Project Pages

Conceptual Framework: Elements of Financial Statement—Project Plan

Project Description: The objective of this project is to define key elements of financial statements as well as to describe or define related concepts that primarily will guide the Board in establishing future standards. The project scope includes transactions and other events, measurement focus, basis of accounting, specific elements (for example, assets, liabilities, revenue), and the interrelation of elements. This project will lead to a Concepts Statement.

Background: This project is needed to provide the GASB with guidelines to help determine if and how events should be recognized as elements in financial statements. Without established definitions of elements and basic concepts, the risk is high that over time standards will include inconsistencies and possibly contradictory solutions to essentially similar accounting issues. Therefore, the project should benefit users by providing them with more consistent reporting, and also should help preparers and attestors when attempting to determine the proper financial reporting for events that are not specifically discussed in the authoritative literature. This project has been an integral part of the overall reexamination of the financial reporting model since that project’s inception in 1984; however, it was not identified as a stand-alone project until January 1993.

Accounting and Reporting Issues:

1. What are elements of financial statements?

2. What is the entity (or governmental unit) that should serve as the reference point for defining elements?

3. What is a fund?

4. Which elements should be defined? When this project was delayed in 1996, the Board had decided to focus initially on defining primary elements (for example, assets and liabilities). A decision on whether to define secondary or sub-elements (for example, financial assets, receivables, capital assets, infrastructure assets, intangible assets, etc.) was deferred.

5. How should these elements be defined?

6. How do elements change? Assuming elements change as a result of transactions or other events, it is necessary to define these terms. How should transactions and events be defined? What are external and internal events? Should the Concepts Statement distinguish between exchange and nonexchange transactions?

7. What is the relationship between elements and recognition and measurement?

8. To what extent should measurement focus and basis of accounting be discussed (in detail or in general)?

Project History:

At the August 1995 meeting, the Board approved the project scope and approach. Also in August, the Board arrived at tentative conclusions on the definition of an “entity” for purposes of applying definitions of the financial statement elements. In the remainder of 1995, the Board reached tentative conclusions on the definitions of event, transaction, exchange transaction, asset, and liability. The Board also tentatively adopted a classification scheme for revenue and expense transactions, the primary purposes of which was to group nonexchange transactions into different classes based on their characteristics and to assist with the development of recognition criteria (in the related financial reporting model project) for each class of transaction. The classification scheme for revenues served as the conceptual underpinning for Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. Also in the fourth quarter of 1995, the Board tentatively concluded that the Concepts Statement should include definitions of basis of accounting, cash basis of accounting, accrual basis of accounting, measurement focus, financial resources, and economic resources. Although reference would be made in the Concepts Statement to “modified accrual basis of accounting,” the Board tentatively agreed that the term should not be defined in the Concepts Statement because the Board did not believe that “modified accrual” was a unique conceptual notion, but rather combined attributes of both the cash and accrual bases of accounting.

In the first quarter of 1996, the Board tentatively adopted definitions of most of the elements and underlying concepts that it planned to include in the proposed Concepts Statement. Several documents, including FASB Concepts Statement No. 6, Elements of Financial Statements—a replacement of FASB Concepts Statement No. 3 (incorporating an amendment of FASB Concepts Statement No. 2) and the International Federation of Accountants‘ Public Sector Committee Study 2, Elements of the Financial Statements of National Governments, as well as publications on financial statement elements by the standards-setting bodies of Canada, Australia, New Zealand, and the United Kingdom, were used as reference sources in the development of these definitions.

At the March 1996 meeting, the Board directed staff to develop a glossary of the financial statement element terms and concepts, as tentatively adopted to date. At that time, the development of a Concepts Statement was placed on hold so that additional Board and staff time could be devoted to the model projects. A glossary containing the definitions of financial statement elements and underlying concepts that the Board had tentatively adopted through the February meeting was distributed to the Board and staff in April 1996. The Board devoted portions of five meetings to the elements project during 1995 and 1996.

A revised version of that paper (revised to include a more thorough discussion of nonexchange transactions) was distributed to the Board and staff in January 1998. (That glossary, titled “Working Definitions of Financial Statement Elements and Related Concepts,” is commonly referred to as the “blue paper.”) Portions of that glossary were especially important in the development of Statement 34. For example, the discussion of interfund activity, balances, and services provided conceptual support for the Board’s decision on how internal events related to interfund activities should be reported.

