Welcome to "Bridging the GAAP," your go-to source for insights directly from the Governmental Accounting Standards Board (GASB). In each episode, we take you on an in-depth journey through the latest financial reporting update and GASB projects that are of interest to investors, accounting professionals, auditors, and financial statement creators across companies, nonprofits, and governments. Our goal is to shed on the critical work of crafting and refining the Generally Accepted Accounting Principles (GAAP) that govern financial reporting in the United States.

Hosted by Matt Broder, FAF VP of Communications, "Bridging the GAAP" is an indispensable tool for anyone engaged with financial issues and seeking firsthand insights from decision-makers about the present and future landscape of governmental financial reporting. The podcast is produced by Eileen Foley, FAF Senior Manager of Digital Operations, and audio-visually enhanced by Patrick Dorsman, FAF Manager of Video and Digital Design.

                

Episode 2—GASB Proposed Guidance on Disclosure and Classification of Certain Capital Assets with Deborah Beams, Supervising Project Manager

Eileen Foley [00:00:00] Hello and, welcome to episode two of Bridging the GAAP, a podcast brought to you by the Governmental Accounting Standards Board. My name is Eileen Foley, Senior Manager of Digital Operations, usually working behind the scenes to add a little bit of excitement into your world of financial reporting. But today, I'm fortunate enough to have GASB Chair Joel Black with me as I introduce our next episode. So welcome, Joel.

Joel Black [00:00:23] Thanks, Eileen. It's great to be here. Very excited for our second episode of Bridging the GAAP, our GASB podcast.

Eileen Foley [00:00:29] Really excited to have you here too. Joel, I understand today that Matt will be speaking with a special guest. Can you tell us a little bit more about today's episode?

Joel Black [00:00:37] Sure. Matt will be talking to Deborah Beams and Deborah is going to be walking through a project she's leading that's currently out for exposure for a comment period in which we are proposing to break out certain capital assets in our required capital asset note disclosure.

Eileen Foley [00:00:52] That sounds great. I can't wait to learn more about it. So, without further ado, then, let's go ahead and welcome Deborah to today's episode. Over to you, Matt.

Matt Broder [00:01:00] Thank you so much, Joel and Eileen. Thank you all for listening. Today we are we are here at episode two of the Bridging the GAAP podcast. And with us today is Deborah Beams. Deborah is a GASB Supervising Project Manager and we're going to discuss an interesting project that's on the on the GASB's agenda right now. It's the project on proposed guidance on disclosure and classification of certain capital assets and what this project might mean for our stakeholders. So, Deborah, welcome to Bridging the GAAP.

Deborah Beams [00:01:37] Thank you, Matt, and thank you for having me on.

Matt Broder [00:01:39] Of course, before we dive into the details of the project, I think it would be great if you could just, for our listeners, talk a little bit about what we mean when we use the term capital assets. It's a pretty broad category. So, I'd like to maybe just color that in a little bit.

Deborah Beams [00:01:56] Sure. So, capital assets is defined in Statement 34 as tangible or intangible assets used in operations and that have an initial useful life extending beyond a single reporting period. So, things that can fall into capital assets are land, buildings, vehicles like police cars or fire trucks, equipment, works of art, infrastructure, software, patents, all types of things can fall under the capital asset category.

Matt Broder [00:02:29] So a school bus or a Manet painting are both, for the purposes of GASB, capital assets. That's great. Good to know. So now we're going to dive a little bit into the project. And, you know, I read off the title of project it is proposed guidance. So, this is, if you will, a proposal not a final standard from the GASB. Can you just give us some background on how the project sort of came to be, how this sort of rose to the top of the agenda for GASB?

