The Governmental Accounting Standards Board is looking for informed comments on possible changes to the disclosure requirements regarding state and local government entities who may be experiencing financial peril.
On Monday GASB issued a call for input regarding its preliminary views on disclosure requirements relative to the legal definitions of "severe financial stress, probable dissolution," and "going concern uncertainties."
According to GASB the comments will inform, "with the intention of making clarifications and improvements to the existing GCU guidance to reduce diversity in practice and providing guidance for disclosures related to SFS."
The board has been using standards developed by the American Institute of Certified Public Accountants as a backbone for its own requirements, but research indicates confusion among stakeholders of how the going concern definition applies to government entities.
According to GASB, "some governments get into financial difficulties but continue to exist and provide services. There are also governments that dissolve and cease to exist for reasons other than financial stress."
GASB is an independent, private-sector organization that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles.
The eventual rulings could have an impact on bonds as their PVs evaluate the parameters of an SFS condition of governmental issuers.
"The Board's preliminary view is that a government should make SFS disclosures if it meets the SFS condition as of the financial statement date. A government meets the SFS condition for financial reporting purposes if it is experiencing financial stress at such a degree that it is near or at the point of insolvency."
Some of the indicators that a government might be near insolvency includes defaulting on certain bonds, and noncompliance with debt service.
The definition of "near insolvency" versus "at the point of insolvency," is also being examined. Per GASB, "Being near insolvency does not indicate a time horizon in which a government will become insolvent."
Dicing through the indicators of near insolvency, GASB is leaning towards the notion that a government might be near insolvency if it is noncompliant on legal matters including defaulting on certain bonds and noncompliance with debt service reserve requirements.
The board is recommending that some possible indicators of near insolvency should not be considered including, the "credit rating of the government's general obligation bonds being downgraded to below investment grade."
Probable dissolution disclosures that the board is favoring come under the broad parameters of "a statement about probable dissolution being issued within twelve months of the date the financial statements are available." The statement should include reasons, causes, pertinent conditions and events relative to the PD.
The government's evaluation of the significance of those reasons and causes are also required along with any actions taken by the government in response. The board wants to see information about, "the recoverability or classification of reported asset amounts such as ownership, disposition, and other treatment."
The board is also looking for input on rulings for disclosures that happen in subsequent periods.
Per GASB, "If a government disclosed PD in the prior financial statements but dissolution of the government is not probable within 12 months of the date the current financial statements are available to be issued, government should disclose why the result of the evaluation of PD for the current financial statements differs from the prior financial statements."
"Specifically, users indicated that they would most commonly use each item to assess the likelihood of and understand the reason for dissolution, assess the effect on bonds for investment decisions, or assess the prudence of doing business with the government. Therefore, the Board concluded that each item is essential information and should be a required disclosure."
Comments will be accepted until June 30, 2025.
