“GASB 34”—or, more formally, Statement No. 34 of the Government Accounting Standards Board—is a new financial reporting method that government agencies will soon be required to use to document their fiscal and operational accountability. This statement, which is being implemented in three phases, establishes a whole new framework or “financial reporting model” for state and local governments, including public colleges and universities. Phase I of GASB 34 began on June 15, 2001 with reporting of annual revenues greater than $100 million. Phase II began on June 15, 2002 with reporting of annual revenues between $10 million and $100 million. Phase III will begin on June 15, 2003 with reporting of annual revenues less than $10 million. A specific consequence of not reporting in the new model is that an auditor may not issue an unqualified opinion on financial statements not prepared in accordance with Generally Accepted Accounting Principles (GAAP). The American Institute of Certified Public Accountants (AICPA) has advised that statements not prepared according to the provisions of GASB 34 might result in an adverse opinion. An adverse opinion is believed to impede a local government agency’s ability in obtaining financing or qualifying for grants.

Why GASB 34?

Local governments must be able to justify that their actions have complied with public decisions concerning the raising and spending of public moneys in the short term. They must also meet their operating objectives efficiently and effectively. In the current system of Fund Reporting and Government-Wide Full Accrual Reporting, there is no long term focus in reporting the condition of infrastructures or other capital assets. GASB 34 will help determine if a government’s fiscal status is improving or declining by assessing the ability to cover costs and to continue financing services in the future. Governmental agencies will also be required to report, retroactively, infrastructure assets at their historical cost and the subsequent depreciation of such assets.

The net effect will be to help governments determine what new services can be provided and what it costs to provide them. GASB 34 will also help determine if sufficient resources were raised during the year to cover all costs, or if there was a shortfall. Governments will also know how much money has been spent to preserve assets, so they can anticipate a budget for future spending. The improved reporting, in turn, is expected to make it easier to persuade elected officials, citizens, board members, directors and others with an interest in public-sector financial reports of the need for financial support.

Under GASB 34 infrastructure assets are defined as those that are expected to have useful life significantly longer than most capital assets, and are normally unmovable: tunnels, water and sewer systems, dams, box culverts, bridges, roads, etc. Assets built before implementation of GASB 34 may be reported anytime up to four years. The two methods for reporting infrastructure assets are the depreciation method and the “modified approach.” In the first, the asset depreciates each year after an initial value is established. In the modified approach, depreciation need not be recorded if infrastructure assets are being maintained or preserved at a certain level. To use the modified approach, the entity must establish an initial value, and it must be able to provide documentation that the asset is being preserved at or above a stated condition level.

What Must We Do Differently?

Implementing GASB 34 will first require the identification of infrastructure assets that will be reported. Next is the selection of the capitalization threshold that will give a good representation of what is out in the field. If there are records of maintenance or an estimate of historical costs they may be used. Otherwise an estimate can be made of the cost to replace the existing asset at today’s costs. A price-trend index and estimated useful life of the asset should be chosen before the valuation using the depreciation or modified approach is implemented.

To use the modified approach, an agency should use one of several widely available, computer-based asset management systems. These systems provide a powerful tool for carrying out three critical functions: maintaining an up-to-date inventory of assets by location, type and physical parameters; performing a regular condition assessment and report of infrastructure assets; and calculating an annual estimate of the budget needed to maintain the assets at the established condition level by way of a preventive maintenance program.

Despite the additional effort required, public agencies will usually prefer to use the modified approach because the reported values will more accurately demonstrate the benefits of maintenance activities, and of preventive maintenance in particular, in the superior condition (and therefore the value) of infrastructure assets.

For more information go to the Government Accounting Standards Board’s website http://www.gasb.org and click on the GASB 34 link.