GASB 65 Means Significant Changes in Government Financial Statements
I always get a little nervous when I hear the word “reclassify” used when talking about financial statements. That’s because, as users of financial statements, we are accustomed to seeing them with the same basic line items in the same place every year. That predictability allows us to focus on the underlying economic reasons behind changes in the amounts presented.
So, the title of the Government Accounting Standards Board’s (GASB) Statement No. 65, Items Previously Reported as Assets and Liabilities, made me sit up and take notice. “Previously reported” sounds an awful lot like “reclassify.” And sure enough, we now will be helping clients figure out where items were previously reported, and how they are going to be reported under the new standard.
GASB 65, which is effective for financial statements for periods beginning after December 15, 2012, is a companion to GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position.
Assets and liabilities versus deferred outflows and inflows
Upon adoption of GASB 65, certain items previously reported as assets will be reported as deferred outflows, and certain items previously reported as liabilities will be reported as deferred inflows. One common liability — deferred property taxes revenue — demonstrates the significance of the changes in how financial statements will appear.
Many local governments that levy property taxes have a tax calendar that looks like this:
January 1 — Tax levy occurs and lien attaches
May 1 — First half of annual taxes collected
July 1 — New fiscal year begins
November 1 — Second half of annual taxes collected
Currently, a government with this tax calendar would report a property tax receivable, and a comparable deferred revenue liability, for the portion of the property tax levied but not yet collected as of June 30. Under GASB 65, the deferred revenue amount will be presented as a deferred inflow rather than a liability.
The magnitude of the change
To better understand the impact of GASB 65, let’s look at an example from a Virginia locality.
|Other current liabilities (millions)||$72|
|Deferred property taxes revenue||$235|
|Total current liabilities||$307|
When GASB 65 is adopted, the information would be presented like this:
|Other current liabilities (millions)||$72|
|Total current liabilities||$72|
|Deferred inflow — property taxes||$235|
|Total liabilities and deferred inflows||$822|
That’s quite a change, especially considering that you will generally not be presenting comparative information. A user of your financial statements who compares last year’s numbers to this year’s may think there was a massive reduction in current liabilities. What the user is actually seeing is the reclassification of the deferred revenue. The economics underlying the financial statements have not changed, but the user of the prior year and the current year financial statements may think that liabilities have significantly decreased.
Prepare your financial statement users
Here are some key questions that financial statement preparers should be asking about GASB 65:
- Have you proactively discussed this change with key users of your financial statements, such as the chief executive (city manager or county administrator) and elected officials? You should begin communicating this significant change now, including preparing a “pro forma” presentation for the current fiscal year financial results to ensure that users understand the impact of GASB 65 implementation.
- Have you evaluated whether this change impacts your debt covenants and other legal requirements with which you must comply? Discuss the implications of the new standards with your bond counsel and other legal counsel to learn about bond covenants and other debt requirements.
- Have you reclassified prior year amounts in key trend analysis schedules (such as those found in your statistical section) to create an apples-to-apples trend analysis? Begin recasting the applicable statistical section schedules for this change.
This is just one example of the presentation changes occurring as a result of GASB 65. The implications for your financial statement presentation are significant, but with proactive planning, implementation of this standard should be smooth.