Cherry Bekaert is proud to provide a professional member of our government services industry team, Scott Anderson, to serve as a Government Accounting Standards Board (“GASB”) practice fellow, which is a two-year assignment working with GASB on technical matters. Scott, a Director within our Central Florida government audit practice, is on the forefront of evolving standards currently contemplated.
On April 9, 2021, Lauren Strope, a Director within our Central Florida government audit practice, had a chance to virtually grab a cup of coffee and chat with Scott about what the GASB is up to these days, and as you can expect — it’s a lot.
GASB Pre-Agenda Research
Lauren: GASB Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance, delayed the implementation of several standards by 12 or 18 months. Even though, there was a postponement of effective dates, the GASB has remained hard at work. Currently the GASB has five pre-agenda research projects, two comprehensive projects, six practice issues projects, and two conceptual framework projects. Several of these projects would significantly impact the financial statements of our clients, so I am excited to gain a little insight into the process of establishing accounting and financial reporting standards. What type of projects are you working on at the GASB?
Scott: I am on four different project teams, so for this conversation, let’s start with the pre-agenda research projects. Most start here before becoming an actual project.
The first pre-agenda research project that I am working on is Nonfinancial Assets. This came about as nonfinancial assets are not currently defined in the standards. Statement No. 72, Fair Value Measurement and Application, defined a financial asset; however, although other standards refer to nonfinancial assets, it isn’t described anywhere. So, the big question is — is the lack of guidance resulting in confusion and inconsistency in financial reporting? There are things that are uniquely reported in the government environment, for instance, inventory. Currently, inventory is considered a financial asset under Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments; however, in the world of Financial Accounting Standards Board (FASB), inventory is not a financial asset. To get an idea of what people think of this, we performed surveys (over 300 preparers and 40 users), performed a literature review (FASB, IASB, IPSASB, etc.), and selected a sample of Annual Comprehensive Financial Reports to see how nonfinancial assets are currently being reported and disclosed. This project was added to the research agenda in August of 2020 and we plan to wrap it up in June/July — which is pretty quick for a research project.
Nonfinancial Assets Research Description: The initial objective of this pre-agenda research is to determine what effect the nonfinancial asset classification has had on financial reporting, including how it has been interpreted and applied by governments and whether it is a valuable distinction for users of financial statements. If it is determined that additional guidance on nonfinancial assets is needed, another objective will be to consider how the existing accounting and financial reporting standards could be improved. (Source: GASB)
Lauren: I have noticed that nonfinancial assets is defined as not being a financial asset as defined in Statement No. 72. So if nonfinancial assets is the quick pre-agenda project – what is the second one?
Scott: Going Concern Disclosures — Reexamination of Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements of Auditing Standards. This has been ongoing for five years, as it was added to the agenda in April 2015. The GASB has outsourced a lot of the research work to professional researchers who perform numerous studies on financial stress indicators in a large population of governments. My job (along with my team) is to take these different pieces of research and put them all in a comprehensive paper to present to the Board. The Government Accounting Standards Board Advisory Council (GASAC) has listed going concern, as a result of the pandemic among other reasons, as a top priority. We have also been working on our own case studies of municipalities that have filed for bankruptcy or defaulted on debt since the implementation of Statement 34, although it is a population of only 18! This involves data collection and ratio analysis to answer the question “what went wrong?”. I have really enjoyed working on this project, but it isn’t clear what the conclusion will be. Statement No. 56 already requires going concern related disclosures and the population of governments impacted is quite low.
Going Concern Disclosures Research Description: The objective of this research is to evaluate whether the existing GASB authoritative literature has provided preparers of financial statements for state and local governments sufficient guidance about management’s responsibilities for evaluating and disclosing uncertainties associated with severe financial stress (what is now referred to as “going concern” uncertainties). The research will provide the Board with the information it requires to consider the need for revisions to existing disclosure standards, which would be intended to reduce existing diversity in note disclosures and to more effectively meet financial statement user needs. (Source: GASB)
GASB Omnibus Project
Lauren: It is amazing that you have the opportunity to be a part of the GASB Practice Fellow Program. I know that the program allows public accountants to participate in the GASB’s standard-setting process. You will spend two years working at the GASB Headquarters before returning to Cherry Bekaert LLP. So how did you get on these projects? Were you able to select the project or were you assigned to them?
Scott: All were assigned, but I was asked what I preferred when I interviewed. The only project I really asked to be a part of was revenue and expenses recognition, which we’ll get to later.
Lauren: Ok — so what was is the third project?
Scott: The Omnibus project, which is comprised of several parts. I am excited about this one, as it gives me the opportunity to see a project from beginning to end. It has provided me with a great learning experience and it is set to go to exposure draft sometime this summer.
