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Economic Condition Reporting—Project Plan

Project Description: The overall, long-term objectives of the Economic Condition Reporting project are to map the information that users require to assess a government’s economic condition, to compare these needs with the information users receive under current standards, and to consider whether standards should be set for the remaining information. The principal focus of the third phase is to consider whether any additional economic condition information should be required or encouraged for inclusion in a government’s financial report, as well as what information, if any, would be appropriate for reporting in a separately issued document.

Background: This phase of the project builds upon research activities of Phase II, which culminated in the issuance of GASB Statement No. 44, Economic Condition Reporting: The Statistical Section. One purpose of the research of Phase II was to develop a comprehensive inventory of the information that users consider important to understanding the economic condition of a governmental entity. When compared with the body of information that currently is provided in governmental financial reports, it may be found that the aforementioned inventory is more extensive.

Accounting Issues: Three basic issues need to be resolved to complete this project: definition of economic condition; identification of the information necessary to meet user needs; and determination of the preferable methods of communicating the information.

Defining economic condition. The first question to be answered is, “What is economic condition?” Thus far the Economic Condition Reporting project has progressed utilizing the tentative definition of economic condition developed in the Communication Methods concepts project. The most recent version of the definition was the following:

• A government’s economic condition is a composite of its financial health and its ability and willingness to meet its financial obligations and commitments to provide services. Economic condition includes three components: financial position, fiscal capacity, and service capacity.
  • A government’s financial position is the status of its asset, liability, and net asset accounts, as displayed in its basic financial statements.

  • A government’s fiscal capacity is its ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they come due.

  • A government’s service capacity is its ongoing ability and willingness to supply the capital and human resources needed to meet its commitments to provide services.

Definitions of economic condition and its components are necessary in order to identify the complete set of information needed to assess economic condition.

Identification of the information. Once a definition is arrived at, the second question is, “What information do users need to assess the economic condition of a government?” A considerable amount of research has already been conducted to answer this question. A literature review conducted in the first phase of this project produced several major findings. First, it confirmed the notion that users employ a wide range of terms when describing the financial health of a government, including financial position, financial condition, fiscal condition, and fiscal capacity. Furthermore, these terms are often used interchangeably, and individual terms have diverse meanings to different persons. Regardless of the terminology used, however, the review of the literature suggests that there is substantial agreement on the key areas of concern that should be addressed when one is assessing the financial health of a government. Despite considerable variation in the way ratios were calculated from financial report information, there was substantial consensus that assessment requires trend information regarding:

1. Fund balances, equity, or net assets

2. Revenues and expenditures/expenses, as well as surpluses and deficits

3. Changes in revenue bases

4. Spending pressures and expenditure needs

5. Outstanding debts, debt service, and postemployment benefits

6. Liquidity.

There was less widespread, though still notable, agreement on several other types of information, including short-term debt, credit ratings, number of employees, condition of the physical plant, output and outcome measures, and management issues such as the quality of financial reporting, planning and budget processes, and accounting practices.

Panel discussions conducted during phase II with users experienced with and knowledgeable about the assessment of a government’s financial health are the other resource. In general, the user panelists agreed that a CAFR containing the Statement 34 financial reporting model provided a considerable amount of the information needed to assess economic condition. The panelists generally agreed that the CAFR contains most, if not all, of the information needed to assess financial position, some but not enough information about fiscal capacity, and little information about service capacity. The panelists considered information in the statistical section to be particularly useful for assessing fiscal capacity, but identified other necessary information not currently found in the CAFR, such as more detailed revenue and expense trends, comparative and benchmarking information, financial ratios, explanations, and a variety of demographic and economic indicators.

The enhancement of the statistical section by Statement 44 should improve the information that our research has shown is valuable to assessing economic condition, particularly fiscal capacity. For instance, the inclusion of government-wide information will give the users more comprehensive trends in revenues, expenses, financial position, and outstanding debt. Furthermore, the addition of trend information to schedules such as principal revenue payers and debt limitations should make them more meaningful to users. The improved statistical section should be an enhanced resource for the purposes it currently serves. However, with the important exception of providing explanations, it does not address the additional information needs that user participants in our research identified, largely because the scope of the revisions to the statistical section were limited to existing reporting.

Communicating the information. After the information needed for assessing a government’s economic condition has been identified, the last question becomes, “How should the information be communicated?” There are several broad, potential alternatives, which are not necessarily mutually exclusive. One would be to report within the structure of the general purpose external financial report covered by the forthcoming Concepts Statement No. 3, Communication Methods. Concepts Statement 3 provides the Board with criteria for deciding if any of the economic condition information should be reported in financial statements, notes, RSI, or SI. In fact, the Board could consider whether other information identified in this project should also be reported in the model.

Another possible avenue for communication is via a separate general purpose report, such as an “economic condition report.” The Board could consider how economic condition information should be arranged and communicated in a separate, self-contained document. Finally, the Board could determine that some economic condition information is not amenable to reporting in any form of general purpose report, and therefore is beyond the Board’s standards-setting purview.

Current Developments: In April 2004, the Board reviewed and tentatively approved a staff description of the issues that Phase III of the project should address. In August 2004, the Board approved a staff proposal to conduct a broad user needs study that would support several current agenda projects in addition to providing the research base necessary to conduct deliberations on economic condition reporting. Interviewing for the user needs study began in November 2004 and will continue into the third quarter of 2005. By the end of March 2005, approximately 70 interviews will have been conducted at nearly 50 firms, organizations, and public entities.

Work Plan: The research conducted thus far provides a solid foundation for asserting what basic matters (such as liquidity, financial position, revenues and expenses, and so on) users consider when assessing a government’s economic condition. The next step is to seek to identify an agreed-upon set of information, indicators, or ratios that are needed to make judgments about each of those pertinent matters. This will require three activities.

First is the completion of our ongoing monitoring of print and Internet reporting of economic condition information by governments. The intention is to obtain a comprehensive understanding of what kinds of information relevant to economic condition governments are reporting to the public through general purpose reports other than the annual financial report. This should help to form a sense of what information users consider important to know about a government’s finances. Second, research (the broad-scope user needs study mentioned above) will be conducted with a variety of users to identify the specific indicators, measures, or ratios that are widely relied upon to make judgments about the matters relevant to economic condition. Third, a task force will be formed and engaged closely in the process of identifying and organizing the inventory of economic condition information.

The identification of indicators, measures, and ratios will be accomplished as part of a broader study of the activities and needs of users. This study seeks to describe the activities of different types of users of governmental financial information: the analytical processes they engage in, the decisions that they make, and the issues they are concerned with. The study will also attempt to determine how the information in an annual financial report is utilized in those analyses and decisions, as well as the additional information that users need. Finally, the study will seek to identify how the various kinds of information is processed by users into decision-useful ratios and indicators and how those ratios and indicators are perceived and judged.

Economic Condition Reporting—Recent Developments

Minutes of Meetings, August 9–11, 2005

The Board reviewed a staff proposal to conduct additional research prior to beginning deliberations on the third phase of this project. The new research would build on the findings of the GASB’s user needs study and would seek to refine the Board’s understanding of the specific information and ratios that users require to assess the financial health of governments. The Board agreed to the staff proposal with the addition of a discussion of the definition of economic condition scheduled for the December meeting.

Economic Condition Reporting—Relevant Links