEFR) it the graph pops up?! The second lie is
element (this element essentially replaces the old that arrow going back and forth between
the government-wide financial statements
GPFS). Finally, as in the old pyramid, the CAFR and the fund financial statements. In prac-
contains the MEFR and as much additional tice, governments prepare the fund finan-
information as is needed for full disclosure. cial statements first and then prepare the
government-wide statements. Therefore,
In the discussion of the new reporting require- this arrow should only point in one direc-
ments, GASBS 34 starts at the top of the pyra- tion. The third lie is “required supplemen-
mid and works down. However, as I have pointed tary information.” How can it be required
if it is supplementary? I suggested that the
out earlier, that is not how things work in the real name be changed to additional required
world. Therefore, I prefer to discuss things from information. As you can see, the GASB
the bottom up. did not adopt this suggestion.
The Growth of GAAP n 49

GASBS 34 is primarily a reporting standard—it has very little effect on the

accounting system. The MFBA of all the fund types remains the same. Still, there
are some important changes of which you should be aware. In accounting for long-
term debt, governments formally accounted for the issuance on a net basis. For
example, if a bond issue of $100,000 were issued at 99 with $15,000 in bond issue
costs, the entry would look something similar to this:

Cash 975,000

Other financing source—bond proceeds 975,000

Now, governments must account for the details of the transaction. The discount
would be reported as an Other Financing Use (OFU), while premiums would
be reported as an Other Financing Source (OFS). Also, bond issue costs would
be reported as an expenditure. These changes make the previous entry look similar
to this:

Cash 975,000

Expenditures—debt service—bond issue costs 15,000

OFU—bond discount 10,000

Other financing source—bond principal 100,000

While all these factors are one-time events in governmental funds, they will be
captured and amortized at the government-wide level. Other accounting changes
include

NN Easier accounting for transfers between funds. Before, governments had to

distinguish between operating transfers and residual equity transfers. Now,
they may be accounted and reported only as transfers (although GASBS 38
does contain a requirement to disclosure unusual or nonstandard transfers,
which are similar to the old residual equity transfers).
NN Capital contributions in proprietary funds. They now affect the operating
statement rather than just the balance sheet.

1.7.4 Impact on the Funds Statements

As we already pointed out, there was no change in the MFBA for funds. There were,
however, some changes in financial statements. For governmental funds, the bal-
ance sheet remained the same. As for the statement or revenues, expenditures, and
changes in fund balance, all the optional methods of preparing the statement have
been dropped in favor of the format known as “Format A,” shown in Figure 1.14.
50 n Handbook of Governmental Accounting

Revenues
– Expenditures
= Excess (deficiency of revenues over (under) expenditures
± Other financing sources and uses, including transfers
± Special items
± Extraordinary items
= Change in fund balance
+ Fund balance, beginning of year
= Fund balance, end of year

Figure 1.14 Operating statement format.

But, perhaps, the biggest change in financial reporting for governmental funds
was saved for budget-to-actual reporting. Governments were given the choice of
presenting the report as an RSI schedule or as a basic financial statement. Either
way, governments now have to present the original and final budgets and the actual
amounts on a budgetary basis. The variance column is optional, although most
governments present it.
For proprietary funds, governments still prepare three financial statements, but
not much else remains the same. The balance sheet is still there, but now it is
called the Statement of Net Assets. A classified statement is required, using the fol-
lowing three categories: Assets (current and noncurrent), Liabilities (current and
noncurrent), and Net Assets. That’s correct: Net Assets. The fund equity accounts
of contributed capital and retained earnings are gone; in their place, we classify net
assets in three ways:

NN Invested in Capital Assets, Net of Related Debt. This classification is the

result of a calculation: net book value of capital assets less related short-term
and long-term debt.
NN Restricted Net Assets. Restrictions are externally imposed by creditors, grant-
ors, contributors, or laws and regulations of other governments or imposed by
law through constitutional provisions or enabling legislation.
NN Unrestricted Net Assets, whatever is left over. Seriously, this is a plug number
if there ever was one. Net assets, naturally, are the difference between assets
and liabilities. After taking out the first two classifications, unrestricted net
assets is the remaining amount.*
* Reporting Restricted Assets as a separate category of Assets is no longer allowed. These assets
must be reported as either current or noncurrent, depending on when they are expected to be
expended.
The Growth of GAAP n 51

Operating revenues
– Operating expenses
= Operating income (loss)
± Nonoperating revenues and expenses
= Income before…
+ Capital contributions
+ Additions to permanent and term endowments
± Special item
± Extraordinary items
± Transfers
= Change in fund net assets
+ Net assets, beginning of year
= Net assets, end of year

Figure 1.15 Proprietary fund operating statement.

Similar to the governmental fund operating statement, the one for Proprietary
Funds saw some changes as well. The name has been changed slightly to Statement
of Revenues, Expenses, and Changes in Fund Net Assets. All the options for pre-
paring this statement have been discarded in favor of a single format, summarized
in Figure 1.15.
The line called “Income before … ” is my own addition to the report. The
GASB example calls it “Income before other revenues, expenses, gains, losses, and
transfers.” This is a very curious title since nonoperating revenues and expenses
are frequently referred to as other revenues and expenses. I believe governments
should name this line by whatever comes after it. For example, if only Capital
Contributions and Transfers come between it and Changes in Fund Net Assets, the
line should be called “Income Before Capital Contributions and Transfers.” Seldom
will all five things that could occur in this area of the statement be reported, but the
title for this line could be quite long.
The single biggest change in proprietary fund reporting was perhaps left to the
Statement of Cash Flows. GASBS 34 now requires that this statement be prepared
using the direct method. In the Basis for Conclusions, paragraph 440, the GASB
cites research that shows “that respondents from four groups—finance directors,
citizens and legislators, creditors, and auditors—‘clearly found the direct method
to provide more and better information than the indirect method.’” The source
cited for this finding is The Use of the Statement of Cash Flows in Governmental
52 n Handbook of Governmental Accounting

