Gasb Up Until the Early 1980s, State

GASB

Up until the early 1980s, state and local governments followed disparate financial policies and systems. The problem began receiving attention in the late 1970s because of New York City's financial crisis. As a result, many began calling for the creation of an oversight body for state and local governments similar to the private sector's Financial Accounting Standards Board (FASB) ran under the Financial Accounting Foundation (FAF). In 1984, the FAF added the Government Accounting Standards Board (GASB).

Because both boards have the authority to establish generally-accepted accounting principles (GAAP), there has been a lot of historical conflict caused by different answers to the same questions. This paper discusses these problems and the need to integrate the Boards into a single organization with a separate accounting staff for commercial and government entities.

The "Agreement Concerning the Structure for a Governmental Accounting Standards Board (GASB)" (the Structural Agreement) defined authority and specified a GAAP Hierarchy, the relative authority of the standards, rules, procedures and other literature on financial accounting and reporting, in an attempt to prevent conflict from two separating boards defining GAAP. It states: "The GASB will establish standards for activities and transactions of state and local governmental entities, and the FASB will establish standards for activities and transactions of all other entities."

And, it dictated that the GAAP Hierarchy for state and local governments would first be pronouncements of the GASB followed by pronouncements of the FASB. In other words, in the absence of a GASB pronouncement every FASB pronouncement automatically applies to state and local governments unless exempted by the FASB, or if GASB issues a "negative standard."

The result of the initial GAAP Hierarchy was a fiasco as GASB constantly issued negative standards for each FASB pronouncement which it determined did not apply to state and local governments. For example, in 1988, the GASB issued two negative standards, issued an exposure draft modifying the application of a FASB standard, and deferred action on the FASB exposure draft on financial instruments pending resolution of the jurisdiction issue.

In response, the Accounting Standards Board issued SAS No. 69 which established a completely separate hierarch for state and local governments:

1. GASB statements, GASB interpretations, and FASB and American Institute of Certified Public Accountants (AICPA) pronouncements made applicable by a GASB statement or GASB interpretation

2. GASB technical bulletins, AICPA industry audit and accounting guides and statements of position that have been made applicable by the AICPA and cleared by the GASB

3. GASB emerging issues task force consensus positions (if created) and AICPA AcSEC practice bulletins that have been made applicable by the AICPA and cleared by the GASB

4. GASB implementation guides and practices widely recognized and prevalent.

Now, GASB is relatively unconcerned with FASB GAAP.

At first glance, two sets of GAAP rules for private and public entities may not appear to be an issue. However, although there are transactions and events unique to a governmental entity and a commercial entity, there are many similar transactions and events that affect both entities economically in the same manner such as paying employees and vendors, executing lease agreements, entering into pension agreements and paying fringe benefits. Logically, similar transactions and events for all entities should be subject to similar accounting standards for comparison purposes.

To illustrate the problem of separate standards boards, three similar health care providers must now follow three different sets of standards for cash flow reporting. Investor-owned hospitals must follow FASB's requirements; not-for-profit organizations may become subject to an AICPA task force's recommendations and governmental hospitals must follow GASB's requirements.