Deborah Beams [00:03:01] Sure. So, it is proposed guidance. It is what we call an exposure draft. So, it is in the format of a final statement, but it is not final yet. It is put out there so stakeholders can provide comments on what is being proposed. For this particular exposure draft, it started with this project, which if you look on the GASB website, it's called Classification Non-financial Assets is the project that this exposure draft is issued under and recent standards on leases, public private partnerships and subscription based I.T. arrangements in particular have required the recognition of certain intangible assets, the assets that represent the right to use somebody else's owned asset. And so those right to use assets were classified as capital assets. And so, in the light of the recognition of those new types of assets, governments have, many of them, sometimes some very large amounts of them. We took on a pre agenda research activity in June of 2020 to gather information on various types of non-financial assets and the effectiveness of the existing classifications. The results of that research indicated that financial statement users generally do evaluate information about certain types of non-financial assets differently. Because of that, the board added this project classification of non-financial assets to its current technical agenda in August of 2021.

Matt Broder [00:04:33] Got it. So essentially the catalyst was new types of assets were brought into the category of capital assets. And now you need it to sort of have a better sense of how users were analyzing and using this information and what their needs were. And that was what sort of brought this project into existence. Good. So now the project is has been sort of brought forward. It's added to the technical agenda. What were the issues that emerged as the staff dug into this a little more deeply?

Deborah Beams [00:05:09] So we looked at different types of non-financial assets and considered whether financial statement users would look at them differently when they're analyzing financial statements. And we did also consider whether some of these right to use assets should continue to be capital assets or if they should be some other type of classification. The board is proposing that they stay in capital assets. But back to the financial statement users, we were asking them if they use information, for example, about lease assets differently than owned assets. Do they care if a government is leasing a building versus if they own the building? So, for the different types of assets that we did in our research, many of them it was indicated that users do use that information differently. And so, the board has decided to propose that certain types of those capital assets would be broken out separately within the existing capital asset note disclosure requirements. And those four types of capital assets are capital assets held for sale, lease assets, subscription assets, and intangible assets.

Matt Broder [00:06:22] Hmm. And right now, these are not broken out differently in the in the disclosure in financial disclosures, you're saying.

Deborah Beams [00:06:31] They may or may not be. The current requirements for those capital asset note disclosures is that they be made by major class of asset. And so, some governments might and probably many do have some of these types broken out separately, but it's not necessarily required that all governments do.

Matt Broder [00:06:53] I see. Got it. That's helpful. Thank you. So, you talked about breaking it out differently. What will that actually mean for governments and what is that going to do to the look of the financial statements and how preparers and users will be able to engage with those financial statements.

Deborah Beams [00:07:11] Right. So, the proposal is that these certain types of assets, if a government has them and if they're material, would need to be broken out separately within the existing note disclosure. Generally, it means those things are going to be on their own line within the table. We have included in the exposure draft an illustration of one possible way that that might look. It's not necessarily the only way that would meet the proposals, but it helps stakeholders to visualize what the proposals are requiring. And so, some governments might already disclose some of these assets on separate lines already so the proposal might not change much for them. But by requiring the disclosure for all governments to report the same types of assets separately, it will enhance comparability for financial statement users as they look at financial statements of different governments and compare them.

Matt Broder [00:08:09] I see. So, for example, capital assets held for sale, this would be a new classification under the proposal. So, when will that new classification come into play? And what does that look like when it happens.

Deborah Beams [00:08:28] Right. So GASB standards so far have not defined what it means for a capital asset to be held for sale, although our research did indicate some governments are already reporting things as held for sale under some criteria. But our research indicated that users do consider capital assets held for sale differently when they're analyzing the financial statements, particularly if they're making assessments of a government's liquidity. So, this proposal describes when capital assets should be held for sale so that when financial statement users see capital assets held for sale, they know exactly what that means. So, the two proposed criteria are, one, that the government has decided to sell the asset, which is terminology that already exists in the GASB literature In Statement 42 and two, it is probable that the sale will be finalized within one year of the financial statement date. So, for example, if a school district has a school building that's no longer needed, it might decide to sell the property. If they think it's probable that the sale of the property will close within one year of the financial statement date, then it would classify that property as capital asset held for sale.