Reporting—the PhD dissertation of G. Robert

Smith, Jr. That’s right: the same guy who wrote O ne other interesting change on the
operating statement for proprietary
funds is that revenues are now reported
this chapter. as net of bad debts expense. I was not
Perhaps the biggest change in financial report- aware of this change until a government
ing came with the fiduciary funds. Prior to GASBS official for whom I was doing a CPE class
pointed it out in my example financial
34, financial reporting for this fund type was some- statements. Naturally, I was surprised
what segmented: and wanted to know the source of this
change. He told me it was in a footnote
to Exhibit 7a in an example in the back
NN Expendable trust funds were reported with of the Q&A for GASBS 34. To be precise,
the governmental funds that footnote reads
NN Nonexpendable trust funds, pension trust
funds, and investment trust funds (created by In the statement of revenues,
expenses, and changes in fund net
GASBS 31) were reported with Proprietary assets, the increase in the reserve
Funds for uncollectibles [bad debts
NN Agency funds, while reported on the com- expense] would be a reduction of
revenue rather than an expense.
bined balance sheet, had their own state- See paragraph 100 (footnote 41).
ment: Statement of Changes in Assets and
Liabilities I found this statement hard to believe.
So, I began a series of e-mails with the
GASB staff to clarify the issue. The cor-
GASBS 34 did away with expendable and nonex-
respondence went something similar to
pendable trust funds, at least for financial report- this:
ing. What had been reported as an expendable
trust fund would now be reported as a special Me: I believe there is an error in the
revenue fund. Nonexpendable trust funds were footnote.
Staff: No, it is correct.
reclassified to either permanent funds (assets held Me: What is the basis for this
for the benefit of the government), or private pur- statement?
pose trust funds (assets held for the benefit of oth- Staff: See paragraph 100, footnote 41
of the standard, as it says in the
ers), which are reported as fiduciary funds. The example.
financial statement formats developed for the Me: I read the reference. It says that
pension trust funds in GASBS 25 have now been “revenues should be reported net
of discounts and allowances.” It
applied to all the fiduciary funds, including agency doesn’t say anything about bad
funds (although these funds would not appear on debts. How does that reference
the Statement of Changes in Fiduciary Fund Net apply here?
Staff: Read paragraphs 16 and 18 of
Assets). Also, agency funds continue to report the
GASBS 33.
Statement of Changes in Assets and Liabilities, Me: I read the paragraphs, but they
although this statement is not part of the basic don’t apply. GASBS 33 addresses
financial statements. nonexchange transactions. These
bad debts arose from an exchange
transaction. How does GASBS 33
apply?
1.7.5 The Change in Focus Staff: We interpreted it that way.
Once all the individual fund statements are pre-
You can’t argue with that; or, if you
pared in accordance with the previously mentioned do, you will lose. That ended the
guidance, nonmajor and major fund statements discussion.
The Growth of GAAP n 53

can be prepared. The concept of a major fund is new to GASBS 34. The major fund
rules apply only to governmental funds and enterprise funds. They do not apply to
Internal Service Funds or Fiduciary Funds.
There are three ways for a fund to be made a major fund. First, the General
Fund is always major. Second, tests are performed to see if a fund is major by cal-
culation. Third, any other fund the government wishes to declare as major may be
reported that way.
The second way to determine major funds is the most complicated. To test if a
fund should be reported as major, a list of all governmental funds and enterprise
funds is made. Then, four financial elements are gathered for each fund in the list:
total assets, total liabilities, total revenues (which excludes extraordinary items for
both governmental funds and enterprise funds), and total expenditures or expenses
(again excluding extraordinary items), depending on the fund type. Subtotals for
the governmental funds and enterprise funds, respectively, are determined, along
with a grand total for both. Two mathematical tests are then performed. The first
divides each element by its corresponding subtotal. If the result exceeds 10%, the
fund may be a major fund. The second test divides each element by the grand
total. If the result exceeds 5%, the fund may be a major fund. At this point, some
confusion comes in to the determination. The standard implies that if one element
passes the 10% test and another element for that fund passes the 5% test, then
the fund is a major fund. The first Q&A stated that the same element had to pass
both tests. This contradiction between the standard and the Q&A was resolved
is a second statement, GASBS 37, Basic Financial Statements—and Management’s
Discussion and Analysis—for State and Local Governments: Omnibus, which adopted
the method in the Q&A.
In financial reporting, the next step is to prepare the nonmajor fund combining
financial statements. Combining statements would be prepared for nonmajor gov-
ernmental funds (governments with many nonmajor funds of all four fund types
may prepare combining statements for each fund type), nonmajor enterprise funds,
internal service funds, and each fiduciary fund type. The total column from each of
these statements then feeds into the major fund statements:

NN In the governmental funds, each major fund is reported in a separate col-

umn with the nonmajor funds reported in a single column. A total column
is required.
NN In the proprietary funds, each major Enterprise Fund is reported in a separate
column with the nonmajor Enterprise Funds reported in a single column. A
total column for the Enterprise Funds is required. An aggregate column for
the Internal Service Funds is reported to the right of this Enterprise Fund
total column.
NN In the Fiduciary Funds, each fund type is reported in a separate column.
There is a maximum of four columns on the Statement of Fiduciary Fund
54 n Handbook of Governmental Accounting

Net Assets and a maximum of three columns on the Statement of Changes in

Fiduciary Fund Net Assets (Agency Funds would never be reported on this
statement).

1.7.6 The Government-Wide Financial Statements

Once all the fund financial statements have been prepared, a government is ready to
prepare its government-wide financial statements. In these statements, we find one
financial statement with a familiar format and another with a radically new format.
In both cases, however, the MFBA is the same. For the government-wide state-
ments, the measurement focus is on economic resources and the basis of accounting
is accrual. That’s right, the same MFBA we see in the proprietary funds. However,
it is a different MFBA from that in the governmental funds, so some adjustments
are going to be necessary to convert those statements to the MFBA for government-
wide statements.
To graphically demonstrate this adjustment process, I developed “Smitty’s
Adaptation of the New Reporting Model,” which is shown in Figure 1.16. This
graphic has been compared to a wiring diagram because of the squiggly lines, but
those squiggles represent the adjustments necessary to prepare the government-
wide statements.
Working from the diagram, we have already prepared all the fund financial
statements. From those, we will prepare the government-wide statements. As you
can see, the line from the fiduciary funds (FF) goes to an “X.” This “X” indi-
cates that the fiduciary fund amounts will not be included in the government-wide
statements. After all, the assets that are in the fiduciary funds are not available
for general government use; therefore, these funds are left out of the government-
wide statements. From the proprietary funds (PF), the line is divided. The line
for the Enterprise Funds (EF) goes directly into the government-wide statements.
Since both sets of statements use the same MFBA, very little (if any) adjustment
should be necessary. However, the line for the Internal Service Funds (ISF) goes
into the adjustment area. These adjustments are necessary because the ISFs will
not be reported at the government-wide level. They are, after all, internal funds.
Finally, the line from the governmental funds (GF) goes into the adjustment area
because so many adjustments have to be made to convert them to government-wide
statements. What kinds of adjustments? The chart in Figure 1.17 summarizes the
major ones.
Other adjustments are also necessary for General Capital Assets (GCAs) and
General Long-Term Liabilities (GLTL). For GCAs, governments must now cap-
ture, report, and depreciate infrastructure. The requirement to keep track of infra-
structure has been around since NCGAS 1, but most governments did little, if
anything, with the information. Also, all other capital assets except land, construc-
tion in progress, and other assets with infinite lives must now be depreciated. For
GCAs, the depreciation expense and accumulated depreciation will be reported
The Growth of GAAP n 55

Management’s
Discussion &
Analysis

Government-wide Fund
Statements Statements

GF Major
Fund
ISF Statements
PF Nonmajor Fund
EF Combining
Statements
Individual Fund
X FF Statements

