Report On GASB 34 Implementation For Illinois School Districts
Report on GASB 34 ImplementationForIllinois School DistrictsGorenz and Associates, LTD.Certified Public Accountants3010 North SterlingPeoria, Illinois 61604Phone: (309) 685-76211
Report on GASB 34 ImplementationFor Illinois School DistrictsTable of ContentsQuestionsPageWho is the GASB?1What is GASB 34?2How/Why was GASB 34 developed?4What is the impact on Illinois School Districts?6Is partial implementation possible?8Can implementation be avoided?8What is the State of Illinois Comptroller’s Office doing with respectTo implementation of GASB 34?9What changes will ISBE have to make for full implementationOf GASB 34?10What changes will ISBE have to make relative to school districtMonitoring, if full implementation of GASB 34 is required?15What are other states doing with respect to imple mentation of GASB 34?17Summary and Recommendations18Next Steps19Bibliography21About the Author22AppendicesLetter from First Midstate Investment BankersAThe Annual Financial Report – An OverviewBFlowchart of Areas where changes would be needed at ISBECStatutory ReferencesDListing of Other StatesEGASB 34 Implementation Guide for South Carolina School DistrictsFStatement from the Missouri Department of Elementary andSecondary EducationG2
November 20, 2001Illinois State Board Of Education100 North First StreetSpringfield, IL 62777-0001It is our understanding that you desire us to outline the required changes forimplementation of GASB Statement No. 34 “Basic Financial Statements andManagement’s Discussion and Analysis for State and Local Governments” and anyrequired changes if GASB 34 were not implemented. First it is crucial that readers of thisreport understand who the GASB is and the reasoning behind the GovernmentAccounting Standards Board’s research and decision to enact a new reporting model.Who is the GASB?The GASB was formed in 1984 to develop and improve financial reporting rules for stateand local governments in the United States. It operates under the auspices of the not- forprofit Financial Accounting Foundation, which oversees, funds, and appoints themembers of the GASB, as well as the Financial Accounting Standards Board (the FASB).The GASB is not part of any government entity, federal or otherwise. Its rules arerequired in most states for financial reporting at the local and state level. GASB rules alsoare required to be followed when a state or local government's audit report says that itfollows generally accepted accounting principles, or GAAP. Bond covenants associatedwith government debt often require them to follow GAAP.The GASB works closely with an Advisory Council, whose members are drawn frommajor organizations of financial statement readers, auditors, and government officials.Highly placed state and local government officials around the country are represented bythe National Governors Association, the US Conference of Mayors and the NationalConference of State Legislators. The financial community is represented by membersfrom the Bond Market Association, the National Federation of Municipal Analysts, andthe Association of Financial Guaranty Insurors, among others. Citizen watchdog groupsand accounting associations, academics and public power associations are alsorepresented on the Council. This structure gives the GASB a broad base to draw adviceon the important issues it considers.3
ISBEGASB 34In developing the new financial statements, the GASB not only worked with its AdvisoryCouncil, but with people in all areas of state and local government finance, accountingand auditing, as well as with countless numbers of citizens' groups and others who needthe information that government financial reports provide. Many focus groups were heldaround the country, and the GASB also gave the public several opportunities for writtenand oral comment on how the new rules should be crafted. The new rules were influencedby that input.What is GASB 34?Governmental Accounting Standards Board Statement No. 34 establishes a new reportingmodel for governmental units. The primary elements of the new model include:-Management’s discussion and analysis (MD&A) as required supplementaryinformation (RSI)Basic financial statements (Government-wide financial statements [totally new],fund financial statements [new emphasis], and notes to the financial statementsRequired supplementary information other than MD&A1. MANAGEMENT'S DISCUSSION & ANALYSISThe Management's Discussion and Analysis (MD&A) section is a new component ofgovernmental financial statements that is intended to introduce users to the informationcontained in the basic financial statements and provide an analytical overview of thegovernment's financial activities. This section is targeted primarily at citizens and otherlay users of the financial statements. As such, it will include a discussion of current yearfinancial results at the government-wide level and compare these to the previous fiscalyear's results. The MD&A section will also be used to discuss significant changes in netassets or large budgetary variances, significant changes in capital assets or long-termdebt, or other matters that impacted the government during the reporting period (e.g.,corporate relocations, lawsuits, tax rate changes, etc.). The information presented in theMD&A must be based on currently known facts as of the date of the auditor's opinion.2. BASIC FINANCIAL STATEMENTSThe Basic Financial Statements provide two distinct levels of reporting on agovernment's financial