Economic Condition Reporting: Financial ProjectionsMarch 23, 2012
Emily A. Fournier, CPA
The Government Accounting Standards Board (GASB) has issued preliminary views supporting the inclusion of forward-looking projections in the basic financial statements as Required Supplementary Information. Through these views, the GASB has tackled the formerly nebulous idea of the fiscal sustainability of a government entity. The board has noted that the purpose of government financial statements is to provide the users of those statements a clear picture of the entity’s economic condition, of which, fiscal sustainability is the forward-looking component. The GASB has determined that the historical data currently included in the financial statements is not sufficient to present a holistic picture of the state of a government entity.
In developing the preliminary views, the GASB asked users what information, in the form of future projections, would aid in contemplating the overall condition of a government. The users involved in this GASB study indicated that the projections they discussed would allow them to judge the government’s ability to generate the future resources required to continue to provide a steady level of services without incurring additional debt that would shift the cost to future generations without a resulting benefit.
From the responses gathered, the GASB narrowed the focus to five components of the future projections that would cover the needs described by the users:
- Total cash inflows, including distinction of major individual inflows
- Total cash outflows, including distinction of major individual outflows
- Total financial obligations, including major individual obligations, covering bonds, pensions, OPEB and other long-term contracts
- Total annual debt service payments, including principal and interest, and covering payments on authorized unissued debt that will be issued during the projection period
- Major intergovernmental service interdependencies
The total cash inflows and outflows will represent any amounts that the government anticipates receiving through normal operations (with any temporary amounts noted specially) and spending on the services that it will provide over the course of the projection period. Financial obligations (and related debt service payments) represent any long-term obligations that the government must satisfy, and this measure will allow the users to determine whether the government will require debt funding to continue to provide services to its residents.
Major intergovernmental service interdependencies represent any service relationships with other government entities that would affect the provision of services or the cost to the government to provide those services, should the relationship change.
In order to provide guidance in the implementation of this requirement, the GASB has also included in its preliminary views the method and basis under which the projections should be made. Because the future projections have the potential to devolve into what the GASB considers “forecasts” or “predictions” the GASB notes that the projections should be based upon historical information, informed by current policies of the government entity, and modified for any known future events or conditions that will affect the periods of the projections.
The GASB has also determined that the basis of the projections should be done on the following bases:
- Cash basis of accounting for inflows and outflows
- Accrual basis of accounting for financial obligations
To provide the users with all of the information necessary to judge the economic condition of the government entity, the GASB has determined that in addition to the quantitative projections in these five areas, the government entity should provide narrative information describing the factors underlying the projections. These disclosures would include information such as trends in the assessed value of property, which affects the cash inflows from property taxes levied. Detailing the factors and assumptions involved will allow the user to determine the reliability of the calculation.
Due to the nature of the fifth category (service interdependencies), the GASB has determined that quantitative projections would impose undue cost for the potential benefit and would not provide any meaningful figures. Rather, the GASB has determined that this information should be completely in narrative form.
In order to ensure that the projected information will provide enough information to present a thorough picture, but not provide so much information that the data becomes very uncertain, the GASB has prescribed a minimum-five year period for the projections.
In order to allow government entities time to appropriately put these projection mechanisms into place, the GASB has determined that an implementation phase-in would be appropriate, should the preliminary views become standard. The GASB has public hearings scheduled for March and April 2012, and will move forward from that point based on the responses received.