GCA GLTL CUs

Notes and ARI

Figure 1.16 Smitty’s adaptation of the new reporting model. (Copyright G. Robert
Smith, Jr.)

only at the government-wide level; for capital assets of other fund types, these items
are reported at the fund level and the government-wide level. Governments typi-
cally have very good records of their long-term liabilities. The amounts due within
1 year must now be separated for disclosure.
Hopefully, relatively few adjustments should be necessary for the component
units (CUs) as they will be preparing their own government-wide financial state-
ments. CUs that are fiduciary in nature will not be reported at the government-
wide level. However, they will be integrated into the fiduciary fund statements
prepared for the primary government. As for reporting the other CUs, rules from
GASBS 14 still apply.
Government-wide statements include a Statement of Net Assets and a Statement
of Activities. The Statement of Net Assets may be prepared in either a balance
sheet format or a net asset format (which is encouraged). Governments may present
assets and liabilities in the order of liquidity (which is encouraged) or use a clas-
sified format. The net asset classifications are the same as those discussed earlier
for proprietary funds. Separate columns are reported for Governmental Activities
(governmental funds and eliminated Internal Service Funds) and Business-Type
56 n Handbook of Governmental Accounting

Balance Sheet Operating Statement

1. Assimilate ISF asset, liability, and 1. Assimilate net revenues and expenses
net asset amounts. from ISFs.
2. Eliminate intra-Governmental 2. Eliminate intra-Governmental Fund
Fund receivables and payables. transfers.
3. Consolidate receivables and 3. Consolidate transfers to and from
payables between Governmental Enterprise Funds into a single amount.
Funds and Enterprise Funds into 4. Eliminate expenditures that aren’t
Internal Balances. expenses (capital outlay and principal
4. Pick up capital assets, net of payments).
accumulated depreciation. 5. Record as revenues amounts
5. Pick up long-term liabilities. previously deferred because of
6. Eliminate deferred revenues that availability criterion.
arose because of the availability 6. Record expenses not previously
criterion. recorded as expenditures (long-term
7. Accrue interest payable on debt interest and changes in other
long-term debt. long-term liabilities).
8. Adjust other receivables and 7. Record depreciation on capital assets.
payables as necessary. 8. Adjust other revenue and expense
accounts as necessary.

Figure 1.17 Adjustment to convert Governmental Fund statements to

Government-wide statements.

Activities (enterprise funds). A total column for the primary government is required.
The CUs are reported to the right of the total column. A total column for the
reporting entity is optional. Differences between Total Net Assets on this statement
and Total Fund Balance/Total Net Assets on the major fund statements must be
reconciled through the use of a special schedule reported with fund statements.
The Statement of Activities is like nothing you have ever seen before. It has two
sections: programs and general revenues. In the programs section, expenses and
program revenues are reported on the function or activity level for governmental
activities; identifiable activities for business-type activities (all or part of an enter-
prise fund in which the government separately accounts for revenues, expenses,
gains, and losses); and by major component units (using the same option used on
the Statement of Net Assets). In the general revenues section, revenues that cannot
be assigned to any one function or activity are reported, as are special items, extraor-
dinary items, and remaining transfers. The change in net assets is reported for each
column (Governmental Activities, Business-Type Activities, Total, and Component
Units) along with the beginning and ending net asset amounts. Differences between
the Change in Net Assets on this statement and Change in Fund Balance/Change
The Growth of GAAP n 57

in Fund Net Assets on the major fund statements must be reconciled through the
use of a special schedule reported with fund statements.

1.7.7 Notes to the Financial Statements

The financial statements and notes are frequently prepared simultaneously.
Sometimes, the notes are needed to help prepare the financial statements, as was
the case with the General Capital Assets and General Long-Term Liabilities. Other
times, the statements must be done to see what needs to go in the notes. Regardless
of the order of preparation, GASBS 34 added some new notes and reinforced old
ones. Some of these disclosures are

NN Description of the government-wide statements, including a comment that

fiduciary funds and fiduciary component units are not included in the
amounts
NN MFBA used in the government-wide statements
NN Policy for eliminating internal activity for the Statement of Activities
NN Option taken in applying GASBS 20 (should have been in that statement)
NN Capitalization policy for capital assets, capitalization threshold, depreciation
method, and useful lives of capital assets
NN Types of transactions included in program revenues on the Statement of
Activities
NN Policy for defining operating and nonoperating revenues in the propri-
etary funds
NN Policy for using restricted or unrestricted resources when an expense is incurred
NN Information on capital assets, including beginning balance, additions, retire-
ments or disposals, and ending balance
NN Information on long-term liabilities, including beginning balance, additions,
retirements, ending balance, and amount due within 1 year
NN Information on donor-restricted endowments, including net appreciation on
investments, how amounts are reported in net assets, state law regarding abil-
ity to spend net appreciation, and policy for authorizing and spending invest-
ment income
NN Segment information for identifiable activities where the government also
separately accounts for assets, liabilities, and net assets
NN If a government uses it, information on the modified approach to account for
capital assets

The GASB rarely issues a statement in which new notes aren’t required, so other
additions to this list will be discussed with the respective standard.
58 n Handbook of Governmental Accounting

1.7.8 MD&A and Other RSI

At some point in time, in conjunction with the financial statements and notes
or after they are prepared, the other RSI and MD&A must be written.* MD&A
is listed last because it is probably the last thing the government will assemble.
However, that does not mean it should be left for the last minute. It is too impor-
tant a document for that. Still, information is needed from other parts of the report
before the MD&A can be completed.
The contents of “Other RSI” depend, in large part, on what the government has
done elsewhere. Also, other RSI is placed after the notes but before the rest of the
financial statements. If the government did not report budget-to-actual informa-
tion in a statement, then the budget-to-actual schedule goes here. If the govern-
ment elects to use the modified approach rather than depreciate their infrastructure
assets, information about the assessed condition of the assets and estimated amount
to maintain and actual amount spent to maintain the assets must be disclosed.
Also, discussion is required for the modified approach on the basis for the condi-
tion assessment and the measurement scale used, the condition level at which the
government plans to maintain the asset, and factors that affect trends in the infor-
mation reported. Finally, any pension-related RSI still goes in this section.
Now, the government should have all the information it needs to complete
MD&A, which is part of the minimum external financial report. As pointed
out earlier, even though the GASB addresses the MD&A topic early in the stan-
dard, it is the last thing most governments will prepare. GASBS 34 laid out eight
required elements that must be included in MD&A, at a minimum. The Q&A for
GASBS 34 indicated that these eight things were not, in fact, the minimum but
were the maximum of things to include in MD&A. GASBS 37 resolved this con-
flict by saying that the eight things were the only things that could be included in
MD&A, but that a government could include more things than the GASB did as
examples in the standard. Regardless of the rhetoric, the eight things to be included
in MD&A are

