Contributors: DeWanna Coleman
Governmental Accounting Standards Board (“GASB”) Statement No. 100, Accounting Changes and Error Corrections—an amendment of GASB Statement No. 62, is in effect for fiscal years beginning after June 15, 2023. This accounting pronouncement is intended to streamline the reporting of accounting changes and error corrections and the related disclosures in governmental financial reporting.
One of the challenges with the prior period adjustment guidance in GASB 62 was that financial statement preparers were unsure how to apply the guidance in certain situations, which led to a lack of consistency across governments. The differences in application meant governmental entities were reporting similar restatements in different ways. One government might report an accounting change, while another government might report a similar change as an error correction. GASB 100 clarifies the accounting change categories and provides guidance for reporting and disclosing those changes.
GASB 100 will apply to all governmental entities and will impact how entities define an accounting error or change. The standard clarifies what represents an accounting change or an error correction and guides how these changes should be presented in the financial statements. Below are the four distinct categories, along with a description and an example of each:
Change in Accounting Principles
A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted accounting principle on the basis that it will improve financial reporting. This category also includes the implementation of new accounting pronouncements. A recent example includes the adoption of GASB Statement No. 96, Subscription-Based Information Technology Arrangements, which many have only just adopted or are now adopting. Most accounting pronouncements include transition guidance in their last couple of paragraphs. Going forward, however, accounting pronouncements will only have transition guidance if they are different from the guidance in GASB 100.
You may have noticed that in GASB Statement No. 101, Compensated Absences, the transition guidance provides the effective date and then references to GASB 100 for further transition guidance. GASB Statement No. 102, Certain Risk Disclosures, is limited to only the effective date. GASB Statement No. 100 requires changes in accounting principles to be applied retroactively by restating the beginning net position, fund balances or fund net position, with the exception of Required Supplementary Information (“RSI”) or Supplementary Information (“SI”), which should only be restated for the periods presented in the basic financial statements. Periods that are not included in the basic financial statements should not be restated.
Changes in Accounting Estimates
Accounting estimates are defined as amounts subject to measurement uncertainty that are recognized or disclosed in the basic financial statements. There are two parts to calculating an accounting estimate: (1) methodology and (2) inputs. A change in an accounting estimate applies only to the change in inputs. A change to the methodology is considered a change in accounting principle. For example, a capital asset is depreciated over 35 years using the straight-line method. A change from the straight-line method to the double-declining balance method, assuming the change is justifiable in terms of the qualitative characteristic of financial reporting, would be a change in accounting principle.
However, if, after receiving new information that wasn’t originally available, the useful life is changed to 25 years, that would be a change in accounting estimate. That distinction is important because, unlike a change in accounting principle, which requires a retroactive change, GASB 100 requires that changes in accounting estimates be reported prospectively by recognizing the change in accounting estimate in the reporting period in which the change occurred.
Changes to or Within the Reporting Entity
The guidance on changes within the reporting entity is new guidance rather than a clarification of the old guidance in GASB 62, which only addressed changes to the reporting entity. Changes to the reporting entity typically result in the addition or removal of component units, while changes within the reporting entity usually result from the movement of funds from major or non-major or changes in a component unit’s presentation as blended or discretely presented. Changes to or within the financial reporting entity should be reported by adjusting the current reporting period’s beginning balances for the effect of the change as if the change occurred as of the beginning of the reporting period. This may result in a somewhat awkward presentation in the year that a fund moves from major to non-major due to the requirement to show the beginning fund balance as previously stated. This may deter governments from ever demoting funds to non-major. When making changes to RSI or SI, entities should restate for all periods presented in the basic financial statements. The entity should not make changes to the RSI or SI presented for reporting periods prior to those presented in the basic financial statements.
Error Correction
Error corrections come from mistakes found in financial reporting. According to GASB 100, mistakes are derived from calculation errors, errors in implementations of standards, or oversight or misuse of facts. Considering our previous example, an error might be manually inputting 35 years as the useful life when 25 years was intended or inputting 35 years when clear historical data was available that concluded that specific class of asset only lasted 25 years. Error corrections should be reported retroactively by restating all prior periods presented. When making error corrections, the entity is required to make changes to any RSI previously reported and included in the report for all prior periods impacted.
Formatting Considerations
In addition to clarifying the accounting changes category, the guidance also prescribes how such changes are presented in the basic financial statements. GASB 100 requires that changes be disclosed in a tabular format in the notes while also presenting the aggregate amount of adjustments on the impacted balances in the financial statements. The restatement disclosure should reconcile the beginning balances as previously reported to the beginning balances as adjusted. The new format is intended to standardize the reporting of accounting errors, changes within the financial reporting entity, and changes in accounting principles to make it easier for users of the financial statements to understand the effect.
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