The first part of this project relates to exchange and exchange-like financial guarantees. Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, does not apply to financial guarantees made or received by governments in an exchange or exchange-like transaction. This project would consider amending current guidance for exchange and exchange-like financial guarantees (Statement 62), which uses a recognition threshold of probable. Amending this recognition threshold to probable would make it consistent with the guidance on nonexchange financial guarantees, which uses a recognition threshold of more likely than not.
The second topic addressed in the Omnibus project is derivative instruments that are neither effective hedges nor investments. The objective was to address an issued raised by a stakeholder. Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, categorizes all derivative instruments that are not effective hedges as investments. However, certain derivative instruments that are not effective hedges also do not meet the definition of an investment in Statement 72. This project considers whether a third category of derivative instruments should be established. It seems really simple, but that was the most debated topic of the project so far. There are some who believe that, conceptually, all derivative instruments are investments, some of which qualify for hedge accounting. Alternatively, if a government is entering into derivative instrument to hedge a specified risk, then it may not meet the “primarily for the purpose of obtaining income or profit” or “has the service capacity based solely on its ability to generate cash” requirements to be an investment. The end result is whether the change in fair value of the derivative instrument should be reported within the investment revenue category or in a separate category.
The third Omnibus topic relates to re-measurement of certain assets and liabilities. Statements No. 87, Leases; No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements; and No. 96, Subscription-Based Information Technology Arrangements, each provide that the asset or liability (as applicable in the context of each pronouncement) is not required to be re-measured solely for a change in an index or a rate used to determine variable payments. However, the phrase “is not required” is problematic because it would represent an option would could be tantamount to a fair value option, which was never the intent of these Standards.
Another change affecting Statement 87 relates to the effect of a purchase option on assessment of the lease term. The lease term is the period during which a lessee has a non-cancelable right to use an underlying asset, plus periods covered by a lessee’s option to terminate the lease if it is reasonably certain that the lessee will not exercise that option. If a lessee determines that a purchase option will be exercised, the period after the purchase option would be exercised is still included in the lease term, because the purchase option cannot be considered a termination option. However, the exercise price of the purchase option is included in the measurement of the liability when payment is reasonably certain.
In addition to other technical corrections to Statements 87, 94, and 96, we will address the re-measurement of short-term leases. In Statement No. 87, there is a provision related to short-term lease exceptions and a provision about the modification of leases, but there isn’t a discussion of the modification of a short-term lease. So, if you had a short-term lease and modified the term, is it still a short-term lease? This will close the gap, as you will have to consider the term from the date of inception through the end of the new lease term. If it is more than 12 months, then it would no longer be a short-term lease.
Lauren: Wow — that’s a lot. Omnibus projects always seem to have so much information, but there are several parts of this one that might impact my clients. It is interesting that this will be implemented at the same time as Statement No. 87. For several of my clients a similar situation occurred with Statement No. 84 and Statement No. 97. I think that it is interesting that this project also “closes the loophole” of short-term leases.
Scott: Wait, there’s more. GASB just issued Statement No. 93, Replacement of Interbank Offered Rates in early 2020. In December 2020, the LIBOR administrator announced its plans to continue publishing certain US Dollar LIBOR tenors through the middle of 2023. There are trillions of dollars of contracts still out there that reference LIBOR. Extending it the extra time will allow a lot of the contracts to naturally mature. The issue for GASB is that when Statement No. 93 was issued, we were told that there would be no change to the LIBOR sunset date, which informed the effective date for paragraph 11b. This paragraph states that LIBOR is not an appropriate benchmark rate for a derivative instrument that hedges the interest rate risk of taxable debt. The question now is “do we amend and tie it to another date that is subject to change outside of the GASBs control?” The Board tentatively decided that LIBOR will no longer be used when it is no longer calculated using its current methodology as opposed to a particular date. This puts additional responsibility on the preparer to watch for that change. GASB staff will be putting out an alert at the time that the change happens. And that’s about it for Omnibus!
Omnibus Project Description: The objective of this proposed project is to address various technical corrections and other practice issues that have been identified in practice. (Source: GASB)
Revenue and Expenses
Lauren: So on to revenue and expenses. I am excited to hear about this one. I have a feeling it might impact the conceptual framework: recognition project down the road. I have heard that this project is very similar to ASU Topic 606 Revenue from Contracts with Customers.
