Governmental Accounting Standards Board chair Joel Black has been overseeing GASB for nearly two years as state and local governments deal with the continuing fallout from the pandemic while accounting for all the aid they received from the federal government.
He has plans for GASB as the board prepares to issue new standards on compensated absences, accounting changes and error corrections, while also weighing issues like the use of digital assets such as cryptocurrency, electronic financial reporting and subsequent events. In addition, GASB is also monitoring how state and local governments are adjusting to standards that have been issued in recent years in areas such as pensions, other post-employment benefits and leases.
Black began chairing GASB in July 2020, at the height of the pandemic, after 16 years at the Atlanta-based firm Mauldin & Jenkins and, prior to that, a dozen years at KPMG. One of his top priorities is to improve technology at GASB, as he was doing in the audit practice at M&J.
“When I left the firm, a regional firm in the South, I had been put in charge of the audit practice,” he told Accounting Today. “Some of my objectives are using technology to become more efficient and effective in our outreach and how we do research. Understanding how technology is going to affect us as a standard-setter is something that we’re paying attention to. I want us to understand how that evolution to electronic financial reporting is occurring, and then be sure that we’re not an impediment to progress, but that whatever our role is in that process as a standard setter to make sure that users of government financial records are getting the right information in a way that’s easily usable for them.”
One of the standards due out soon from GASB is on accounting for compensated absences, updating a standard that came out in 1992. Black expects it will probably be issued in June.
“We undertook the project to try to modernize that literature because GASB 16, which is the current guidance for compensated absences, came out a long time ago, and those types of benefits have evolved,” said Black. “When we issued that, the guidance talks about a difference between vacation leave and sick leave. Now a lot of organizations and governments have PTO, which is a combination of those. So how does PTO time work in a comparable way, accounting wise, to a government that might still have vacation and sick [days], versus a government that just has PTO that combines them? We wanted to relook at that literature and try to modernize it, and make sure that for all the current ways in which those benefits are provided, the accounting allows for that and can result in consistent guidance.”
He expects that GASB will probably issue a final standard in June for the completed absences project. Other projects afoot at GASB include redeliberations on the conceptual framework and disclosure framework, along with accounting changes and error corrections for prior-period adjustments. Like the completed absences standard, the accounting changes and error corrections final standard will probably be issued in June as well.
“That is somewhat similar in that it was pretty old guidance that was brought over on how to account for a transaction that maybe should have happened in the prior period or was the result of a change in your accounting policy,” said Black. “For example, the old literature was a little bit complicated for people to sometimes figure out which kind of accounting changes they were. Is it a change in principle? Is it a change in estimate? Is it an error correction? And so what we did is we defined those three buckets better and added a new bucket for which we were commonly getting questions.”
Stakeholders were asking for more clarity about how to account for when there is a change in a component unit, such as a government fund being added or removed.
“We got lots of questions and the literature didn’t really address them,” said Black. “The new standard will better define those four different buckets and then describe what the accounting should be for each of them.”
The omnibus standard was approved several weeks ago at a board meeting, and contains a set of technical corrections to either make different GASB pronouncements more consistent or to help with implementation of a current standard by tweaking it a bit.
“There are about four or five different things that we’re covering in that omnibus,” said Black. “It will be GASB 99 when we get it processed and released.”
The omnibus may be issued as soon as this week.
As part of a review of its technical plan for 2022, GASB added a major project on going concern uncertainties and severe financial stress disclosures to its technical agenda, along with pre-agenda research on a standard for subsequent events. GASB has also been doing post-implementation reviews of some of its existing standards to see how well they have worked in practice, including its pension standards and other post-employment benefits, also known as OPEB, as well as fair value, along with standards for leases and fiduciary activities.
“With the older standards, pensions is the furthest along in that review,” said Black. “For the others, leases and fiduciary are pretty early in their review.”
GASB has held several roundtable discussions on the pension standards where different types of stakeholders, including users, preparers and auditors, have talked about some of the issues they have encountered.
“The feedback I sense from those roundtables is that largely the standards are working well, doing what they were intended to do and getting a better picture of those liabilities on the government-wide statements,” said Black. “But there could be some potential tweaks that we make along the way that could be necessitated. We will look at that at the end of the review and see what the overall recommendations are, and then the board will decide whether or not we need to make any such tweaks.”
Leases and related standards
The leases standard, GASB 87, would put leases on the balance sheet for the first time for many state and local governments, much as the Financial Accounting Standards Board’s leases standard would do for companies. As with many private companies, state and local governments seem to be waiting to implement it (see story). The federal aid that went out to state and local governments in the wake of the pandemic has shifted their priorities to making sure it’s being used where it’s needed.