Matt Broder [00:09:46] Okay, well, that makes sense. Does that affect the value or the measured value of that asset?

Deborah Beams [00:09:53] So this proposal would not change the measurement of any capital assets that are classified as held for sale. It is strictly a matter of breaking them out separately in the note disclosure at the same amount they would be reported that if they were not held for sale, so those capital assets would still be subject to guidance on depreciation and impairment as applicable. So, the measurement of the asset would not change.

Matt Broder [00:10:18] Right. That makes sense. What I'm wondering, though, is let's say the Board of Education has decided to sell a surplus school. There's suddenly a change in demographic trends in the community and the school, which was once slated for sale, is now going to be either brought back in and used as a school or repurposed in some other way for the community. I mean, once you've made this disclosure, are you locked in and you can't change your mind or does it does the proposal sort of have guidelines for what happens when a community changes its mind?

Deborah Beams [00:10:55] So, of course, because we're dealing with the probability of something happening in the future, there's always a chance that it won't.

Matt Broder [00:11:02] Right. There's uncertainty.

Deborah Beams [00:11:03] Right. So, the proposal does allow for capital assets once they're classified as held for sale if something changes and they no longer meet the criteria. Maybe they decide they're not going to sell the school building or perhaps the expected timing changes. It gets pushed out beyond one year that the capital asset would be reclassified back into its regular category out of the held for sale classification.

Matt Broder [00:11:31] Okay, Got it. Well, this all makes a lot of sense. Where is the GASB in the standard setting process with this project? You've issued the proposal. Where are you now?

Deborah Beams [00:11:44] Yes. So, we issued the exposure draft at the end of September, which is available on the GASB website, gasb.org and we are looking for stakeholder feedback on the proposal before we start the next round.

Matt Broder [00:11:56] I see and how can stakeholders provide that feedback?

Deborah Beams [00:12:01] So there are two ways to submit comments on this proposal, both of which are described in the document. There's the traditional comment letter that many of our stakeholders are used to writing and sending to us. But there's also an electronic input form that we've created that's on the GASB website, which is in a survey form, and it asks them guided questions for stakeholders to help.

Matt Broder [00:12:30] Elicit a kind of feedback you're looking for.

Deborah Beams [00:12:33] Some stakeholders might find it easier to answer questions rather than sitting down with a blank page and trying to write a full letter. So, the idea is to make it as easy as possible for people to provide their feedback.

Matt Broder [00:12:47] That's great and what's the timing on all this?

Deborah Beams [00:12:50] So the comment deadline is January 5th of 2024. We typically do about a 90-day comment period, and that allows a little time also after the holiday break. The Board will then start re deliberations based on the feedback we received in the spring. How long they spend in re deliberations will depend on the feedback that's received. But right now, we are targeting July of 2024 to have a final statement.

Matt Broder [00:13:17] That's terrific. Well, this is an interesting project. Thank you, Deborah for joining us today to sort of fill us in and to encourage stakeholders to review the proposal and provide feedback. We really appreciate it. Thank you so much.

Deborah Beams [00:13:34] You're very welcome.

Matt Broder [00:13:35] And anybody who's listening who would like to provide feedback, please use the electronic feedback form which you can find on GASB.org. Thank you for listening to the podcast today and be sure to subscribe for future episodes that we will have with the GASB. Thank you.

Eileen Foley [00:13:59] Thank you all so much for tuning in with us to this episode of Bridging the GAAP. We hope you'll join us again and please be sure to visit gasb.org/podcast to subscribe and to stay updated on future episodes. You can also follow the GASB on LinkedIn, Facebook, and X (previously Twitter.) Bridging the GAAP is a production of the Financial Accounting Foundation, produced by myself, Eileen Foley, and brought to Audio Visual life by Patrick Dorsman. So, until next time, keep balancing those books, crunching those numbers, and embracing the art of financial reporting.