1. Brief discussion of the basic financial statements, including how the govern-
ment-wide statements and fund statements are related
2. Condensed summary information (14 items) derived from the government-
wide statements for the current year and previous year†
3. An analysis of the government’s overall financial position and results of
operations

* Note that in Figure 1.16, I refer to RSI as ARI. ARI, or additional required information,
was my suggested name change for RSI to remove one of the “lies” from the GASB drawing.
Needless to say, this recommendation was not adopted by the Board.
† In the year a government implemented GASBS 34, only the current year had to be shown.
The Growth of GAAP n 59

4. An analysis of balances and transactions in individual funds (with emphasis

on the major funds)
5. An analysis of significant variations between the original and final budgets,
and between the final budget and the actual results
6. A description of significant capital asset and long-term debt activity during
the year
7. A discussion of the modified approach, if used by the government
8. A description of currently known facts that are expected to have a significant
impact in the future

GASBS 34 and 35 were the first standards ever issued by the Board that went into
effect at different times for different sizes of governments. Some standards have had
long implementation dates (such as GASBS 11, which was also the first standard
that governments were prohibited from implementing early, and GASBS 25, 26,
and 27), but none had ever had staggered implementation dates. The stagger was
based on total revenues of the governmental funds plus the enterprise funds for the
first fiscal year ending after June 15, 1999. The dates for implementation are shown
in Figure 1.18.
These standards were only the first to have staggered implementation dates.
Similar staggers have also been applied to GASBI 6, GASBS 38, GASBS 43, and
GASBS 45.
Without question, GASBS 34 (and 35 for colleges and universities) was the
most significant standard ever issued by the GASB and implemented by state and
local governments. It continues to have an impact even though all governments
should have implemented the standard by now. It has been modified several times
by subsequent standards and probably will be again in the future. However, the
requirements of GASBS 34 are here to stay.
The only other document issued by the GASB in 1999 (as if GASBS 34 and 35
weren’t enough), was GASBI 5, Property Tax Revenue Recognition in Governmental
Funds, which came out in November. This interpretation removed the concept of
“when due” from the availability criterion. However, it left in place the guidance
that the availability period should not exceed 60 days.

Implement in First Fiscal Year

Ending After

Revenues of $100 milliion or more June 15, 2002

Revenues of $10 million or more June 15, 2003

but less than $100 million

Revenues less than $10 million June 15, 2004

Figure 1.18 Implementation dates for GASBS 34 and 35.

60 n Handbook of Governmental Accounting

1.8 More Recent GASB Standards

Anyone who thought that GASBS 34 would be the end of the GASB was severely
mistaken. Since the publications of GASBS 34 and 35, the Board has published
18 more standards. Some of these—such as GASBS 43 and 45 dealing with other
postemployment benefits (OPEB)—won’t be addressed here as they haven’t yet gone
into effect. When these later standards do go into effect, the issues will be addressed
in separate chapters. In this last section, we want to touch on the standards that
have gone into effect or will soon have an impact on governmental GAAP.
GASBS 36, Recipient Reporting for Certain Shared Nonexchange Revenues, issued
in April 2000, was a very limited scope standard. It was actually an amendment
to GASBS 33. The only way to amend a standard is to issue another standard;
an interpretation or other GASB document just doesn’t do the trick. The stan-
dard aligned reporting of shared revenues between the grantor government and the
recipient government to report the revenues in the same nonexchange classification.
The first Q&A for GASBS 34 was also published in 2000.
The most recent interpretation issued by the GASB also came out in 2000:
Recognition and Measurement of Certain Liabilities and Expenditures in Governmental
Fund Financial Statements. This document provided additional information about
several NCGA Statements and Interpretations as well as three GASB standards.
Issues addressed in GASBI 6 included the following: requiring governmental fund
liabilities and expenditures that would normally be paid from current financial
resources to be accrued; reporting of all forms of unmatured long-term liabilities
as general long-term liabilities and not in the funds; for governments that elect to
accrue interest on long-term debt that comes due “early” in the next fiscal year,
“early” is defined as one to several days and not more than one month; and requir-
ing accrual of other long-term liabilities (not debt) that mature during the period.
We have already mentioned GASBS 37 several times. This standard fixed a
number of errors in GASBS 34 as well as inconsistencies between GASBS 34 and
the first Q&A. Points already covered include determining major funds and what
is to be included in MD&A. Other “fixes” include accounting for escheat property;
removing the capitalization of interest from general capital assets; making a change
to or from the modified approach, a change in estimate (as in useful life) rather
than a change in principle; how to define program revenues; how to report fines
and forfeitures; slightly modifying the definition of an enterprise fund to include
that they charge fees to external users; defining a segment of an enterprise fund;
reporting component units; and clarifying RSI reporting of the budgetary sched-
ules where there is an excess of expenditures over appropriations.
GASBS 38, Certain Financial Statement Note Disclosures, was published in June
2001. This standard started out as an effort to reduce the number of notes prepared by
governments. In that regard, it was a dismal failure. The end result was adding at least
The Growth of GAAP n 61

11 new notes (we say “at least” because it is possible to count the number of additions
different ways), while eliminating only one: the requirement to disclose the account-
ing policy for encumbrances. Figure 1.19 summarizes the new note requirements.
The only other major document issued in 2001 was the second Q&A on
GASBS 34. Actually, the title of this version was Guide to Implementation of GASB
Statement 34 and Related Pronouncements, as it related to more than just GASBS 34.
In the foreword to the document, it states that the document addresses issues in
GASBS 33, 35, 36, 37, and 38. It is interesting that both Q&As came out before the
required implementation date for large governments. These were the most timely
Q&As ever issued by the GASB.
GASBS 39, Determining Whether Certain Organizations Are Component Units,
published by the GASB in May 2002, marked the first significant change to
GASBS 14 since it was issued in 1991. The project for this standard actually
started in the early 1990s, prior to GASBS 34, with an exposure draft on Affiliated
Organizations. However, the Board got so involved with the new reporting model
that this project was put on hold for several years. The standard addresses other
organizations that were left out of GASBS 14 that should be reported in the CAFR
as discretely presented component units. In most cases, the standard is concerned
with foundations of colleges and universities, but can include other activities that
meet the following three criteria:

1. The economic resources received or held by the separate organization are

entirely or almost entirely for the direct benefit of the primary government,
its component units (CUs), or its constituents.
2. The primary government, or its CUs, is entitled to, or has the ability to other­
wise access, a majority of the economic resources received or held by the
separate organization.
3. The economic resources received or held by an individual organization that
the specific primary government, or its component units, is entitled to, or has
the ability to otherwise access, are significant to that primary government.

