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Warren Ruppel
This edition first published 2016
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ISBN 978-1-118-97990-7 (pbk) ISBN 978-1-118-97992-1 (ebk)
ISBN 978-1-118-97993-8 (ebk) ISBN 978-1-118-97994-5 (ebk)
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Governmental accounting is a specialized area that has undergone significant changes over the past few decades. As governmental accounting standards have developed, the complexities of preparing financial statements for governmental entities have greatly increased. Providing meaningful financial information to a wide range of users is not an easy task. Adding to these challenges, the Governmental Accounting Standards Board (GASB) brought sweeping changes to the governmental financial reporting model and is now continuing the process of addressing many important accounting areas related to that model.
Given this rapidly changing environment, the financial statement preparer needs a technical resource that provides more than accurate, competent technical information. The resource needs to be written to fit today's governmental accounting environment. It needs to take a fresh look at some of the long-standing accounting questions faced by governments and to provide meaningful up-to-date information on recently issued and soon-to-be-issued accounting pronouncements.
The purpose of this book is to meet these needs by providing a useful, complete, and practical guide to governmental accounting principles and financial reporting. Throughout, the book will provide the reader with:
The approach used in this book is to provide the reader with useful information in a usable format. Accounting theory must correspond with practical examples to be useful, because theory seldom matches the specific situation. For technical information to be usable, it must be clearly presented without clutter and unnecessary repetition. The substance of accounting requirements must also be understood in order for them to be properly applied. Understanding the reasons why technical requirements exist is an important ingredient in properly applying accounting standards.
The 2016 edition of this book begins with an overview of governmental accounting principles and a description of the various types of funds currently in use by governmental entities. It then describes basic financial statements and provides guidance for reporting various assets, liabilities, revenues and expenses/expenditures. Finally, it examines the accounting and financial reporting requirements for several specific types of governmental entities. The book also includes a “Disclosure Checklist,” which should prove very helpful in determining the completeness of a governmental entity's financial statement disclosures.
This book would not have come to fruition without the hard work and perseverance of a number of individuals. John DeRemigis of John Wiley & Sons had the confidence to work with me in developing the original concept for the book and in ensuring its continuing quality and success. Pam Reh's efforts in producing past editions of the book are greatly appreciated, as are the current members of the Wiley team.
Of course, the time and effort needed to write and maintain this book would not be possible without a supportive family, for which I am grateful to my wife Marie, and my sons Christopher and Gregory.
Warren Ruppel, CPA
Woodcliff Lake, NJ
August 2015
Warren Ruppel, CPA, is a Partner at Marks Paneth LLP, New York, in the firm's Nonprofit and Government Group. He formerly was the assistant comptroller for accounting of The City of New York, where he was responsible for all aspects of the City's accounting and financial reporting. He has over thirty years of experience in governmental and not-for-profit accounting and financial reporting. He began his career at KPMG after graduating from St. John's University, New York. His involvement with governmental accounting and auditing began with his first audit assignment—the second audit ever performed of the financial statements of The City of New York. From that time he served many governmental and commercial clients until he joined Deloitte & Touche in 1989 to specialize in audits of governments and not-for-profit organizations. Mr. Ruppel has also served as the chief financial officer of an international not-for-profit organization.
Mr. Ruppel has served as an instructor for many training courses, including specialized governmental and not-for-profit programs and seminars. He has also been an adjunct lecturer of accounting at the Bernard M. Baruch College of the City University of New York. He is the author of five other books, OMB Circular A-133 Audits, Not-for-Profit Organization Audits, Not-for-Profit Accounting Made Easy, Government Accounting Made Easy, and Not-for-Profit Audit Committee Best Practices. He is also the government specialist for SmartPros online CPA Report, in which he appears quarterly to provide a governmental accounting and auditing update.