Episode 1 Transcription

Speaker 1 [00:00:07] Hi there and welcome to the very first episode of Bridging the GAAP, a podcast brought to you by the Financial Accounting Foundation. My name is Eileen Foley, and each episode we will be putting you in contact directly with leaders from the Governmental Accounting Standards Board, otherwise known as the GASB. In today's episode, our host Matt Broder speaks with GASB chair Joel Black to discuss and demystify the Financial Data Transparency Act, a hot topic these days in governmental financial reporting. Now, let's go ahead and listen in as Matt guides us through today's discussion. Over to you, Matt!

Speaker 2 [00:00:44] Thank you, Eileen and Joel. Welcome to the inaugural edition of the Bridging the GAAP podcast. We're delighted to have you here today. Thank you so much for coming.

Speaker 3 [00:00:53] Thanks for having me. Looking forward to it.

Speaker 2 [00:00:55] So we're going to talk about the Financial Data Transparency Act and I'm guessing that not everybody in the world follows this as closely as you do. So for those who may not be following it as closely as the folks at the GASB, what is the Financial Data Transparency Act and why is it a big deal for states and cities and towns that prepare financial statements?

Speaker 3 [00:01:14] Sure. And we call it the FDTA, right? Financial Data Transparency Act for short. It is an act that was signed into law in December of 2022 by Congress as part of the Defense Authorization Act. And basically it requires the federal financial regulators, which include the SEC, Treasury, the Comptroller of the Currency and others to create a data standard that makes all the information filed with them machine readable, or maybe for lack of a better term, digitized in a way. And some might think that that means, well, can I just have a PDF that's unlocked or searchable? But it's really something more than that. The Act wants the data that's in those reports to be defined in a way to be part of a taxonomy, part of a schema so that the machine not only can see it and pick it up, but also knows at each point what each information element means. And that it means the same thing from report to report to report so that the machine not only kind of reads it, but understands it.

Speaker 2 [00:02:24] So it's almost like a language to read and understand and be able to share with others.

Speaker 3 [00:02:29] In a way, that's right. And why states and cities and counties care about it is that within the Act, it does require the municipal bond market to participate in this, with the SEC specifically being given the regulatory authority to require any information filed with the Municipal Securities Rulemaking Board to fall under this Act and have a data standard required for it, which would encompass the municipal bond market.

Speaker 2 [00:03:01] Which thousands of governments participate in. Okay. So it's got big implications for cities and towns and states. But why does GASB care about this issue?

Speaker 3 [00:03:12] Sure, it is a good question and I'd like to kind of step back a little bit beyond just the FDTA and talk about why we care about electronic financial reporting altogether, because we actually have started looking at this and thinking about this prior to the FDTA coming along. And it was something that was interesting to me as I came in to be the GASB Chair about three years ago. And if you think about the mission of the GASB, it's to make sure that we set accounting and financial reporting standards for state and local governments in the US. But it's really to make sure that users of government financial information, which includes citizens, legislative bodies and those in the investment community, the municipal bond community, make sure that those users are getting the financial information they need to make decisions and assess the government's accountability.

We have in our government community done that in much the same way for decades. The government produces a big thick what used to be paper document and now is an electronic paper document in PDF. They send that out into the world. Users manually extract information out of that document to then ingest into their processes and use the information. I had to imagine that technology was going to change that, was going to disrupt that somehow; evolve that process. So if you think about that in the context of our mission and if there is disruption in that process and there comes some other way in which users can more easily get access to financial information, then they might start using that way of getting the information instead of that hard manual way of extracting from a financial report.

So who is it that makes the decisions about what information is produced electronically? If somebody else were making that choice about the right pieces to pull out of the financial statement document, this is the information we want to make more easily accessible, then somebody else is kind of achieving our mission for us, right? They're deciding what information users get, at least get easily. And I wanted to be sure we understood how that was evolving so that we could take our place, continue to achieve our mission, and make sure that users are getting the information they need and whatever this new mode of communication was. And so that's my interest in electronic financial reporting.

