Adoption of GASB 89 Will Be Simple for Governments — With Two Exceptions
Government entities and public colleges and universities no longer have to calculate and record construction period interest as part of the historical cost of an asset. This is because GASB has issued Statement No. 89 to amend paragraphs five through 22 of Statement No. 62.
If your organization is affected, this is likely welcome news and you’ll be glad to implement the new standard early. This will be easy to do — with caveats for component units and regulated operations. Before we get to those, a little background information may be helpful.
GASB 89 supplants parts of GASB 62
If your government or public higher education institution prepares financial statements using the economic resources measurement focus (business-type activities and enterprise funds), under GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989, FASB and AICPA Pronouncements, you were required to calculate and record construction period interest as part of the historical cost of an asset. This calculation was normally seen as an afterthought and only done because the auditors required it. Once calculated, just about everyone tried to find some way to avoid recording it. It was viewed as inflating the cost of (and not adding value to) an asset.
So, GASB re-examined the matter and ultimately responded by issuing Statement No. 89, Accounting for Interest Costs Incurred Before the End of a Construction Period, which now eliminates that requirement.
GASB 89 is effective for reporting periods beginning after December 31, 2019, but earlier application is encouraged. Changes adopted to conform to its provisions should be applied prospectively (no need to restate prior periods).
Implementation may not be as simple for component units and entities with regulated operations
Organizations across the country can rejoice and implement the standard as soon as possible. Component units and entities with regulated operations, however, each have some particular concerns.
Is your government a component unit of another larger primary government? For instance, public colleges and universities are typically a component unit of a state or city government, and public utility authorities are typically a component unit of a city or county.
When your organization is a component unit, it is generally considered a best practice to have all members of the reporting entity align your implementation periods, so the users of the financial statements will have consistency in what they read and rely on.
If your government has regulated operations (as defined by paragraph 476 of GASB 62), then GASB 89 does not eliminate or remove the requirements of paragraph 485 of GASB 62. This means that if a regulator requires your organization to calculate and capitalize construction period interest, you will still be obligated to do so and record the capitalized interest as a regulatory asset.
How we can help
GASB 89 brings welcome relief for most government entities, and early implementation should be easy: You simply stop doing busy work that didn’t add value to your financial operations or better serve citizens or constituents. But component units and entities with regulated operations have a little more to consider, whether adoption comes before or after the effective date. CLA’s state and local government and higher education professionals can help you understand and implement GASB 89 as soon as you are ready.