Mr. Ruppel is a member of the American Institute of Certified Public Accountants as well as the New York State Society of Certified Public Accountants, where he serves on the Board of Directors and chairs its Audit Committee. He also serves on the Governmental Accounting and Auditing Committee and is a past President of the Foundation for Accounting Education. He is a past president of the New York Chapter of the Institute of Management Accountants. Mr. Ruppel is a member of the New York State Government Finance Officers Association, where he serves on its Accounting, Auditing and Financial Reporting Committee. He also serves on the Special Review Committee of the national Government Finance Officers Association. In addition, he is a member of the Executive Advisory Board to the Department of Accounting and Taxation of St. John's University.
The 2016 Governmental GAAP Guide incorporates all of the pronouncements issued by the Governmental Accounting Standards Board (GASB) through August 2015. This chapter is designed to keep the reader up to date on all pronouncements recently issued by the GASB and their effective dates, as well as to report on the Exposure Drafts, Preliminary Views, and Invitations to Comment for proposed new statements or interpretations that are currently outstanding. This chapter also includes relevant information on the GASB's Technical Agenda for the upcoming year to give readers information as to potential areas for future GASB requirements.
| GASB Statement | Effective Date | Where in this book | |
| 68 | Accounting and Financial Reporting for Pensions— An Amendment of GASB Statement No. 27 | Periods beginning after June 15, 2014 | Chapter 17 |
| 69 | Government Combinations and Disposals of Government Operations | Periods beginning after December 15, 2013 | Chapter 11 |
| 70 | Accounting and Financial Reporting for Nonexchange Financial Guarantees | Periods beginning after June 15, 2013 | Chapter 15 |
| 71 | Pension Transition for Contributions Made Subsequent to the Measurement Date – An Amendment of GASB Statement No. 68 | Periods beginning after June 15, 2014 – to be applied simultaneously with GASB 68 | Chapter 17 |
| 72 | Fair Value Measurement and Application | Periods beginning after June 15, 2015 | Chapter 12 |
| 73 | Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 | Fiscal years beginning after June 15, 2016 for pensions not within the scope of GASB 68 Fiscal years beginning after June 15, 2015 for asset reporting and GASB 67 and 68 Amendments |
Chapter 17 |
| 74 | Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans | Fiscal years beginning after June 15, 2016 | Chapter 22 |
| 75 | Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions | Fiscal years beginning after June 15, 2017 | Chapter 17 |
| 76 | The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments | Periods beginning after June 15, 2015 | Chapter 2 |
| 77 | Tax Abatement Disclosures | Periods beginning after December 15, 2015 | Chapter 9 |
| Concepts Statement No. 6 Measurement of Elements of Financial Statements | N/A –for use by GASB in setting future standards | Chapter 2 |
The GASB has a number of Exposure Drafts and Preliminary Views that it has issued which will affect future accounting and financial reporting requirements when final standards are developed. The following provides a brief synopsis of what is being covered by each Exposure Draft and Preliminary Views document. Readers should always be aware that the GASB often modifies proposal stage literature based upon its continuing deliberations and consideration of comments that it receives on each Exposure Draft and Preliminary Views Document.
In December 2014 the GASB issued two Exposure Drafts related to the amendment of the GAAP hierarchy for governments. Under the first Exposure Draft, the GAAP hierarchy would be as follow:
The sources of authoritative GAAP are categorized in descending order of authority as follows:
The GASB issued GASBS 76.The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments which is effective for periods beginning after June 15, 2015.
This Exposure Draft related to the Implementation Guides is an updated, cumulative implementation guide which, given its higher level of authority in the GAAP hierarchy, had to go through the due process procedures.
The requirements of GASBS 76 are effective for periods beginning after June 15, 2015, with earlier application encouraged. When issued the Implementation Guide Exposure Draft is expected to have the same implementation date.
This Exposure Draft was issued in June 2015 to address the accounting and financial reporting for irrevocable split-interest agreements. The requirements are similar to those used by not-for-profit organizations for similar type agreements, except for the recognition of deferred inflows of resources. These accounting requirements will more likely affect governmental colleges and universities as well as governmental hospitals, which are the most common recipients of these types of contributions.
