Current Issues in Service Efforts and Accomplishments Reporting

AGA

Performance Management ConferenceOctober 31, 2006

Robert Attmore, Chairman GASB

The views expressed in this presentation are those of Mr. Attmore. Official positions of the GASB are determined only after extensive due process and deliberation.

What is the Purpose of Financial Reporting?

• To communicate decision-useful information to those to whom an entity is accountable.

• Financial reporting should be based on user needs and be appropriate for the environment in which the entity operates.

“Governments are fundamentally different from for-profit business enterprises in several important ways.”

Key Differences

• Basic Missions/Purposes• Stakeholders• Processes for Generating Revenues• Budgetary Obligations• Longevity and Powers• Accountability

The needs of users of financial reports of governments and business enterprises differ.

Basic Missions/Purposes

• Business organizations

• Governmental organizations

- To maximize the wealth of owners.

-To provide services for the common good that maintain or improve the wellbeing of stakeholders.

Basic Missions/Purposes

• So what type of information is most important for financial report users?

– Business organizations• Profit, earnings per share and owners’ equity.

– Governmental Organizations• Information about the cost of services provided,

results achieved, and how those results affect the lives of stakeholders.

Who are the Primary Stakeholders?

• Business organizations– Equity owners/shareholders– Creditors

• Governmental Organizations– Citizens (residents, taxpayers, visitors, businesses)– Those who directly represent citizens (legislative and

oversight bodies)– Those who participate in the lending process

(investors and creditors)

What are the Processes for Generating Revenues?

• Business organizations– Voluntary transactions between willing parties

exchanging relatively equal value.

• Governmental Organizations– Generally involuntary non-exchange transactions

between stakeholders and government with little or no correlation between amounts paid and services received.

How Critical Are Budgets?

• Business Organizations– Budget is an internal financial plan that is frequently

amended as new business opportunities arise.

• Governmental Organizations– Budget is enacted in law, sets public policy priorities,

and forms the basis to control spending of public resources for authorized programs and amounts.

– Budget amendments require the agreement of the legislative and executive branches of government.

What About Longevity and Powers?

• Business Organizations– Operate in a competitive environment and generally

have limited lives.– Subject to acquisition, bankruptcy and dissolution.

• Governmental Organizations– Rarely, if ever, file for bankruptcy or go out of

business.– Have unique powers to write and enforce laws,

impose taxes and fees, and compel compliance.

Accountability

• GASB Concepts Statement No. 1 on objectives of financial reporting says that accountability is the cornerstone of all financial reporting in government.

• Aspects of public accountability– Who is the organization accountable to?– What is the entity accountable for?– How can the obligation for accountability be

fulfilled?

Public Accountability

• Who are the stakeholders that governments are accountable to?– Citizens– Legislative and oversight bodies– Investors and creditors

Source: Concepts Statement 1

Public Accountability

• What is a governmental entity accountable for?– Legally obtaining and safeguarding resources and

spending them on things that are authorized within the mission of the organization.

– Providing services that are authorized through the political budget process.

– Achieving effective results with services provided.– Communicating results achieved in a manner that

allows stakeholders to assess the degree to which the organization has met its goals.

Public Accountability

• How can the obligation for accountability be fulfilled?– Operating in an economical, efficient, and

effective manner.– Communicating with stakeholders about

priorities and results achieved.– Providing clear understandable information

that stakeholders can use to assess results achieved.

Examples of Financial Reports

• General Purpose External Financial Reporting – Basic financial statements and notes – Required supplementary information and

supplementary information– Other general purpose external financial reports

• Economic condition reports• SEA performance information reports• Popular reports

• Other Types of Financial Reporting– Budgets– Offering statements– Grant and regulatory reporting

General Purpose External Financial Reporting

What Has the GASB Done?

• Bringing financial reporting up to date– New accounting and reporting model (GASB 34)

• Accrual basis entity–wide financial statements• Reporting changes in financial position• Management discussion and analysis• Infrastructure reporting

– Modifying economic condition reporting (GASB 44)• Addressing unresolved issues in financial reporting

– Postemployment Benefits, Environmental Obligations, Investments (including derivatives)

• Research in and encouragement of SEA performance reporting

Managing for Results and SEA Performance Reporting

• GASB research indicates that SEA performance reports should be part of a system of managing for results.

• Managing for results was a focus of yesterday’s sessions, but it is worth mentioning again because it is key to the GASB’s research focus.

What are the Major Issues with Reporting SEA Performance Information?

• Should GASB (and for that matter FASB) be establishing guidance or standards for SEA performance reporting?