At the July 2004 meeting, the Board restarted deliberations on the elements projects with a review of the progress of the Board in its prior deliberations, reviewed elements Concepts Statements issued by other standards setters, and discussed the principal differences between governmental and business entities with a view to why an elements Concepts Statement might be different.

The Board requested that staff prepare a memorandum for the August 2004 meeting that would explore in greater depth the principal features of governments, including why they were formed, what their objectives are, why financial reporting by governments is needed, the purpose of financial reporting by governments, and the implications for elements of financial statements. This paper has been drafted and is undergoing revisions with the goal being to issue a stand-alone “white paper” that will serve to explain to those not familiar with governmental accounting how governmental accounting is unique and why governmental standard setting should continue.

At the October meeting, the Board tentatively decided that it will pursue defining elements of financial statements using a “flow of resources” approach. In using the term “flow of resources” approach, the Board believes that the statement of activities (or other change statement) should present information that can be used to assess the performance of management of the government, rather than strictly presenting increases and decreases in assets and liabilities from the prior period. This approach recognizes that there are circumstances in which it may be appropriate to defer costs and revenues. The Board also tentatively decided at this meeting that elements that will be defined through this project are the basic building blocks of financial statements, such as assets, liabilities, and revenues, etc. and are not the items, such as receivables, bonds payable, or sale tax revenue, that meet the definitions of particular elements.

At the November 2004 meeting, the Board considered the various possibilities to determining which entity elements of financial statements should refer and tentatively decided that elements will be defined for a governmental unit, a legally separate entity. The Board also acknowledged that when financial statements are prepared for a reporting unit (for example, an activity, fund, or segment), the elements of the reporting unit are the elements of the governmental unit that have been assigned to the reporting unit, delegated to the reporting unit for management purposes, or reported in the reporting unit for the purpose of demonstrating accountability or legal compliance, plus interfund elements (for example. interfund assets and liabilities) that may arise due to the fact that the reporting unit is a subset of a governmental unit.

Current Developments:

At the January 2005 meeting, the Board tentatively decided to pursue defining elements of financial statements by their inherent characteristics such that the definitions would be applicable to any measurement focus, basis of accounting, and measurement attribute employed in a particular financial statement. The Board began discussing the inherent characteristics of assets.

At the February 2005 meeting, the Board continued its discussion of the definition of assets and began discussing the inherent characteristics of liabilities, tentatively agreed on a definition for assets,

Work Plan:

Because the last Board discussion on the elements project was in February 1996 and only one current member of that Board was still a member when deliberations restarted, the Board agreed that the work plan would reflect the fact that issues previously discussed will again be deliberated. At the same time, the value of the Board’s previous work on elements was recognized and the project will build upon the work already performed by the Board in developing the blue paper and the work of other accounting standards-setting bodies.

Elements of Financial Statements—Recent Developments

Minutes of Meeting, August 9-11, 2005

The Board considered whether inflows and outflows of resources reported in change statements each consists of more than one element and tentatively concluded that the staff should continue to explore definitions of inflows and outflows that do not consist of more than one element, consistent with the Board’s intention to define element of financial statements at a high level. The Board also recognized that the previously used terms net inflows and net outflows could be interpreted to mean that related inflows and outflows should be netted on the change statements, and requested staff to develop new terms for these elements.

Through their evaluation of the models of integrating financial statements presented in issues paper 2, the Board tentatively concluded that timing is an inherent characteristic of the element of inflows of resources that are presented in a change statement, thereby eliminating models 5–7 in issues paper 2. The Board did not reach a conclusion among the remaining models on which best describes the relationship among elements of financial statements.

Minutes of Meeting, June 21–23, 2005

The Board discussed the hybrid approach and the preliminary definitions of elements of financial statements included in the staff paper. The Board agreed to continue pursuing the hybrid approach in which assets, liabilities, net inflows of resources, and net outflows of resources are defined based upon their inherent characteristics, with deferred items serving to articulate the statement of net assets and change statement. The Board tentatively agreed that the definition of revenues (net inflows of resources) and, by extension, the definition of expenses and losses (net outflows of resources) should not refer to the period of time to which the flow is applicable, but rather should be at a higher level that is applicable to all measurement focuses and bases of accounting. The Board tentatively agreed that the period in which the flow should be reported (recognition) should be discussed in future Concepts Statements, but not as an inherent characteristic of a net flow of resources. Further, the Board considered whether net flows of resources should be separated conceptually into those associated with or available to support provision of services and those not available to support or to provide services (gains and losses) and tentatively agreed that they should be defined separately.