Split-interest agreements are a specific type of giving arrangement used by donors to provide resources to two or more beneficiaries, including governments. Split-interest agreements can be created through trusts or equivalent arrangements under which a donor transfers resources to an intermediary to hold and administer for the benefit of the government and at least one other beneficiary. Examples of these types of arrangements include charitable lead trusts, charitable remainder trusts, charitable annuity gifts, and life-interests in real estate.
The accounting requirements resulting from this Exposure Draft would require that a government that receives resources pursuant to an irrevocable split-interest agreement recognize assets, liabilities, and deferred inflows of resources.
In addition, Exposure Draft would require that a government recognize as assets beneficial interests in irrevocable split-interest agreements that are administered by a third party, if those beneficial interests are under the control of the government and embody present service capacity.
The requirements of the Statement expected from this Exposure Draft are expected to be effective for financial statements for periods beginning after December 15, 2016, and would be applied retrospectively. Earlier application is expected to be encouraged.
The GASB issued this Exposure Draft in June 2015 to amend the blending criteria established in GASB Statement No. 14 (GASBS14) The Financial Reporting Entity, as amended.
The proposed Statement resulting from this Exposure Draft would establish an additional blending criterion for the financial statement presentation of component units of all state and local governments. The proposed criterion would require blending of component units incorporated as not-for-profit corporations when the primary government is the sole corporate member of the corporation. This proposed blending criterion would not apply to component units included in the financial reporting entity by Statement No. 39, Determining Whether Certain Organizations Are Component Units.
The requirements of the Statement resulting from this Exposure Draft are expected to be effective for financial statements for reporting periods beginning after June 15, 2016 with earlier application encouraged.
In June 2015 the GASB issued an Exposure Draft to address accounting and financial reporting issues for certain external investment pools and their participants.
Under the requirements that result from this Exposure Draft, if an external investment pool meets specified criteria, the pool would be able to elect to measure for financial reporting purposes all of its investments at amortized cost. Likewise, the pool participants would be able to measure for financial reporting purposes their investments in the external investment pool at amortized cost.
The provisions resulting from this Exposure Draft would replace the existing concept of a “2a7-like” pool, since these types of pools have been superceded and without new accounting guidance the amortized cost election would no longer be available based upon the 2a7-like pool criteria.
The accounting guidance resulting from this Exposure Draft would establish criteria to identify a qualifying external investment pool. The specific criteria would address (1) how the external investment pool transacts with participants; (2) requirements for portfolio maturity, quality, diversification, and liquidity; and (3) calculation of a shadow price. Professional judgment would be required to determine if any instances of noncompliance during the reporting period were significant and, therefore, would prevent the external investment pool from measuring for financial reporting purposes all of its investments at amortized cost.
Upon implementation of the accounting requirements resulting from this Exposure Draft, an external investment pool that elects to measure its investments in accordance with other GASB Statements would not be allowed to reverse that election. However, an external investment pool that meets all of the specified criteria contained in the Exposure Draft and elects to measure for financial reporting purposes all of its investments at amortized cost would be allowed to change that election in a future reporting period.
The requirements resulting from this Exposure Draft would also establish additional note disclosure requirements for external investment pools that measure for financial reporting purposes all of their investments at amortized cost and for governments that participate in those pools. These required disclosures for both the qualifying external investment pools and their participants would include information about limitations or restrictions on participant withdrawals.
The requirements of the Statement resulting from this Exposure Draft are expected to be effective for financial statements for reporting periods beginning after June 15, 2015, except for certain portfolio quality provisions and the provisions related to shadow price calculations. Those exceptions are expected to be effective for reporting periods beginning after December 15, 2015. Earlier application would be encouraged.
A qualifying external investment pool that previously had not reported all of its investments at amortized cost would be allowed to elect to measure for financial reporting purposes all of its investments at amortized cost only upon initial application of the Statement resulting from this Exposure Draft.