activities: government-wide and fund level. Traditionally,governments have only presented fund level information in their financial statements.The government-wide financial statements consist of a Statement of Net Assets and aStatement of Activities. The Statement of Net Assets will report all of the assets,liabilities, and net assets of the District. It will distinguish between the primarygovernment and any discretely presented component units as well as between the primarygovernment's governmental and business-type activities while exclud ing information onfiduciary funds and component units that are fiduciary in nature. The Statement of NetAssets will specifically: include information on the long-term assets and liabilities of thegovernment, resembling the balance sheet of a business; be presented on the accrual basisof accounting; account for all capital assets as part of the government's general and4
ISBEGASB 34business type activities and include depreciation expense of these capital assets; andreport information on infrastructure assets.The Statement of Activities, much like an operating statement, will: present consolidatedinformation on a government's revenues and expenses on an accrual basis; display theexpenses and related revenues of the government by major activity; classify revenues intoseveral categories on the statement including charges for services, operating grants andcapital contributions; and show net cost of each activity before tax revenues and othernon-program revenues are applied to support the remaining expenses.GASB 34 retains the traditional fund level financial statements. Although the fundfinancial statements closely follow current governmental financial statements, twosignificant changes in fund definitions have been introduced. First, GASB 34 defines anew fund type, the permanent fund, in the governmental fund category. Permanent fundsare to be used to account for funds in which the earnings of the fund are used to supportgovernment programs (the principal must be legally restricted). Second, expendable andnonexpendable trust fund types have been eliminated. Governments will typicallyreclassify these funds either as permanent funds, special revenue funds or private purposetrust funds.GASB 34 also introduces the major fund concept in the presentation of the fund financialstatements. Unlike the current governmental reporting model, the major fund conceptallows governments to discretely report only its major governmental and enterprise fundsin the fund financial statements. Major funds are defined as those that have revenues,expenditures, assets, or liabilities that account for at least 10 percent of correspondingtotals for all governmental or enterprise funds and at least 5 percent of the aggregateamount for all governmental and enterprise funds. Other funds deemed integral tounderstanding a district's financial position can be added at the discretion of management.The financial reporting requirements for the fund level statements are to be determinedby the fund type. The fund level financial statements include the following:Governmental Funds, Proprietary Funds, and Fiduciary Funds.Finally, the basic financial statements will still include explanatory footnotes. Requireddisclosures under the old model are still required under the new model. GASB Statement38 (Certain Financial Statement Disclosures) has been issued to clarify which previousstatements are no longer applicable. The only disclosures that have actually beeneliminated are the requirement to disclose encumbrances and the requirement to detail thebudgetary calendar and the legal level of control. Other areas of required disclosure, suchas debt and lease obligations, short-term debt, receivable and payables have all beenclarified by Statement 38, but not substantively changed.3. REQUIRED SUPPLEMENTARY INFORMATIONAlthough the MD&A section is considered part of Required Supplementary Information(RSI), it precedes the basic financial statements. Other RSI, as required by GASB 34, willbe presented following the footnotes to the basic financial statements. The RSI sectionwill include information on budgetary comparisons for the general fund and major specialrevenue funds. RSI is the section in which users of the modified approach for reporting5
ISBEGASB 34infrastructure assets will provide supportive data such as the results from their regularasset conditional assessments, estimated maintenance and preservation costs, thecondition level intended to be maintained and budgetary trend information.It should be noted that the required financial statements could potentially present threebasis of accounting. The Government-wide financial statements are required to bepresented on a full accrual basis. The major fund financial statements are to be presentedon a modified accrual basis. Individual funds that legally adopt a budget are required toreport on their budgetary basis, generally a cash basis for most Illinois school districts.How/Why was GASB 34 developed?The GASB spent a considerable amount of time and deliberation with substantialcontroversy before the Board unanimously approved Statement No. 34 in June of 1999.One compromise that was adopted in the final implementation was a gradualimplementation requirement allowing smaller entities more time to prepare forimplementation. Statement 34 requires entities with gross revenues of 100 million ormore (in FY99) to implement in fiscal years beginning after June 30, 2001. Entities withrevenues over 10 million will