FDTA kind of takes that thing that I thought was happening anyway and going to happen and really just speeds it up and kind of puts the SEC in the role of potentially making that determination of what's the right information to make tagged in this information that goes to the investor.

Speaker 2 [00:05:56] So this transition, which you foresaw coming at some point in some fashion, is now actually arriving. Although we don't know the final form of it.

Speaker 3 [00:06:06] Yet, seems to be.

Speaker 2 [00:06:09] So I know you travel a lot. You meet with stakeholders all over the place. When you talk to stakeholders about the FDTA, what kind of outcomes are they looking for? And I guess maybe another way of saying that is what kind of questions they have or concerns are they expressing to you about where this is now going?

Speaker 3 [00:06:28] Sure, it is definitely a hot topic. And when I go to conferences, this tends to be mainly what they want us to talk about. And what you largely hear from people that are, you know, optimistic and are kind of looking at what the positive outcomes of the Act should be. It's really kind of that reduction of friction of information getting from government to end user. Can we make that process more effective and efficient to increase the efficiency and effectiveness of the capital market because we can get that information to them quicker? That's the positive. That's maybe why this exists. That's what we all want. That is a good positive outcome.

I think those that have concerns are concerned with, especially from a preparing government perspective, they're concerned with "I'm limited for resources, I'm limited in personnel. I've got too much to do already with that limited resource. Now you're just adding one more thing to my plate. One more either technology solution thing I have to buy and understand and implement or at least one more part of my process I have to add that I didn't have before and I don't have the resources to do that."

And then on the user side, what they're worried about tends to be "Am I going to keep getting all the information that I used to get? I don't want a reduction in information. It would be nice to have it easier, right, and more frictionless. But I don't want to lose information in the process. I don't want poorer quality data as a part of that process." So they're interested in making sure they get the same or more information and that it's the same quality of an audited financial statement. Those tend to be the concerns.

Speaker 2 [00:08:11] I guess that make sense. I mean, if you're resource-constrained on the one side and if your information-interested on the other side, you don't you don't want to go backwards, no matter what.

So you've established that GASB has an interest in this. The question that I have would be, what is the role that you think GASB might play as this new era of digital financial reporting or electronic financial reporting kind of comes into being. What role would you guys have?

Speaker 3 [00:08:47] I guess my view of it is that that the data standard is really kind of a rule about what's the right items of information to be digitized, what level of aggregation or disaggregation should there be, What should the common rule be that's written that says here in a municipal financial statement, this is how we describe each piece of information that's in that and make sure that they're all encompassed. I think that we have a place to write that rule, to maintain that taxonomy, to maintain that schema, to develop that, because it really is what we've done for our 39 years of existence is establish rules about what the information should be in financial reports.

We can also kind of convert that into, if you will, this kind of data standard electronic age. I think we definitely have a role to play there. And my view of it, our view of it would be that it would be kind of technology solution agnostic, which really means we're not going to develop the actual technology solution that uses the rule and we don't care what it is, whether it's, you know, an XBRL tagging kind of methodology or data extraction AI-influenced kind of technology solution. Any one of those technology solutions could use a rule that we develop to program into their systems, create definitions, whatever that might be. So I think that that's a role that we can and hopefully should be able to play.

Speaker 2 [00:10:11] Good. I'm wondering, though, does the FDTA actually raise any accounting issues for local governments, state governments. You haven't mentioned GAAP yet and you guys write GAAP. And I'm just wondering, does the implementation process, will that require any standard setting on your part?

Speaker 3 [00:10:34] The short answer is no. Actually, the rule itself, the Act itself says that no new reporting requirements can be created in the implementation of this Act. It only kind of makes machine readable information that's already required. So there will be no changes that we will have to take in GAAP to implement this.

Speaker 2 [00:10:54] So no projects forthcoming that would require.

Speaker 3 [00:10:57] No GASB standard number XXX will result from this.