• If so, how should SEA performance reporting be addressed as part of GPEFR?

Background for SEA Performance Reporting

• Long history of recommendations for reporting SEA performance information as part of governmental financial reporting– AICPA’s Trueblood Committee—1973 – FASB Concepts Statement No. 4—1980 – NCGA Objectives of Financial Reporting—1982 – GASB Concepts Statement No. 1—1987 – GASB Concept Statement No. 2—1994 – AICPA Special Committee on Financial Reporting—

1994 – GASB White Paper —2006

AICPA’s Trueblood Committee

• Objectives of Financial Statements, Report of the Study Group on the Objectives of Financial Statements (AICPA, October 1973)

• The committee addressed the issue of objectives of financial statements for governmental and not-for-profit organizations.

• Report recognized that maximizing return of cash was not the central goal of governmental and not-for-profit organizations, but that financial statements nonetheless should provide information that serves users’ needs

Trueblood Committee (continued)

• Indicators that provide information about the achievement of the organization’s principal goal(s), whether it be reducing poverty, encouraging research, or providing a quality education should be reported

• “An objective of financial statements for governmental and not-for-profit organizations is to provide information useful for evaluating the effectiveness of the management of resources in achieving the organization’s goals. Performance measures should be quantified in terms of identified goals.”

FASB Concepts Statement 4, Objectives of Financial Reporting by

Nonbusiness Organizations

• The Statement says that “nonbusiness organizations generally have no single indicator of performance comparable to a business enterprise’s profit. Thus, other indicators of performance usually are needed.”

FASB Concepts Statement 4 (continued)

– “Managers of an organization are accountable to resource providers and others not only for the custody and safekeeping of organization resources, but also for their efficient and effective use.”

– The Statement provides that “financial reporting should provide information about the performance of an organization during a period” and that “information about the service efforts and accomplishments of an organization” are a major part of “the information most useful in assessing its performance.

NCGA Concepts Statement

• The “overall goal” of accounting and financial reporting was:

– To provide (1) financial information useful for making economic, political and social decisions, and demonstrating accountability and stewardship, and (2) information useful for evaluating managerial and organizational performance

NCGA (continued)

• The NCGA noted that “although profit is not a relevant measure of performance in governmental units, some reasonable measures of performance, both for the organization as a whole and for particular programs and activities, are necessary.”

• The NCGA recognized that measures of effectiveness had not progressed very rapidly at that time, but that it was important to distinguish a need for information from the ability to provide such information within the current state of the art

NCGA (continued)

• As basic objectives under the area of organizational and managerial performance, the study listed the following:

– To provide information useful for evaluating managerial and organizational performance.

• For evaluating the efficiency and economy of operations of organizational units, program activities

• For evaluating the results of programs, activities, and functions and their effectiveness in achieving their goals and objectives.

GASB Concepts Statement No. 1, Objectives of Financial Reporting

• The first objective listed was that financial reporting should assist in fulfilling government’s duty to be publicly accountable and should enable users to assess that accountability

– The sub-objectives stated that financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services and provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity

GASB Concepts Statement No. 2, Service Efforts and Accomplishments

Reporting

• Concepts Statement 2 provides that “for GPEFR to provide information that will assist financial report users to assess performance for accountability and decision-making purposes, it is necessary to broaden its scope to keep pace with the evolving information needs of those users. . . .

• Having considered the information users need for assessing accountability and making decisions, and the role of financial reporting in providing information to assess performance, the GASB believes that SEA information is an integral part of GPEFR”

AICPA’s Special Committee on Financial Reporting—Improving Business Reporting—A Customer Focus and Meeting the Information

Needs of Investors and Creditors

– “to stay relevant, [financial reporting] must change in response to users’ evolving needs for information.”

– Included in this model is information that will “focus more on the factors that create longer-term value, including nonfinancial measures indicating how key business processes are performing”

Where is the GASB Now Regarding SEA Performance Reporting?

• Issued staff special report setting forth suggested criteria for effective communication of performance information (2003)

• Encouraged experimentation with non-financial performance reporting

• Researched value of suggested criteria and value of GASB continuing work in this area (Subject of a session yesterday afternoon)– Interviews– Phone survey

What is Next for the GASB?

• Staff will present research results to the Board on December 1– Findings– Conclusions

• Subsequently the Board expects to consider staff recommendations regarding SEA reporting guidance, including options for:– GAAP standard

• Required, or• Voluntary

– Non-authoritative guidance (not GAAP)

Current Issues in Service Efforts and

Accomplishments Reporting

Questions?