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The Great GASB

Governmental Accounting Standards Board's Statement 34 seeks to make state and local government financial statements more comprehensive and comprehensible.

Governments big and small, state and local, issue them every year. But is there anyone who actually considers even the most well written and stylized Comprehensive Annual Financial Report (CAFR) a really good read?

In fact, CAFRs -- painstakingly researched and thoughtfully recorded each fiscal year -- generally languish unread and gathering dust in numbers equal only to auditors' assessments, environmental impact reports and copies of Beowulf ... in the original Old English.

But with Statement 34, the Governmental Accounting Standards Board (GASB) hopes to make the documents not only reader-friendly, but useful as well. "[Statement 34] provides information to people in a format that has a much broader interest, and that's provided in a format that a citizen or a financial statement user can actually compare to other governments," said Tom Allen, GASB chairman.

The general purpose of GASB 34 is to make governmental accounting more like business accounting. Whereas state and local government entities have traditionally used cash accounting methods, GASB 34 requires accrual accounting from the public sector.

Instituted in 1999 and implemented in stages over the past several years -- with the third and final phase under way as of June 15 -- Statement 34 requires governments to significantly change the way they report their finances.


Once Upon a Time
GASB officials considered implementing the changes for nearly a decade, but struggled to determine exactly how to maintain the positive features of traditional fund accounting while requiring disclosure of economic resources on a full accrual basis. Statement 34 was finally issued when officials found an acceptable way to blend the two.

"Statement 34 retains the fund accounting focus, which is important from a budgetary and a short-term focus," said Allen. "We added what are called 'government-wide financial statements,' wherein a government has to account for all assets -- including infrastructure assets -- all liabilities and financial position; is it improving or deteriorating? That's a key measure."

Created in 1984, GASB is a nonprofit agency charged with setting Generally Accepted Accounting Principles (GAAP) for state and local governments. It is a sister organization to the Financial Accounting Standards Board (FASB), which sets similar standards for private business.

Although GASB has no authority to set law, most -- though not all -- public agencies follow its standards. Doing so helps governments obtain clear opinions from their auditors and may reduce the cost of issuing debt, as bonding organizations generally like to see accounting information based on GAAP.

Despite the seeming improvements Statement 34 offers public-sector accounting, many governments were none too happy to see the required changes.


Continuing Changes
Most notable is the new requirement that calls for the capitalization and depreciation of infrastructure assets. That change means governments must find resources and information to accurately record and value such items as roadways, bridges, sewer facilities and dams.

Although most people who work in finance agree that such an approach more accurately reflects a government's true financial status -- physical infrastructure, after all, continues to have value long after its original purchase -- many officials balked at the work required to record, value and formulate depreciation of their infrastructure.

"We could see the positives, but we could also see the great deal of work involved," said Calvin McKelvogue, division administrator of the State Accounting Enterprise for Iowa. "We were very concerned about what the cost benefit was going to be for the work involved."

Indeed, most government entities confronted with the changes required in GASB 34 wondered how they would get a handle on their diverse infrastructure.

"I see change as a good thing," said Doreen Hazelip, financial analyst for Carroll County, Md. But Hazelip admitted, "At first the staff could not see the benefit in the implementation of GASB 34."

Many governments knew they would need to build or purchase software for the project. Some even turned to other alternatives, such as GIS, to record infrastructure. Staff members in Carroll County and Iowa were lucky because both upgraded their computer systems just prior to implementation of Statement 34.

"Iowa had to upgrade their overall accounting program for the Y2K project," explained McKelvogue. "That upgraded the system we were using to give us some better information and make it easier to get some information."

Similarly Carroll County finance had, for its own reasons, upgraded their computer software in 1999. The change was a lucky break for staff working to implement the new GASB rules.

"When GASB 34 came around, we did not have many changes to our information gathering and storage methods," said Hazelip.

Allen sees technology in general as a sort of salvation for both those who compile CAFRs and those who could benefit from the information CAFRs contain. He said he hopes advancing technology coupled with a more relevant CAFR will help eliminate one of the main reasons he believes government financial statements are underutilized.

"The reason [financial statements] aren't read is because they don't contain good information that somebody needs to make a decision," Allen said. "And it takes so long to get them out."

With governmental accounting lag time typically at six months or longer, Allen said he understands the documents simply aren't timely.

"If a corporation issued a financial statement six months after the end of the year, the stockholders would go crazy," he said.

Delayed statements, however, may soon be a thing of the past. Many state and local governments now place added emphasis on getting financial statements out as quickly as possible.

This year, Michigan issued its financial statements -- including those for every state college and university -- less than 90 days after the end of the year. State officials hope next year to complete statements even more quickly.

"With technology, we ought to be able to do that," said Allen. "We used to go through an elaborate process of closing the books, adjusting entries and gathering information from different departments. We should take care of all that electronically now."


Real-Time Finances
Also envisioned in the near future is governments providing constituents with real-time financial information via the Internet, Allen said.

"If people have access through a Web site to real-time information about government, and when they get their tax bill can figure out what it costs to provide a certain service or why their tax bill is higher or lower -- I think that's one of the things people want to know," he said.

Such instant accessibility would also let the public compare their government's financial standing with other governments around the country.

For most governments, real-time information on the Internet is a ways off, and in implementing GASB 34 over the past few years, most agencies have realized that accounting software and up-to-date computer systems can do only so much.

There is still the vital task of actually determining where information can be found and how to gather that information expeditiously. Many GASB 34 implementers simply asked around various departments to figure out what resources they had.

Many, such as Iowa, leaned heavily on their transportation departments.

"Our Department of Transportation had a pretty good handle on the roads and bridges and that kind of infrastructure," said McKelvogue. "And we moved along pretty quickly."


Numeric Intimidation
In Carroll County, Hazelip said her office struggled with several aspects of Statement 34. "Going from the Governmental Fund statements to the Statement of Net Assets and Statement of Activities was a challenge," Hazelip said. "Going from the modified accrual statements to the full accrual statements, we had to analyze which entries needed to be made and what elimination entries to record."

Although Statement 34 added new, and hopefully, more accurate twists and turns to public-sector accounting, financial statements essentially remain filled with numbers. And numbers -- especially in large quantity -- can be intimidating.

For that reason, GASB 34 also requires finance departments to assemble what is known as a Management Discussion and Analysis (MD&A). In effect, the MD&A provides a narrative discussion of any significant changes in the overall financial picture of a given agency.

MD&As necessitate comparative discussions of basic financial information from one year to the next, analysis of overall fiscal health, analysis of the transactions and balances of individual funds, explanation of significant variations in original and final budgets, discussion of long-term debt and capital asset activity, and any other pertinent decisions or conditions that significantly impacted on the government's financial position.

"The Management Discussion and Analysis is probably the most popular part of Statement 34 for taxpayers and other financial statement users," said Allen. "The MD&A is required to discuss significant changes from one period to the next and why those changes take place."

McKelvogue believes that in general, financial reports have become far too complicated for the average person to comprehend. He hopes the MD&As will help make CAFRs more understandable -- and more useful.

"I think that once they get used to [the MD&A], people will start looking at it a lot [more closely]," he said. "It is something you can understand."

Indeed, the easy-to-read MD&As should make CAFRs -- once virtually inscrutable to laymen -- at least somewhat accessible. And to hear GASB officials tell the tale, that is exactly what Statement 34 is supposed to accomplish.

"We've had many letters from many governments. They've heard from mayors, county commissioners and others who have said, 'I never really understood the financial statements before, but now I do and I appreciate that,'" said Allen. "We have set the proper platform for good government reporting."