Speaker 2 [00:10:59] As chair of the GASB, do you have any advice or insights for people that are in state and local government if they're tracking this issue and they're concerned about it? Do you have any thoughts about what it might mean for them?

Speaker 3 [00:11:17] What I would suggest that they do is pay attention to and participate in the process. The SEC, in particular the Office of Municipal Securities, who has responsibility for the municipal securities market within the SEC is asking for and looking for market participants to participate with them in the rulemaking. They will come out with at some point rules with an exposure draft. You can comment on them, but I would suggest being involved even before that. Talk to them, communicate with them. They are open to listening. They have had a couple meetings with us. They are open to listen to whoever wants to talk to them. They are, as they say, in the information gathering mode so I would participate with your groups like GFOA and other stakeholder groups that represent you. Work on task forces, make sure your messages are getting out to the SEC and participate in the process.

Speaker 2 [00:12:18] Now, is it your sense and I'm not going to ask you to like put odds on this or make a wager, but is your sense that, you know, GASB will ultimately be responsible for driving the taxonomy that's going to guide these digital financial reports?

Speaker 3 [00:12:34] Well, hard to say because that is totally up to the SEC. It is, I guess, worth noting that our sister standards setter, the FASB, has a contract with the SEC on the public corporation side…Speaker 2 [00:12:48] Right, FASB does oversee XBRL, right?

Speaker 3 [00:12:50] …That's right. They maintain this taxonomy or rule, if you will, for XBRL on behalf of the SEC. So the SEC could do the same thing and ask the same thing of us, but we don’t know.

Speaker 2 [00:13:00] Well, that's true because FASB has been involved with XBRL for many, many years now.

So, what's the next thing that that that you expect to see in the development of this interesting initiative?

Speaker 3 [00:13:16] Well, it's kind of broken into two phases of rulemaking in the Act. The first is all the federal financial regulators jointly are creating presumably some kind of broad data standard that then each individual agency will enact. And the law requires that broad rulemaking to happen within the first two years, of which we're six months in already. So, in the next 12 months or so, look for a broad joint rulemaking kind of document to come out for public comment. And then the SEC will likely begin their rulemaking process and have two years after that to then enact their specific rule for, in our case, the muni environment. But even that would just be when they're required to have the rule issued. So four years from the Act, three and a half years from now, what its effective date will be is something the SEC has the ability to determine. So it could be even several years further down the road.

Speaker 2 [00:14:14] So they’re in information gathering mode now, perhaps a rulemaking in 2024 or at some point after that? Good. Well, this has been great, Joel. Is there anything else that you think our listeners ought to know about, about the Financial Data Transparency Act?

Speaker 3 [00:14:31] Yeah. The only thing other thing I would say—and this is probably advice for anybody but in particular the state and local governments—is that know that these rules have not been written. The Act itself is a pretty broad mandate on the regulators to enact a rule. But there's no rule written, which means that there's no technology solution out there that's already been picked that can solve this for you. So I would just say to state and local governments, don't go purchase some software because you don't even know what the rules are that you're trying to adhere to yet. Just participate in the process along the way.

Speaker 2 [00:15:04] Well, Joel, this has been really illuminating. I'm grateful to you for your time and thank you. And I'm sure we'll be checking back in with you about this and other topics in the future.

Speaker 3 [00:15:13] Thanks, Matt. Look forward to it.

Speaker 2 [00:15:14] Thanks.

Speaker 1 [00:15:20] Thank you all so much for tuning in with us to this episode of Bridging the GAAP. We hope you'll join us again and please be sure to visit GASB.org/podcast to subscribe and to stay updated on future episodes. You can also follow the GASB on LinkedIn, Facebook and X (previously Twitter). Bridging the GAAP is a production of the Financial Accounting Foundation, produced by myself, Eileen Foley, and brought to Audio/Visual life by Patrick Dorsman. So, until next time, keep balancing those books, crunching those numbers, and embracing the art of financial reporting!