In November 2014 the GASB issued a Preliminary Views document relating to lease accounting. The FASB has a similar project on its agenda and the GASB preliminary views in this document take a similar, but not quite the same, approach to lease accounting. The GASB's preliminary views are based on the underlying principle that all leases are financings of the right to use an underlying asset. This underlying principle is virtually the same as that being contemplated by the FASB, although lease classification is simpler and certain government related topics (e.g. fiscal funding clauses) are addressed.
The following paragraphs are a summary of the PV document's preliminary views.
A lease would be defined as a contract that conveys the right to use a nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction. Any contract that meets this definition would be accounted for under the leases guidance, unless specifically excluded. Leases that transfer ownership or contain a bargain purchase option would be accounted for as financed purchases and would not be accounted for under the leases guidance.
Contracts that contain both lease and service components generally would be separated so that each component is accounted for on its own. Contracts that contain leases of multiple assets may be separated in certain circumstances. Contracts entered into at or near the same time with the same counterparty would not be presumed to be part of the same lease unless there is evidence to the contrary.
The lease term is defined in the PV document as the period during which a lessee has a noncancellable right to use an underlying asset, plus the following, if applicable:
Fiscal funding or cancellation clauses would continue to be disregarded for financial reporting purposes if the possibility of cancellation is remote. A government would reassess the lease term only if the lessee does one or both of the following:
Lessees would recognize a lease liability and an intangible lease asset at the beginning of a lease, unless it is a short-term lease as defined below. The liability would be measured at the present value of certain lease payments to be made over the lease term. The lease asset would be measured at the value of the lease liability plus any prepayments and certain initial direct costs. A lessee would recognize interest expense on the lease liability and amortization expense on the lease asset. Disclosures would include a description of leasing arrangements, the amount of lease assets recognized, and a schedule of future lease payments to be made.
Lessors would recognize a lease receivable and a deferred inflow of resources at the beginning of a lease, unless it is a short-term lease as defined below. The receivable would be measured at the present value of certain lease payments to be received over the lease term. The deferred inflow of resources would be measured at the value of the lease receivable plus the amount of any payments received at or prior to the beginning of the lease that relate to future periods. A lessor would recognize interest revenue on the lease receivable and also would recognize revenue over the term of the lease from the deferred inflow of resources. A lessor would not derecognize the underlying asset in the lease. Disclosures would include a description of leasing arrangements, the total amount of revenue recognized from leases, and a schedule of future lease payments to be received.
A short-term lease would be defined as a lease that, at the beginning of the lease, has a maximum possible term under the contract, including any options to extend, of 12 months or less. A lessee in a short-term lease would not follow the regular accounting for leases but, instead, would recognize lease payments as expenses or expenditures based primarily on the payment terms of the contract. A lessor in a short-term lease would not follow the regular accounting for leases but, instead, would recognize lease payments as revenue based primarily on the terms of the contract.
An amendment to a lease contract would be considered a modification unless the lessee's right to use the underlying asset decreases, in which case it would be a partial termination. A lease termination would be accounted for by adjusting the balances of the lease liability and lease asset by a lessee, or the lease receivable and deferred inflow of resources by a lessor, with any difference being recognized as a gain or loss. A lease modification would be accounted for by adjusting the balances of the related lease liability and lease asset by a lessee, or the related lease receivable and deferred inflow of resources by a lessor. However, if the modification is due to the refunding of related debt, other guidance would apply.
Subleases would be treated as transactions separate from the original lease. A government that has sublet an asset would recognize separately the liability and lease asset as lessee in the original lease and the receivable and deferred inflow of resources as lessor in the sublease. A sale-leaseback transaction would be accounted for under sale-leaseback accounting if there is a qualifying sale. In that case, the sale would be accounted for as any other sale, except any gain or loss would be reported as a deferred inflow of resources or a deferred outflow of resources and recognized over the term of the leaseback. The leaseback would be accounted for in the same manner as any other lease. A lease-leaseback transaction would be recognized as a net lease liability or lease receivable, with disclosure of the gross lease liability and lease receivable.