implement in fiscal years beginning after June 30, 2002and all other entities will implement in fiscal years beginning after June 30, 2003.The GASB’s intention in creating a new reporting model was to establish a format thatwould be more consistent and comparable from government to government. It alsodesired to make governmental financial statements more similar to business financialstatements. The GASB contacted numerous “financial statement users” for input on thenew model. These users primarily represented the financial community, bond issuers andrating agencies. These users appreciated the GASB intent of comparability and fullaccrual and encouraged that format.We agree that this format is very appropriate for large governments (such as the State ofIllinois), however we disagree with its application to small units of local government.There have been many comments that implementation of GASB 34 is essential tomaintaining good bond ratings. While this may be true for large entities, it is not true forsmall governments. In discussions with investment bankers in central Illinois, it hasbecome apparent that they are more concerned with an entities ability to levy taxes forthe repayment of government debt than they are in the format of the financial statements.We have obtained a letter from First Midstate, Inc. - Investment Bankers showing theircomments on GASB 34 (Appendix A).Another idea that came out of the GASB research was a “need” for more prospectiveinformation on the entities, as opposed to the purely historical information that they hadbeen receiving. Out of this idea has come the Statement’s requirement for governmententities to provide “Management discussion and analysis” that will give a narrativedescription of what the numbers in the financial statements mean and give more detail asto why specific changes occurred and potentially what the governing bodies intentionsare for the use of their resources into the future. The assumption is that this will improvegovernment’s fiscal and operational accountability.6
ISBEGASB 34The following illustration shows the key changes to the reporting model for Fiscal andOperational Accountability.Changes to EnhanceChanges to EnhanceFinancial AccountabilityNew ModelPrevious ModelInformation in basic Information in basicfinancial statements financial statementspresented separatelyaggregated by fundfor “major” governtype.Operational AccountabilityNew ModelPrevious ModelAll reporting basedIntroduction ofon individual fundsDistrict-wideand fund types.financial statements.Budgetary comparisons associated withthe basic financialstatements aggregated by fund type.Information ongovernmentalactivities limited tonear-term inflowsand outflows ofspendable resources.District-widefinancial statementsprovide additionallong-term focus forgovernmentalactivities.Cost data availablefor business-typeactivitiesCost data providedfor both governmental and businesstype activities.No narrativerequired.Narrative overviewand analysis requiredin the form ofManagement’sDiscussion andAnalysismental and enterprisefunds.Budgetary comparisons report onlyfinal amendedbudget amounts.Budgetary comparisons associated withthe basic financialstatements presentedfor the general fundand each “major”special revenue fundwith a legallyadopted budgetBudgetary comparisons report bothoriginal andamended budgets.The Schedule was obtained from the GASB Statement No. 34 Implementation Recommendations for SchoolDistricts published by the Association of School Business Officials International and is reprinted here withpermission.7
ISBEGASB 34What is the impact on Illinois School Districts?The answer to this question depends directly on the actions of the State Board ofEducation. The response could be that major changes would have to be made in order toget ALL Illinois Local Education Agencies (LEAs) in compliance, or some changesbased on a partial implementation, or very little change if the ISBE would allow LEAs toreport only on a regulatory basis. Let’s start with a presumed requirement that ALLLEAs would be forced to fully implement GASB 34.This report has been limited to major implementation issues and general comments. Fordetailed implementation guidelines please utilize the “Guide to Implementation of GASBStatement 34 on Basic Financial Statements – and Management’s Discussion andAnalysis – for State and Local Governments” (copies furnished with this report, underseparate cover).Full implementation is going to be costly. Many school districts, particularly small cashbasis districts, will be forced to change their accounting systems. Specifically, they willlikely need to purchase new accounting software that will allow them to trackencumbrances and payables. In addition to new software, they will need to create newprocedures in order to be able to capture the required data for modified and full accrualfinancial statements. A vast majority of our clients do not have accounting staff capableof handling the requirements to produce accrual or modified accrual financial statements.In fact, they sometimes have difficulty even balancing their bank accounts.Districts that are currently on the modified accrual basis of accounting will have lessdrastic changes with implementation of GASB 34. Since they are already gathering datato report on the modified accrual basis, establishing procedures to capture the full accrualinformation should not be as difficult. There are currently 79 of the 896 Illinois schooldistricts utilizing the modified accrual basis. Of those 