At first, it was feared that many small organizations, such as PTAs or band booster
clubs, would be included in this standard. Certainly, these types of organizations
meet the first two requirements. However, they will almost always fail the third
(that is not true for many booster organizations at major universities, particularly
those with large athletic programs).
During the debate on GASBS 34, considerable attention was paid to the format
of the budget-to-actual presentation. In some of the earlier discussions, it was felt
that the format should be similar to the format of the budget document. However,
this suggestion was dropped when many governments opposed it because they
62 n Handbook of Governmental Accounting

Changing the definition of funds from the “boilerplate” definitions found

in NCGAS 1 to describing the activities of the major funds, internal service
fund type, and fiduciary fund types.
Requiring governments to disclose the amount of time used in the
availability criterion.
There has always been a requirement for governments to disclose
significant violations of finance-related or contractual provisions. Now,
governments must address what is being done to solve the violation.
In the past, principal and interest debt service requirements on long-term
debt were reported for each of the next five fiscal years and then
“Thereafter” for the remaining life of the issues. Now, governments must
disclose the “Thereafter” amounts in five-year increments. Several
governments have elected to report each year until maturity, thus
simplifying the disclosure even if it takes up more room.
When interest has variable rates in the above disclosure, use the rate if
effect at the end of the fiscal year. Also, disclose what would cause the
variable rate to change.
Obligations under capital leases are to be reported in a manner similar to
the one above for long-term debt.
Governments are now required to present a schedule of short-term debt
showing the amount outstanding at the beginning of the year, increases,
decreases, and the amount due at the end of the year. This disclosure is
required even if the amounts at the beginning of the year and/or end of the
year are zero. Also, governments must disclose the purpose of the short-
term debt.
Governments have always reported interfund balances by fund. That
disclosure is now required for individual major funds, nonmajor
Governmental Funds in the aggregate, nonmajor Enterprise Funds in the
aggregate, Internal Service funds in the aggregate, and Fiduciary Fund type.
Also, the purposes of the balances must be disclosed as should any
amounts not expected to be repaid within one year.
If receivables and payables are aggregated in the financial statements,
details about the major components must be disclosed in the notes. Also,
balances not to be collected within one year must be disclosed.
Governments have always reported interfund transfers by fund. That
disclosure is now required for individual major funds, nonmajor
Governmental Funds in the aggregate, nonmajor Enterprise Funds in the
aggregate, Internal Service Funds in the aggregate, and Fiduciary Fund type.
Also, there must be a disclosure of the principal purposes of interfund
transfers and separate disclosure for transfers that are unusual or contrary
to the purpose of the fund [similar to the old residual equity transfers].

Figure 1.19 New note requirements in GASBS 38.

The Growth of GAAP n 63

felt their budget format was too complicated for inclusion in the annual report.*
However, after GASBS 34 came out, several governments pointed out that the
requirement for reporting budget-to-actual information for the General Fund and
major special revenue funds with legally adopted budgets did not match the way
those governments budgeted. GASBS 41, Budgetary Comparison Schedules—Per­
spective Differences, issued in May 2003, allows governments to use functions or
activities to present budget-to-actual information. However, governments using
this format must report the information as an RSI schedule rather than a basic
financial statement.
GASBS 42, Accounting and Financial Reporting for Impairment of Capital Assets
and for Insurance Recoveries, issued in November 2004, is one of the stranger stan-
dards issued by the Board in its nearly 20-year history. We say it is strange because it
does not require accountants or auditors to look for impairments. If they are aware
that an impairment exists, then the impairment must be reported. Otherwise, there
is no requirement to search out possible impairments. Also, the GASB has adopted
its own rules on how to calculate and report impairments that differ significantly
from those adopted by the FASB. The FASB rules tend to look at the discounted
expected future cash flows from an asset compared to its book value. However,
since few government capital assets generate cash flows, using that measure would
have been difficult.
An impairment is defined in the standard as “a significant, unexpected decline
in the service utility of a capital asset” (paragraph 5 of the standard). It is a matter
of professional judgment what “significant” means, and any impairment had better
be “unexpected”—otherwise, why would you have purchased the asset? The Board
cites five indicators of impairment:
NN Physical damage
NN Change in laws and regulations or environmental factors
NN Technological developments or evidence of obsolescence
NN Change in duration of use
NN Construction stoppage
If an asset is determined to be impaired, the standard allows three ways to calculate
the amount of the impairment, including restoration cost approach, service units
approach, and deflated depreciation replacement cost approach. In our opinion, the
first three make the most sense, but all are doable.
Finally, we come to GASBS 44, Economic Condition Reporting: The Statist­ical
Section, issued by the GASB in May 2004 but not effective until fiscal years end-
ing after June 15, 2006. This is the first standard issued by the GASB that directly
addresses the “Other Information” section of the CAFR. Most standards address
what is included in minimum external financial reporting (MEFR), as defined by

* It makes you wonder if the budget document is too complicated for inclusion in the CAFR
(given what else is included there), it might also be too complicated to be a budget.
64 n Handbook of Governmental Accounting

GASBS 34. If you refer to the pyramid in

Figure 1.16, it is the information below T his is a summary of an actual event that occurred
between myself and a CPA firm in Alabama after
the implementation date of GASBS 18.
the “Other RSI” line. Everything below It seems that one of the CPA firm’s clients oper-
that point is called “Other Information.” ated a landfill, which was an old rock quarry hole.
Also, in the organization of the CAFR, Although the EPA rules did not apply to it (because
of the type of landfill), the government still had to
there are three sections: account for its closure and postclosure care costs.
In the year of implementing GASBS 18, an accrual
1. Introductory Section, which the had to be made based on how full the hole already
was. The CPA firm contacted me to get my take on
GASB rarely addresses, except to how to estimate how full the hole was at that point
say what should go there in time.
2. Financial Section, which contains Not being familiar with landfill operations, I
tried to dismiss the question. However, the firm was
the MEFR, combining nonma- in dire straits and needed an answer. Although I
jor statement, and individual fund am not familiar with landfill operations, I am famil-
statements iar with rock quarry holes. Working in one was
a summer job I had for 2 years while in college.
3. Statistical Section, which, until
Therefore, I recommended that the CPA firm hire
GASBS 44, had been left largely a well-drilling company. I then told them to park
untouched by the GASB the rig in the middle of the landfill and start drill-
ing. When the drill hit solid rock, they would know
they had reached the bottom of the landfill. By then
Instead, all we had to work with for the measuring the depth of the hole, they would know
Statistical Section was a list of 15 tables how full it was.
taken from NCGAS 1 on what should be The firm immediately balked at this solution.
After all, someone would have to pay the driller,
included in this section. and they didn’t want to get involved with that. I
Now, the GASB has totally redefined told them I would think about it some more and get
the information to be presented in this back to them, hopefully, with another solution.
After a few days I called them back to see if they
section of a CAFR. It is to be divided knew how long it was going to take to fill up the rest
into five categories: (a) financial trend of the hole. They said they did. When I asked them
information, (b) revenue capacity infor- how, they said engineers had projected the growth
mation, (c) debt capacity information, (d) in the population of the town and how much gar-
bage they would generate. These two figures were
demographic and economic information, used to project how long it would take to fill up
and (e) operating information. To date, the hole.
only a few states and some local govern- I said, “There is your answer.” You know how
long the landfill has been in operation. You know
ments have implemented this standard. what the population was when it went into opera-
It will be interesting to discover the tion. Finally, the same engineers from above could
impact these new rules have on financial estimate garbage output for the population each year
(as they were going to do in the future) and come up
reporting and other types of information with a reasonable amount. From these three pieces
included in the CAFR. of information, it would now be possible to project
how full the hole was. They liked that response and
said they would use it in making their estimate.
Some months later, I saw representatives of the
1.9 Conclusion firm at a meeting. I asked them how they made their
estimate on how full the hole was. Their response:
It is impossible to write any chapter like “We guessed.” I looked at them in disbelief and
asked why we had gone through all the above. They
this one and be complete in the analysis had a response to that, too: “It was easier.” I just
of GASB standards. The last standard smiled, shook my head, and walked away.
The Growth of GAAP n 65