“When I go out and talk to stakeholders and attend their conferences, what they have largely for the last year and a half plus been focused on is spending the stimulus funding that they received in an efficient, effective way that’s compliant with the requirements,” said Black. “They’re spending a lot of time and energy on that, similar to many of us in the accounting and finance profession.”
State and local governments have also had their hands full with the so-called Great Resignation as they try to hold onto their workforce, including in the accounting and finance department. The leasing standard has gone on the back burner for many state and local governments as they deal with more pressing priorities, but they’re getting around to it.
“I have confidence that the governments are going to implement it on time,” said Black. “We are getting 40 to 50 technical inquiries on leases pretty consistently each quarter for the last, I’d say, five quarters. So people are working on it. I’m confident that they’re going to get that implemented in 2022 when the effective date comes.”
On the other hand, he is worried that GASB hasn’t been fielding many inquiries about two other recent standards, GASB 94, which deals with public-private partnerships (P3), and GASB 96, for subscription-based information technology arrangements (SPITA).
“Those two are really cousins of GASB 87 because they are both financings and they build on the same accounting theory that the lease standard was built on, that these financings are liabilities and need to be on the balance sheets, but then they have extra layers of complexity because the transactions that they’re interacting with are more complex,” said Black. “That necessitated them to be separate standards. They’re effective largely in 2023, a year after the lease standard, and we aren’t getting many questions on either of those. They are similar to leases. If you look at a P3 contract, a lot of times it probably meets the definition of a lease, but it really is a P3 because it has these added complexities. Or the same with a SPITA. It really meets that definition of a lease, but because of these added complexities, it really is a SPITA. So we might expect that as people were working through GASB 87 and the lease standard and looking at their populations and some of these contracts that we might be getting more questions about whether it’s a SPITA or a lease? And we aren’t getting many of those questions. We aren’t getting many questions on 94 and 96, which is a year later in its effectiveness. We are maybe a little concerned, but we’re working on getting that message out.”
The public-private partnerships standard, GASB 94, expands on an earlier standard. “GASB 60 was service concession arrangements, which was a form of public-private partnership,” said Black. “We had literature that covered how you would present if you had one of these agreements. The P3 standard, 94, broadens the umbrella to encompass not only those service concession arrangements but other similar types of arrangements. Our focus is on making sure that the accounting model for it makes sense, and the assets that a government might acquire as part of one of those are accounted for at the right time and that any obligations they may have related to them show up as well.”
GASB has been calling attention to those upcoming requirements at its conferences and seminars, especially now that state and local governments are starting to take a closer look at the leases standard.
Accounting for federal pandemic aid
The pandemic aid from the federal government has helped state and local governments to stabilize their finances, and the strong economic recovery last year also helped bring in more tax revenue, allowing some states to see unexpected budget surpluses.
“We are really focused on the accounting and financial reporting,” said Black. “Early on, there were a lot of questions when the CARES Act first came. We issued in June of 2020 a technical bulletin, which didn’t create new GAAP but applied existing revenue recognition GAAP specifically to the CARES Act. We answered a lot of those common questions and applications. We’ve been very focused since then on the [American] Rescue Plan funding and the subsequent stimulus money, a lot of which went directly to local governments, whereas CARES went to the states and got passed through to the locals. Some of the locals were getting more direct federal money than they were used to getting, which brings about compliance issues that we are not as worried about, but accounting issues were the ones we were worried about. We spent a lot of time in our education efforts a year ago, making sure those local governments knew about the technical bulletin and were bringing any questions to us.”
In addition to the leases standard, the standards for fiduciary activities and nonexchange transactions, such as grant revenue, have been prompting more technical inquiries in the last few years thanks to the stimulus funding.
“What we are finding is that technical bulletin where we talked about when to recognize revenue for the CARES Act funding was easily applicable to the Rescue Plan funding by the local governments,” said Black. “So while we were open to issuing guidance and helping people if they needed help, largely we think they’ve got the accounting guidance they need to account for it. What they spend a lot of time on is grant reporting to the federal government or being sure they’re in compliance with the federal requirements. The accounting of it, I think, from our initial technical guidance has been relatively easy.”
On the other hand, some watchdog groups such as Truth in Accounting have warned about the way that some states and cities are accounting for their finances and making perhaps overly optimistic budget projections, especially with pension liabilities and other government obligations for retiree health care coming up in the future. They have been pressing for GASB to adjust its standards to be more upfront about their projected debts.