79, 47 received the Certificate ofExcellence in Financial Reporting from the Association of School Business OfficialsInternational. Those 47 districts are already familiar with MD&A, because theirComprehensive Annual Financial Reports (CAFR) have been required to provide a“transmittal letter” that was required to include many of the components that are nowrequired to be part of MD&A. Generally speaking, the schools utilizing the modifiedaccrual basis are larger districts with numerous accounting staff to enable them to gatherthe required data.The reality of financial statement production for smaller governments is that auditorsactually audit a general ledger/trial balance and then prepare financial statements fromthat audited data. The auditors are actually the ones putting the information into the formof financial statements under the existing model and undoubtedly would be expected tocontinue this practice under the new model. There are, however, additional difficultiesfor auditors to do this under the new reporting model. Specifically, the requirement forManagement’s Discussion and Analysis is intended to be written by an administrator whois familiar with the day-to-day operations of the district and knows the board’s intentionsfor use of accumulated funds, or plans to overcome current deficit spending. It would bevery difficult for an auditor to appropriately write such detail based on interviews of8
ISBEGASB 34district staff. The additional problem caused by the new model is that MD&A is requiredsupplemental information. This means that the auditor’s opinion must give, at least, an“in relation to” opinion on this information. So, if the auditors are forced to write theMD&A for a school district they would effectively be auditing themselves. This is abreach of independence and a serious problem for auditors to overcome.Another area of great discussion and concern has been accounting for fixed assets, whichapplies to both current cash and modified accrual districts. Many school districts do nothave adequate fixed asset records. The use of full accrual is going to change thecharacterization of fixed assets from historical cost to a depreciated cost amount. Schooldistricts will need to report annually for each category of fixed assets; beginning and endof- year balances, acquisitions, sales or other dispositions, and current depreciation. In thefirst year, balances will have to be adjusted for depreciation that has not been recognizedin prior years. To prepare for recognition of depreciation, the following tasks will needto be performed:- Determine the level to which current capital asset records meet informationneeded to comply with GASB 34.- Determine if there is a need to re-define capital assets (e.g. consider acapitalization threshold), for purposes of compliance.- Determine the inventory of capital assets in service as of the implementationdate of GASB 34.- Review recent capital maintenance projects to ascertain those that should becapitalized.- Examine the historical or estimated historical cost for all capital assets.Valuations need to be objectively determined. Many districts will have assetvalues dating back to the inception of the General Fixed Asset AccountGroup. Districts that choose to re-create records for GASB34 complianceshould consider the following information sources to assist with valuing fixedasset i
implementation of GASB Statement No. 34 “Basic Financial Statements nd a . report understand who the GASB is and the reasoning behind the Government Accounting Standards Board’s research and decision to enact a new reporting model. . account for all capital assets as part of the government's general and .
Local Governments, published in April 2000 by the Governmental Accounting Standards Board (GASB) on GASB Statements 34 and 35. Since GASB Statement 35 merely amends GASB Statement 34 to make it apply to public institutions, the GASB Statement 34 implementation guide also addresses Statement 35.
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prior to the implementation of GASB 34; therefore this plan will discuss only changes from the old reporting model to the new model as set forth by GASB 34. Annual Financial Reporting Counties are required to implement GASB Statement No. 34, “Basic Financial Statements - and
GASB 34: Fixed Assets An Introduction to GASB 34 Tracking assets does not have to be a burden. Through the use of a simple barcode and scanner you can conduct inventories and keep your asset records up to date. Get the most out of your assets, while maintaining complete
The Governmental Accounting Standards Board (GASB) issued new guidelines in 1999 that . of these guidelines in GASB’s Statement Number 34 and provided commentary on them through . annually in the construction, improvement and rehabilitation of capital assets, including infrastructure assets. This figure represents more than 10% of every .
New GASB Rules for Cloud Computing Costs On June 5, 2020, . software and tangible capital assets (hardware) that meets the lease definition in Statement 87, . service when initial implementation is completed for the first independently functional module or for the first set
Otherwise, assets should be grouped according to one of the like or similar asset class groups recommended and depreciated accordingly. If infrastructure is reported, the committee recommends the use of methodologies for accounting for infrastructure as prescribed by GASB Statement 34.
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