Minutes of Meeting, May 17–19, 2005

The Board discussed the five approaches to defining elements of financial statements described in the staff paper as well as an additional approach suggested during the meeting. The additional approach would be to define assets, liabilities, net inflows of resources, and net outflows of resources according to their inherent characteristics, and to use defined deferred items (if such an element category is ultimately used) in such a way as to articulate elements of the statement of net assets or balance sheet with elements in a change statement. The Board agreed with staff’s recommendation to continue to pursue defining flows of resources according to their inherent characteristics, recognizing that this may require expanding the scope of the project to include certain issues associated with recognition and measurement focus/basis of accounting.

The Board also briefly discussed the revised draft language for the definition of an asset, but decided to defer finalizing the language until definitions of additional elements have been further explored.

Minutes of Meeting, April 5–7, 2005

In reviewing the language of the assets section of a Concepts Statement on elements of financial statements, the Board reached several tentative conclusions that modified earlier conclusions. The first inherent characteristic of an asset is that it is a resource capable of providing a future benefit. The section describing this inherent characteristic will be titled “Resources” and will present a definition of resource as well as a discussion of what is meant by the term future benefit, which is a key feature of a resource. Future benefit tentatively will be described as “a capacity to provide, directly or indirectly, service.” It will no longer be necessary to refer to future benefit as being of either a service or an economic nature because the notion of providing service, either directly or indirectly, captures both concepts and more closely aligns with the purpose for which governments have been created.

The second and third inherent characteristics tentatively will be combined by describing the characteristic as “present control by the entity of access to or use of the future benefit.” The section describing this inherent characteristic will explain that for an entity to presently control the future benefit embodied in a resource, a transaction or other event giving rise to that control is required to have occurred in the past.

The Board directed staff to make other changes, which are editorial in nature, to the draft Concepts Statement language.

In its deliberations on issues related to the definition of a liability, the Board tentatively agreed that obligations arising out of exchange transactions that are legally enforceable are liabilities. Further, the Board tentatively concluded that obligations arising out of nonexchange transactions are liabilities when all eligibility requirements have been met, which is a surrogate for legal enforceability. The Board then began discussion of whether constructive obligations should be considered liabilities and tentatively concluded that some, but not all, constructive obligations arising from exchange transactions are liabilities. The Board discussed but did not reach a conclusion regarding whether constructive obligations arising from nonexchange transactions are liabilities or whether equitable obligations give rise to liabilities.

Minutes of Meeting, February 22–24, 2005

The Board evaluated the definition of assets and the paragraphs explaining the inherent characteristics of that definition proposed by staff and tentatively agreed that:

• Assets are certain types of resources that contain a future benefit, rather than being the future benefit directly.

• The description of the future benefit embodied in resources should specifically state that the future benefit may be in the form of either services or economic benefit.

• The discussion of how uncertainty relates to the definition of assets should be included in a more general discussion of how uncertainty relates to the definitions of all elements of financial statements.

• The proposed description of the control characteristic of an asset is acceptable as drafted.

• Although no examples of assets arising from other events need be provided, the discussion of the inherent characteristic that assets have arisen as a result of past transactions or other events should continue to include the reference to other events.

The Board also directed staff to make additional editorial and clarifying changes to the proposed language.

The Board then discussed whether deferred charges, such as bond discounts, would meet the definition of assets and tentatively concluded at this time that it would not. The Board is not, however, excluding the possibility of defining an element or elements of financial statements that would include deferred charges and credits.

The Board then began discussing some of the issues related to defining a liability. The Board considered the question of whether an obligation should be considered only as a legal obligation, or whether it also include constructive or equitable obligations. The Board tentatively agreed not to limit what is considered an obligation to only legal obligations. As part of the discussion of obligations, the Board also considered whether the nature of an obligation was different depending upon whether the related transaction is an exchange transaction or a nonexchange transaction. No general agreement developed as to whether the distinction between exchange or nonexchange transactions affects the nature of an obligation.

Next, the Board considered whether time restrictions, such as those related to property taxes that have been levied for the subsequent year, create an obligation. The Board did not reach any conclusions on this issue.