S tandard setting is a political process. I hope you have seen that in

your study of this chapter. I thought it would be interesting to look
at how the various members of the GASB have voted over time. This
voting record can be seen in Figure 1.20.
From this analysis, several things stand out. First, of the 46 Standards
issued in the 21-year history of the Board, there have been dissents on
only 12 of them (26.1%). In 5 of those 12 cases (41.7%), there has been
more than one dissenting vote. Interestingly, there has never been a
dissenting vote cast on an interpretation.
Second, Mr. Antonio voted on more standards than anyone else.
That is not surprising as he was the only member of the Board to serve
11 years. Since the mid-1990s, no one has been allowed to serve on
the GASB or FASB for more than two full terms (10 years and 14 years,
respectively). For example, had the rules not changed, Dr. Freeman
could have served for 13 years: his initial 3-year appointment and two
5-year terms. In number of votes cast, Dr. Freeman and Mr. Klasny are
tied for second with 28 standards, Tom Allen is fourth with 26, and
Barbara Henderson and Martin Ives are tied for fifth with 25.
Third, Mr. Antonio dissented more often than any other Board
member—with five “nay” votes—and has the highest percentage
of nay votes among people who have served 5 years or more (Mr.
Mandolini voted nay one-third of the time, but he only served 2 years
and voted on 3 standards). Mr. Antonio dissented on all four pension
standards that came up during his tenure and his was the only dissent-
ing vote on any of those standards. Only once did anyone join Mr.
Antonio in dissent, and that was on the highly controversial GASBS
17 that indefinitely delayed GASBS 11. No one else voted nay more
than twice. Of the remaining nay votes cast, there have been only
three members who have stood alone against the Board: Mr. Defliese
on GASBS 9, Mr. Ives on GASBS 22, and Mr. Reilly on GASBS 45. Dr.
Freeman voted nay twice and was joined by Mr. Mandolini on GASBS
14 and Mr. Klasny on GASBS 24. Mr. Klasny voted nay on GASBS 39
in which he was joined by Mr. Reilly. Mr. Allen voted nay one time, on
GASBS 42, in which he was joined by Mr. Mazur in his only negative
vote. Of the 17 people who have served on the Board, 8 members (Mr.
Harmer, Mr. Staats, Ms. Henderson, Dr. Green, Mr. Tracy, Dr. Holder,
Mr. Williams, and Mr. Attmore) have not cast a nay vote.
All things considered, that is a remarkable record of harmony on
the GASB.

published by the Board while this chapter was being written was #45. Since then,
seven more standards have been published:

NN No. 46, Net Assets Restricted by Enabling Legislation (an amendment of GASB
Statement No. 34).
NN No. 47, Accounting for Termination Benefits.
NN No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity
Transfers of Assets and Future Revenues.
NN No. 49, Accounting and Financial Reporting for Pollution Remediation
Obligations.
NN No. 50, Pension Disclosures (an amendment of GASB Statements No. 25 and
No. 27).
66 n Handbook of Governmental Accounting

NN No. 51, Accounting and Financial Reporting for Intangible Assets.

NN No. 52, Land and Other Real Estate Held as Investments by Endowments.
NN No. 53, Accounting and Financial Reporting for Derivative Instruments.

Some of these standards have been fairly simple and straightforward; others,
including No. 48, No. 49, and No. 53, have been fraught with controversy and
will have long-term effects not known at this time. Standard-setting is a dynamic
process, and not one that lends itself to writing a handbook like this one.
This chapter has been a rather long review of the development of governmental
GAAP. After all, we have had over 70 years of activity to look at, with the most
significant developments occurring in the last 20 years or so with the GASB. What
will the next 20 years bring, particularly as standard-setting starts to go beyond the
borders of the United States and begins to become a global process? One can only
guess. But, if it is anything like the last 20 years, it will not be boring.
The Growth of GAAP n 67

Figure 1.20 GASB voting records.

68 n Handbook of Governmental Accounting

Figure 1.20 (continued).

The Growth of GAAP n 69

Figure 1.20 (continued).

70 n Handbook of Governmental Accounting

Figure 1.20 (continued).

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<http://www.gao.gov/archive/2000/ai00293.pdf>.

______. (2003). Government Auditing Standards. Washington,

DC: Government Printing Office, viewed May 12, 2005,
<http://www.gao.gov/ govaud/ybk01.htm>.

Appendix A

Unqualified Independent Auditor’s Report on Basic Financial

Statements Accompanied by Required Supplementary

Information and Supplementary Information*

[Addressee]
We have audited the accompanying financial statements of
the governmental

activities, the business-type activities, the aggregate

discretely presented compo

nent units, each major fund, and the aggregate remaining

fund information of

the City of Example, Any State, as of and for the year

ended [financial statement

date], which collectively comprise the City’s basic

financial statements as listed in

the table of contents. These financial statements are the

responsibility of the City of

Example’s management. Our responsibility is to express

opinions on these financial

statements based on our audit. We conducted our audit in

accordance with auditing standards generally

accepted in the United States and the standards applicable

to financial audits con

tained in Government Auditing Standards, issued by the

Comptroller General of

the United States. Those standards require that we plan and

perform the audit to

obtain reasonable assurance about whether the financial

statements are free of mate

rial misstatement. We were not engaged to perform an audit

of the City’s internal

control over financial reporting. Our audit included

consideration of internal con

trol over financial reporting as a basis for designing

audit procedures that are appro

priate in the circumstances, but not for the purpose of

expressing an opinion on

the effectiveness of the City’s internal control over

financial reporting. Accordingly,
we express no such opinion. An audit includes examining, on
a test basis, evidence

supporting the amounts and disclosures in the financial

statements, assessing the

accounting principles used and the significant estimates

made by management, and

evaluating the overall financial statement presentation. We

believe that our audit

provides a reasonable basis for our opinions. In our

opinion, the financial statements referred to above present
fairly, in all

material respects, the respective financial position of the

governmental activities,

the business-type activities, the aggregate discretely

presented component units,

each major fund, and the aggregate remaining fund

information of the City as of

[financial statement date], and the respective changes in

financial position, and,

where applicable, cash flows thereof for the year then

ended in conformity with

accounting principles generally accepted in the United

States.