“We do hear from Truth in Accounting, and we listen to them the same way we do all our stakeholders,” said Black. “They largely have been commenting recently on the Financial Reporting Model Project, which is one of our big comprehensive ongoing projects. In that project we were looking in particular at the governmental funds and what would be the appropriate measurement, focus and basis of accounting for those funds, which is where groups like Truth in Accounting have some concern because measurement focus-based accounting is kind of a shorter-term perspective.”
GASB has listened to the feedback and made some adjustments to the proposal. “While it’s not a final standard and we still have a ways to go to finish that reexamination of the reporting model and what standard might result from that, we have tentatively redeliberated the feedback based on what we heard from Truth in Accounting and others and decided to retain some version of a short-term perspective in the governmental funds,” said Black.
Governments are unique entities with their own accounting standards, but there is a need to show both the short- and long-term cash flow, tax revenue and expenditures.
“What we’re working on now is trying to make sure that the descriptions of those two different financial statements that both show the same activity but in different ways are articulated well and presented well in the financial statements,” said Black. “So if you’re looking at the governmental funds, you know that this is just a kind of short-term focus on flows, what went in and out. If you want a picture of what the real cost of services were, then you’ve got to go to the government-wide statements, which include full economic resources and measurement focus, and make sure that people understand those two perspectives are both needed to get a full picture.”
GASB regularly asks its advisory council, GASAC, about the highest priority projects it should pursue in the future. The top four vote getters were capital assets, subsequent events, electronic financial reporting and digital assets. Capital assets and subsequent events are both in GASB’s pre-agenda research phase. The staff is working on evaluating the earlier literature for both topics, how they are currently being accounted for, and any potential improvements that GASB might make. Black anticipates that research will be done over the next year or so on each of those topics and then the board will decide whether to take up a project on either of them. For electronic financial reporting. GASB is basically just monitoring the activity in that space to understand how users are consuming financial information now and in the future.
“It’s still not an official standard-setting project,” said Black. “It probably never will be a standard. We’re not going to require electronic financial reporting, but we don’t want to be in the way. We want to understand it to see what impact it should have on us as a standard-setter and what role we should have in it. It’s something we’re going to spend a lot of time on, and our advisory council has told us that that’s a high priority for them.”
In December, GASB also added digital assets to its monitoring activity list. Like FASB, which is looking into adding a project on intangible assets to its agenda, many accountants would like to see more detailed standards for how to account for cryptocurrency like Bitcoin and virtual assets like non-fungible tokens, or NFTs.
“At our last meeting, we got an update from the team on what governments are doing with digital assets and we will continue to monitor that and see if it is pervasive and prevalent enough, if there’s an achievable standard-setting project where standards could help and whether the board should take it on as project,” said Black. “It’s something we’re certainly looking at closely.”
The two boards try to stay in sync in their standard-setting efforts. “We work closely with them so that we can share research and knowledge, but we have somewhat different literature,” said Black. “For example, we’re not seeing governments invest in digital assets much, except in pension funds, and even there it seems at this point relatively limited. If they are doing it, the few that might be doing it are typically doing it through index funds, although there is one large pension fund that seems to have directly invested in some digital assets.”
The board already has a standard, GASB 72, on fair value, that defines what an investment is, and it differs from FASB’s fair value measurement standard.
“It essentially says if you purchase something and your intent on purchasing it was for its ability to generate income or profits and you can convert it to cash to pay for goods or services, that’s an investment and you should value it at fair value,” said Black. “A pension fund that might be investing in digital assets in the government world probably should be looking at GASB 72, applying that investment definition, and if it meets it, applying fair value accounting to it.”
Few state and local governments are even discussing the possibility of accepting cryptocurrency or other digital assets to pay for taxes or fees, although one state, Colorado, recently decided to allow that. Lawmakers in California and Colorado have also introduced legislation that would permit it.
“It could be becoming more prevalent, but at that point you’re accepting it as payment,” said Black. “Its original acquisition wasn’t for income or profit generation. It’s not an investment. Then what do you do with it? I don’t have an answer for what our literature would call that at this point in time, but that would be something we’re looking at. Also, with confiscated assets or unclaimed property, governments might be holding digital assets under either of those areas. What would the accounting model be for that? Should those be the same as an intangible asset? Are they in our literature? That’s something we need to continue to look at and focus on. We aren’t seeing much of it now, but there’s a lot of talk about it. It’s something we’re looking at to see if we should start a more fully formed project.”