Finally, the Board discussed whether or not, for an obligation to exist, there must be an external party or possibly a specifically identified external party to whom the obligation is owed. The Board tentatively agreed that a specific external party need not be identified for an obligation to exist.

Minutes of Meeting, January 11–13, 2005

The Board considered whether elements of financial statements should be defined solely by their inherent characteristics or whether elements should be defined for a particular measurement focus, basis of accounting, and measurement attribute. After considering the theoretical ranges of measurement focuses, bases of accounting, measurement attributes, and the various combinations thereof, the Board tentatively decided to pursue defining elements of financial statements by their inherent characteristics such that the definitions would be applicable to any measurement focus, basis of accounting, and measurement attribute employed in a particular financial statement.

The Board then began evaluating potential inherent characteristics of assets. The Board tentatively decided that one inherent characteristic of assets is that they embody a future benefit, which will be described more precisely at future meetings, but generally will include the notion that the future benefit may take the form of either singly or with other assets providing service to citizens or the public or may take the form of an economic benefit that may be used, for example, to satisfy liabilities. The benefit may flow directly to citizens or the public or it may flow to the entity (legally separate government). The Board also tentatively decided that an additional inherent characteristic of assets is that their future benefit is controlled, through legal or other means, by the entity. The Board also tentatively decided that the definition of assets should include as the third inherent characteristic that the asset has arisen as a result of past transactions.

The Board then discussed the basics of the notion of deferred charges and credits, without reaching a decision as to whether deferred charges and credits should be considered a separate element (or elements) of financial statements or what their inherent characteristics might be. However, they did not rule out the possibilities that it might be appropriate to define deferred items as a separate element (or elements) as the project progresses.

Elements of Financial Statements—Major Tentative Decisions to Date

At the October 2004 meeting, the Board tentatively decided that it will pursue defining elements of financial statements using a “flow of resources” approach. In using the term “flow of resources” approach, the Board believes that the statement of activities (or other change statement) should present information that can be used to assess the performance of management of the government, rather than strictly presenting increases and decreases in assets and liabilities from the prior period. This approach recognizes that there are circumstances in which it may be appropriate to defer costs and revenues. The Board also tentatively decided at this meeting that elements that will be defined through this project are the basic building blocks of financial statements, such as assets, liabilities, and revenues, etc. and are not the items, such as receivables, bonds payable, or sale tax revenue, that meet the definitions of particular elements.

At the November 2004 meeting, the Board considered the various possibilities to determining which entity elements of financial statements should refer and tentatively decided that elements will be defined for a governmental unit, a legally separate entity. The Board also acknowledged that when financial statements are prepared for a reporting unit (for example, an activity, fund, or segment), the elements of the reporting unit are the elements of the governmental unit that have been assigned to the reporting unit, delegated to the reporting unit for management purposes, or reported in the reporting unit for the purpose of demonstrating accountability or legal compliance, plus interfund elements (for example. interfund assets and liabilities) that may arise due to the fact that the reporting unit is a subset of a governmental unit.

At the January 2005 meeting, the Board tentatively decided to pursue defining elements of financial statements by their inherent characteristics such that the definitions would be applicable to any measurement focus, basis of accounting, and measurement attribute employed in a particular financial statement. The Board began discussing the inherent characteristics of assets.

At the February and April 2005 meetings, the Board continued its discussion of the definition of assets and began discussing the inherent characteristics of liabilities, tentatively agreed on a definition for assets,

Assets are resources that are presently controlled by the entity.

For an item to be an asset of an entity, it is required to possess both of the following inherent characteristics:

• The resource is capable of providing a future benefit.

• Access to or use of the future benefit is presently controlled by the entity.

For this resource to also be reported as an asset of an entity, it should also meet applicable recognition and measurement criteria.

At the May 2005 meeting and prior to completing discussions of the inherent characteristics of liabilities, the Board considered issues of how all elements integrate tentatively concluding that assets, liabilities, inflows and outflows of resources presented in change statements should be defined according to their inherent characteristics and that deferred items should be defined in such a way as to integrate the elements defined according to their inherent characteristics—the hybrid approach.

At the June and August 2005 meetings, the Board further discussed the hybrid approach, tentatively concluding that all elements should be defined at a high level, such that they can be applied to all measurement focuses and bases of accounting. The Board also tentatively concluded that inflows and outflows of resources presented in change statements are the only elements of change statements and that timing is an essential characteristic of these elements.

Elements of Financial Statement—Relevant Links