* This sample audit report was found within the City of

Orlando’s September 30, 2007,

Comprehensive Annual Financial Report, viewed September 4,

2008, <http://www.

cityoforlando.net/admin/accounting/PDFs/2007CAFR.pdf>. The
City and Auditor names

were removed. In accordance with Government Auditing

Standards, we have also issued our

report dated [date of report] on our consideration of the

City’s internal control over
financial reporting and on our tests of its compliance with
certain provisions of

laws, regulations, contracts, and grant agreements and

other matters. The purpose

of that report is to describe the scope of our testing of

internal control over finan

cial reporting and compliance and the results of that

testing, and not to provide

an opinion on the internal control over financial reporting

or on compliance. That

report is an integral part of an audit performed in

accordance with Government

Auditing Standards and should be considered in assessing

the results of our audit. Management’s discussion and
analysis, the budget to actual comparison–major

funds (general and special revenue), and the schedules of

funding progress and

employer contributions listed under required supplemental

information in the table

of contents are not a required part of the basic financial

statements but are supple

mentary information required by the Governmental Accounting

Standards Board.

We have applied certain limited procedures, which consisted

principally of inqui

ries of management regarding the methods of measurement and

presentation of the

required supplementary information. However, we did not

audit the information

and express no opinion on it. Our audit was conducted for

the purpose of forming opinions on the finan

cial statements that collectively comprise the City’s basic

financial statements. The

introductory section, combining financial statements,

supplementary information,

and statistical section listed in the table of contents are

presented for purposes of

additional analysis and are not a required part of the

basic financial statements.

The combining financial statements have been subjected to

the auditing procedures

applied in the audit of the basic financial statements and,

in our opinion, are fairly

stated in all material respects in relation to the basic

financial statements taken as a

whole. The information presented in the introductory,

supplementary, and statisti

cal sections have not been subjected to the auditing

procedures applied in the audit

of the basic financial statements and, accordingly, we

express no opinion on them.

[Audit Firm Signature]

[Audit Firm Location]

[Date]

Appendix B

Independent Auditors’ Report on Internal Control over

Financial Reporting and on Compliance and Other Matters

Based on an Audit of Financial Statements Performed in

Accordance With Government Auditing Standards*

[Addressee]

We have audited the financial statements of the

governmental activities, the busi

ness-type activities, the aggregate discretely presented

component units, each major
fund, and the aggregate remaining fund information of the
City, as of and for the

year ended [financial statement date], which collectively

comprise the City’s basic

financial statements, and have issued our report thereon

dated [audit report date].

We conducted our audit in accordance with auditing

standards generally accepted

in the United States and the standards applicable to

financial audits contained in

Government Auditing Standards, issued by the Comptroller

General of the United

States.

Internal Control over Financial Reporting

In planning and performing our audit, we considered the

City’s internal control

over financial reporting as a basis for designing our

auditing procedures for the

purpose of expressing our opinion on the financial

statements but not for the pur

pose of expressing an opinion on the effectiveness of the

City’s internal control over

financial reporting. Accordingly, we do not express an

opinion on the effectiveness

of the City’s internal control over financial reporting. A

control deficiency exists when the design or operation of a
control does not

allow management or employees, in the normal course of

performing their assigned

functions, to prevent or detect misstatements on a timely

basis. A significant defi

ciency is a control deficiency, or combination of control

deficiencies, that adversely
affects the entity’s ability to initiate, authorize,
record, process, or report financial

data reliably in accordance with generally accepted

accounting principles such that

there is more than a remote likelihood that a misstatement

of the entity’s financial

statements that is more than inconsequential will not be

prevented or detected by

the entity’s internal control.

* This sample audit report was found within the City of

Orlando’s September 30, 2007,

Comprehensive Annual Financial Report, viewed September 4,

2008, <http://www.city

oforlando.net/admin/accounting/PDFs/2007CAFR.pdf>. The City

and Auditor names were

removed. A material weakness is a significant deficiency,

or combination of significant

deficiencies, that results in more than a remote likelihood

that a material misstate

ment of the financial statements will not be prevented or

detected by the entity’s

internal control. Our consideration of internal control

over financial reporting was for the lim

ited purpose described in the first paragraph of this

section and would not necessar

ily identify all deficiencies in internal control that

might be significant deficiencies

or material weaknesses. We did not identify any

deficiencies in internal control over

financial reporting that we consider to be material

weaknesses, as defined above.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the

City’s financial state

ments are free of material misstatement, we performed tests

of its compliance with

certain provisions of laws, regulations, contracts, and

grant agreements, noncom

pliance with which could have a direct and material effect

on the determination

of financial statement amounts. However, providing an

opinion on compliance

with those provisions was not an objective of our audit

and, accordingly, we do

not express such an opinion. The results of our tests

disclosed no instances of non

compliance or other matters that are required to be

reported under Government

Auditing Standards. We noted certain matters that we

reported to management of the City in a

separate letter dated January 24, 2008. This report is

intended solely for the information and use of the Mayor
and

Members of the City Council, management, applicable federal

and state grantor

and pass-through agencies, and the Auditor General, State

of Florida, and is

not intended to be and should not be used by anyone other

than these specified

parties.

[Audit Firm Signature]

[Audit Firm Location]

[Date]

Appendix C

Independent Auditors’ Report on Compliance

with Requirements Applicable to Each Major

Program and Internal Control over Compliance

in Accordance with OMB Circular A-133*

[Addressee]

Compliance

We have audited the compliance of the County with the types

of compliance

requirements described in the U.S. Office of Management and

Budget (OMB)

Circular A-133 Compliance Supplement that are applicable to

its major federal

programs for the year ended [financial statement date]. The

County’s major federal

programs are identified in the summary of audit results

section of the accompany

ing schedule of findings and questioned costs. Compliance

with the requirements

of laws, regulations, contracts and grants applicable to

its major federal program is

the responsibility of the County’s management. Our

responsibility is to express an

opinion on the compliance of the County based on our audit.

We conducted our audit of compliance in accordance with
auditing standards

generally accepted in the United States of America; the

standards applicable to finan

cial audits contained in Government Auditing Standards,

issued by the Comptroller

General of the United States; and OMB Circular A-133,

Audits of States, Local

Governments, and Non-Profit Organizations. Those standards

and OMB Circular
A-133 require that we plan and perform the audit to obtain
reasonable assurance

about whether noncompliance with the types of compliance

requirements referred

to above that could have a direct and material effect on a

major federal program

occurred. An audit includes examining, on a test basis,

evidence about the County’s

compliance with those requirements and performing such

other procedures as we

considered necessary in the circumstances. We believe that

our audit provides a

reasonable basis for our opinion. Our audit does not

provide a legal determination

on the County’s compliance with those requirements. In our

opinion, the County complied, in all material respects,
with the require

ments referred to above that are applicable to its major

federal programs for the year

ended [financial statement date].