A lease between related parties would continue to be recognized based on the substance instead of the form of the transaction. Leases within financial reporting entities would continue to be treated like any other transaction between component units. Leases with blended component units would be eliminated in the financial statements of the reporting entity, while leases with discretely presented component units would be presented separately from other leases.
In November 2014 the GASB issued a Preliminary Views document regarding financial reporting for fiduciary responsibilities. The purpose of the PV document is to address how financial statements address a government's accountability for its activities as a fiduciary and when a government should reporting on its fiduciary responsibilities.
The preliminary view expressed in the PV document is that a government is a fiduciary and has a fiduciary responsibility when it controls assets (1) from a pass-through grant for which the government does not have administrative or direct financial involvement, (2) in accordance with a trust agreement or equivalent arrangement in which the government itself is not a beneficiary, or (3) for the benefit of individuals that are not required to be part of the citizenry as a condition of being a beneficiary, or organizations or other governments that are not part of the financial reporting entity.
Further a government “controls assets” in a fiduciary capacity if those assets (1) are used by the government (or its assignee) to provide benefits to specified or intended beneficiaries and (2) have present service capacity that can be (a) used; (b) exchanged for another asset, such as cash; or (c) employed in any other way that provides benefits.
The PV document notes a variety of legal structures or custodial arrangements that define the relationship of a governing body to a fiduciary activity, including (1) directly holding the assets, (2) serving as the trustee for the assets held in a trust agreement or equivalent arrangement, or (3) being legally separate from the entity (other than a trust) that holds or administers the assets.
The PV document provides that a government's control of fiduciary assets should be determined by a combination of the legal structure that defines the relationship of the governing body to the fiduciary activity and whether the government has a responsibility for administering the exchange of assets, as follows:
Under the PV document, a government has control of assets if:
Under the PV document, a government does not have control of assets if:
Fiduciary funds would continue to be used to report the fiduciary activities of a government in its basic financial statements. The PV document is proposing that the classification of fiduciary activities as a particular fiduciary fund would be determined in part by the presence or absence of a trust agreement or equivalent arrangement.
The PV document is also proposing a new custodial fund type to report any fiduciary activity that is not administered through a trust agreement or equivalent arrangement. A custodial fund would be reported as a fiduciary fund and would include certain funds previously classified as agency funds or as trust funds, but for which there is no trust agreement or equivalent arrangement.
A liability would be recognized in fiduciary funds when an event has occurred that compels a government to disburse fiduciary resources. A government would be compelled to disburse fiduciary resources when no further action or condition is required to be met by the beneficiary to be entitled to receive the resources.
All fiduciary funds would report additions and deductions in the statement of changes in fiduciary net position in the basic financial statements. The Board believes that users need detailed information about the additions to and deductions from fiduciary funds. Therefore, governments engaged in fiduciary activities would present (1) additions disaggregated by source and, if applicable, by net investment income, including separate display of investment income and investment costs, and (2) deductions disaggregated by type and, if applicable, separate display of administrative costs.
Some special-purpose governments engaged only in fiduciary activities that are component units of another government have component units of their own that are engaged only in fiduciary activities. Fiduciary fund financial statements of a primary government would include the combined information of that component unit and its component units that are fiduciary in nature.
In addition, the PV document also provides that a stand-alone business-type activity also engaged in fiduciary activities should present fiduciary fund financial statements within its basic financial statements.
The GASB has a number of additional important projects on its agenda that will likely affect governmental accounting and financial reporting in the future. Some of the more significant projects are as follows.
The GASB, as always, maintains an active agenda, and the accounting and financial reporting standards for governments are consistently evolving. Financial statement preparers need to keep an eye on emerging new GASB pronouncements to ensure that they have adequate time to plan for their implementation, as well as to inform financial statement users about their potential impacts.