GASB 34: Penalty or Panacea?
Background
The Government Accounting Standards Board (GASB) is a non-profit agency that
establishes generally accepted accounting practices (GAAP) for local and state
governments. There is no legal requirement for governmental agencies to adhere to
these voluntary standards, but it is good public business sense to do so. In part this is
true because bonding companies use GAAP to look at the financial condition of
governmental agencies and they use the results to set the bond rating for an agency™s
general obligation and revenue bonds.
Over the last several years, GASB has been studying how governmental agencies value
and report infrastructure under their domain. Traditionally agencies reported via the
cash accounting method. Under that method, the capital cost of a bridge, for example,
only appears in the annual financial report in the year of its construction. Neither the
long-term value of an individual bridge over a period of years is reported, nor is the total
value of all bridges. Also existing reporting allows the cost of separate infrastructure
built in any one year to be reported in separate funds, which makes it difficult to even
determine the total infrastructure built by one agency in one year.
The result of the GASB study was a statement issued in June 1999 and numbered 34,
hence GASB 34. This statement outlined a new reporting standard by government for its
infrastructure assets, including roads, bridges, water, sewer, storm sewer, etc.
The standard outlined in statement number 34 requires several changes, the most
important of which is accrual accounting. Accrual accounting is the standard in the
private sector, and thus places governmental accounting more in line with the private
sector. With this method, the cost and value of an asset is spread across its life. Also
agencies are required to report the value of all of their assets in one report. Therefore,
the benefit of the new GASB requirement is that any citizen, public official, investor or
agency can look at the financial report and see the financial condition and remaining
useful life that agency™s entire infrastructure.
With GASB 34 comes better accountability and better infrastructure stewardship.
Governmental agencies are expected to comply with the new GASB 34 requirement
based upon their annual revenues. Agencies with over $100M in revenue were required
starting in June 2001. Agencies from $10M to $100M in revenues are affected starting in
June 2002. The remaining agencies face compliance beginning in June 2003. Initially
agencies have to report projects from the first year of compliance forward. Within four
years of each agency™s report start date, all projects going back to 1980 will have to be
reported. The exception to the retroactive requirement will be agencies with under $10M
in revenue. They will only have to report on projects from inception date forward.
GASB 34 allows two methods for valuing infrastructure: the depreciated method and the
modified approach. Each method will require a good inventory, including an asset™s cost,
condition and remaining life.
The depreciated method appears on the surface to be the easiest. Using a straight-line
depreciation method for each asset, the agency calculates the annual depreciation by
determining the historical cost, subtracting the salvage value and dividing that number
by the useful life in years. Using this method, the ‚formula™ current value of the asset is
easy to calculate, but unfortunately annual maintenance and its value to the asset is not
taken into consideration.
The modified approach does not come with a neat formula, but it outlines how a value
should be arrived at. To arrive at it, an agency needs an up-to-date inventory, a regular
assessment of an asset™s condition and a scale upon which to rate condition. The agency
also needs to determine an estimated annual cost to maintain an asset at a minimum
condition level and a definition of that minimum condition (i.e. good, fair, etc.). GASB 34
gives infrastructure managers latitude in valuing their assets, with the caveat that they
should use consistent and reasonable methods.
With the GASB 34 table set, how will agencies comply with the new requirement? Will
the new requirement be looked at as an unfunded mandate for the agency to comply
with? Or will the requirement become a tool for the agency to truly become a sound and
justifiable manager of the infrastructure assets. What remains to be seen is how well all
the players play together. Those players are of course the Finance Director, the Engineer
and one additional player, the GIS Manager.