* This sample audit report was found within the Salt Lake
County, Utah Supplemental Report

in Compliance with Government Reporting Standards and OMB

Circular A–133 for

December 31, 2007, viewed September 4, 2008,

<http://www.slcoaud.org/pdf/mgtbudget/

SingleAudit/2007SingleAudit.pdf>. The County and Auditor

names were removed.

Internal Control over Compliance

The management of the County is responsible for

establishing and maintaining

effective internal control over compliance with the

requirements of laws, regula
tions, contracts, and grants applicable to federal
programs. In planning and per

forming our audit, we considered the County’s internal

control over compliance

with requirements that could have a direct and material

effect on a major federal

program in order to determine our auditing procedures for

the purpose of express

ing our opinion on compliance, but not for the purpose of

expressing an opinion

on the effectiveness of internal control over compliance.

Accordingly, we do not express an opinion on the
effectiveness of the County’s

internal control over compliance. A control deficiency in

an entity’s internal control over compliance exists when

the design or operation of a control does not allow

management or employees, in

the normal course of performing their assigned functions,

to prevent or detect non

compliance with a type of compliance requirement of a

federal program on a timely

basis. A significant deficiency is a control deficiency, or

combination of control defi

ciencies, that adversely affects the County’s ability to

administer a federal program

such that there is more than a remote likelihood that

noncompliance with a type

of compliance requirement of a federal program that is more

than inconsequential

will not be prevented or detected by the County’s internal

control. A material weakness is a significant deficiency,
or combination of significant

deficiencies, that results in more than a remote likelihood

that material noncom
pliance with a type of compliance requirement of a federal
program will not be

prevented or detected by the entity’s internal control. Our

consideration of internal control over compliance was for
the limited pur

pose described in the preceding paragraph and would not

necessarily identify all

deficiencies in internal control that might be deficiencies

or material weaknesses.

We did not identify any deficiencies in internal control

over compliance that we

consider to be material weaknesses, as defined above.

Schedule of Expenditures of Federal Awards

We have audited the financial statements of the

governmental activities, the busi

ness-type activities, the aggregate discretely presented

component units, each major

fund, and the aggregate remaining fund information of the

County as of and for

the year ended December 31, 200X. Our audit was performed
for the purpose of

forming opinions on the financial statements that

collectively comprise the basic

financial statements of the County. The accompanying

schedule of expenditures of

federal awards is presented for purposes of additional

analysis as required by OMB

Circular A-133 and is not a required part of the basic

financial statements. Such

information has been subjected to the auditing procedures

applied in the audit of

the basic financial statements and, in our opinion, is

fairly stated, in all material
respects, in relation to the basic financial statements
taken as a whole. This report is intended solely for the
information and use of County manage

ment, federal awarding agencies, state funding agencies,

and pass-through entities

and is not intended to be and should not be used by anyone

other than these speci

fied parties.

[Audit Firm Signature]

[Audit Firm Location]

[Date]

Appendix D

Examples of Acceptable and Unacceptable

Nonaudit Services (GAGAS Section 3)

Acceptable Nonaudit Services Examples

Auditors may provide basic accounting assistance limited to

services such as prepar

ing draft financial statements that are based on

management’s chart of accounts

and trial balance and any adjusting, correcting, and

closing entries that have been

approved by management; preparing draft notes to the

financial statements based

on information determined and approved by management;

preparing a trial bal

ance based on management’s chart of accounts; maintaining

depreciation schedules

for which management has determined the method of

depreciation, rate of depre

ciation, and salvage value of the asset. Auditors may

provide payroll services when payroll is not material to
the subject

matter of the audit or to the audit objectives. Such

services are limited to using

records and data that have been approved by entity

management. Auditors may provide appraisal or valuation
services limited to services such

as reviewing the work of the entity or a specialist

employed by the entity where

the entity or specialist provides the primary evidence for

the balances recorded in

financial statements or other information that will be

audited; valuing an entity’s

pension, other postemployment benefit, or similar

liabilities provided management

has determined and taken responsibility for all significant

assumptions and data. Auditors may prepare an entity’s
indirect cost proposal or cost allocation plan

provided the amounts are not material and management

assumes responsibility for

all significant assumptions and data. Auditors may provide

advisory services on information technology limited to

services such as advising on system design, system

installation, and system secu

rity if management acknowledges responsibility for the

design, installation, and

internal control over the entity’s system and does not rely
on the auditors’ work as

the primary basis for determining (1) whether to implement

a new system, (2) the

adequacy of the new system design, (3) the adequacy of

major design changes to an

existing system, and (4) the adequacy of the system to

comply with regulatory or

other requirements. Auditors may provide human resource

services to assist management in its eval

uation of potential candidates when the services are

limited to activities such as

serving on an evaluation panel of at least three

individuals to review applications or

interviewing candidates to provide input to management in

arriving at a listing of

best qualified applicants to be provided to management.

Auditors may prepare routine tax filings in accordance with
federal tax laws,

rules, and regulations of the Internal Revenue Service, and

state and local tax based

on information provided by the audited entity.

Unacceptable Nonaudit Services Examples

Auditors may not maintain or prepare the audited entity’s

basic accounting records

or maintain or take responsibility for basic financial or

other records that the audit

organization will audit. Auditors cannot determine account

balances, determine capitalization criteria

or provide payroll services that (1) are material to the

subject matter of the audit or

the audit objectives, and/or (2) involve making management

decisions. Auditors cannot recommend a single individual
for a specific position that is

key to the entity or program under audit, otherwise ranking

or influencing man

agement’s selection of the candidate, or conducting an

executive search or a recruit

ing program for the audited entity. An audit organization

cannot develop an entity’s policies, procedures, and

internal controls or perform management’s assessment of

internal controls when
those controls are significant to the subject matter of the
audit. Auditors may not provide services that are intended
to be used as management’s

primary basis for making decisions that are significant to

the subject matter under

audit. An audit organization cannot be responsible for

designing, developing, install

ing, or operating the entity’s accounting system or other

information systems that

are material or significant to the subject matter of the

audit. An audit organization cannot develop an entity’s
performance measurement sys

tem when that system is material or significant to the

subject matter of the audit. The audit organization cannot
maintain or prepare the audited entity’s basic

accounting records or maintain or take responsibility for

basic financial or other

records that the audit organization will audit. Auditors

should not post transactions (whether coded or not coded)
to the

entity’s financial records or to other records that

subsequently provide data to

the entity’s financial records. Auditors should not serve

as voting members of an entity’s management com

mittee or board of directors, make policy decisions that

affect future direction and

operation of an entity’s programs, supervise entity

employees, develop program

matic policy, authorize an entity’s transactions, or

maintain custody of an entity’s

assets.