Scott: I have really enjoyed working on this project. Folks that have been involved in 606 in some ways will find this much easier. The idea here is that there is Statement No. 33, which covers nonexchange revenue transactions. As far as exchange revenue transactions, there is only one paragraph in Statement No. 62; there is currently nothing on expense recognition in the GASB literature. GASB actually gets a lot of inquiries regarding the recognition of expenses. The goal is to add a principles-based framework for revenue and expense recognition. In going to a principle-based approach, you will always have stakeholders who prefer the rules-based approach. GASB is looking at the principle-based approach to better address the increasingly complex environment in which governments operate.
The Preliminary Views document, which was issued in June 2020, proposes a four-step categorization process. If you are familiar with 606, the steps are going to sound familiar. The four steps include:
- Is there a binding arrangement,
- Is there mutual assent,
- Are there rights and obligations that are substantive, and
- Are those rights and obligations interdependent?
If, while assessing a transaction, you answer “yes” to each of the four steps, then you have a transaction with a performance obligation. If you answer “no” to any of the steps, there is no performance obligation. The Preliminary Views (“PV”) is very careful not to refer to this as exchange/non-exchange or performance obligation/no performance obligation. Recognition is informed by when there is a legally enforceable claim and this four-step categorization helps to determine when the legally enforceable claim exists. Although the Preliminary Views document was issued prior to my arrival at the GASB, I have spent much of my time gathering stakeholder feedback on the document. We have administered two field tests in the last nine months and we actually have had a few Cherry Bekaert clients involved in these field tests, and we are in the process of going through the results and feedback. We have completed the public hearing process in which preparers and auditors testified via Zoom regarding their views on the PV document. We have completed user forums where we received feedback from financial statement users and we had one public hearing comment that I thought was very insightful. The commenter stated that all governments should go through the categorization process regardless of any GASB statement because, if you are entering into a contract, you should really understand all of your rights and obligations in order to properly manage the contracts. This really made sense to me. This project has been going on for about four or five years and probably has four or five more years to go. The next step will be for the Board to deliberate on all of the feedback that we received as we continue to build out the model, addressing topics that were not addressed in the PV, such as measurement.
Revenue and Expense Recognition Project Description: The overall objective of this project is to develop a comprehensive, principles-based model that would establish categorization, recognition, and measurement guidance applicable to a wide range of revenue and expense transactions. Achieving that objective will include: (1) development of guidance applicable to topics for which existing guidance is limited, (2) improvement of existing guidance that has been identified as challenging to apply, (3) consideration of a performance obligation approach to the GASB’s authoritative literature, and (4) assessment of existing and proposed guidance based on the conceptual framework. The expected outcome of the project is enhanced quality of information that users rely upon in making decisions and assessing accountability. (Source: GASB)
Lauren: Are you hoping to get to Statement No. 100 before your time with the GASB ends?
Scott: Yes, I would think that the Omnibus projects would either be Statement No. 100 or Statement No. 101.
Financial Reporting Model
Lauren: Ok — beyond your work, anything going on at the GASB that would be of interest to our clients?
Scott: The financial reporting model (“FRM”) project. The FRM project also just completed public hearings and user forums on its Exposure Draft. There may still be some work to do in order to figure out how that project should interact with the Revenue and Expense Recognition project that I am working on.
Financial Reporting Model—Reexamination of Statements 34, 35, 37, 41, and 46 and Interpretation 6 Project Description: The objective of this project is to make improvements to the financial reporting model, including Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and other reporting model-related pronouncements (Statements No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities, No. 37, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus, No. 41, Budgetary Comparison Schedules—Perspective Differences, and No. 46, Net Assets Restricted by Enabling Legislation, and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements). The objective of these improvements would be to enhance the effectiveness of the model in providing information that is essential for decision-making and enhance the ability to assess a government’s accounting and to address certain application issues, based upon the results of the pre-agenda research on the financial reporting model. (Source: GASB)
Alan Skelton was named the Director of Research and Technical Activities effective April 1, 2021, replacing David Bean. In his role as GASB’s Director, he leads the staff and serves as the principal advisor to the chair and Board. Alan has been great. He told me that David is still watching the Board meetings and is still following the going-on of the GASB. Alan promoted two people to assistant director, a new position for the GASB, but we always knew it would take two or three people to replace David.
Lauren: Well thank you so much for your time today and for sharing. Is there anything you want to say to your fans out there?
Scott: Please encourage your clients to respond to surveys and participate in field tests. That really makes a big difference when the GASB is trying to consider cost/benefit and what preparers think of a new project. That is all taken into consideration.
Lauren: Will do. It is great to hear that the GASB really takes the results of the surveys and field tests in account when establishing accounting and financial reporting standards. It is also a great way to gain insight into a project. In my experience, that insight can become invaluable when implementing a new standard. Thank you again and we will see you back at Cherry Bekaert LLP in a year and three months!
