U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

SEC Field Hearing — Disclosure of Certain Significant Liabilities

Jim Lanzarotta — Opening remarks

September 21, 2010, San Francisco, California

I appreciate the opportunity to take part in this hearing. While I’m here participating individually, and my remarks are my own and not that of my Firm’s or the American Institute of Certified Public Accountants (AICPA), they come from my experience while serving governments for the past 26 years, as well as my experience serving on the AICPA State and Local Government Expert Panel (SLGEP) for the past four years. The SLGEP is a group of individuals from CPA firms and governments that work to provide financial reporting and auditing guidance to practitioners performing SLG audits. The panel reviews and provides feedback on the vast majority of exposure drafts issued by the Governmental Accounting Standards Board (GASB) and maintains an ongoing liaison relationship with them; addresses state and local government practice issues; and provides auditing guidance to the profession in the form of the AICPA’s Audit and Accounting Guide, State and Local Governments.

To address specifically the topic of this session, I would like to highlight the many changes that have been made in recent years in the areas of reporting liabilities in governmental financial statements. The SLGEP and I have generally been in favor of these changes, and in the direction the GASB is heading based on projects it has on its current, and research, agendas.

Probably one of the most significant of the recent improvements to governmental financial statements, is the change in the reporting model required by GASB 34. This standard, among other things, introduced two new statements; a government-wide statement of net assets, or balance sheet, and a government-wide statement of activities; that is presented on the full-accrual basis of accounting. This is in contrast to previous requirements to only report balance sheets and statements of revenues and expenditures that followed a modified accrual basis of accounting that did not include all assets and liabilities of the entity. In addition, GASB 34 requires a ‘management discussion and analysis’ section to be included as ‘required supplementary information,’ (RSI) that is similar to the nature of required SEC reporting. This RSI section includes a discussion of events, transactions, and circumstances that explain differences in financial statement amounts and balances from prior years and initial and final budgets; as well as certain capital asset and debt activity; and future economic conditions that could have an impact on the entity.

The addition of full accrual financial statements set the stage for many subsequent improvements to reporting liabilities, inherent risks, claims on an entity’s resources, and related disclosures. As examples, I would highlight:

  • GASB 40 on disclosing risks associated with an entity’s deposit and investment portfolio,
  • GASB 45 on accounting and reporting Other Post Employment Benefits referred to as OPEB,
  • GASB 46 on reporting resources restricted by enabling legislation,
  • GASB 47 on recognizing liabilities for employee termination benefits,
  • GASB 48 on reporting resources pledged for future repayment of debt,
  • GASB 49 on accounting and reporting liabilities for pollution remediation activities,
  • GASB 50 on improved disclosures on the funded status of pension plans, and
  • GASB 53 on accounting and reporting for derivatives, and
  • GASB 54 is issued and soon to be effective on reporting the level of constraints on resources and clarifying the appropriate use of governmental fund-types.

While these recent standards represent a significant improvement in terms of reporting risks, claims on resources, and liabilities, there are more improvements that the SLGEP has discussed with the GASB over the past several years. The SLGEP and I would like to believe that, at least in part as a result of our discussions, the GASB has added other projects to their current and research agendas, some of which are currently in the deliberation stage that we are generally supportive of including:

  • a project that could result in the recognition of pension liabilities in the financial statements at amounts closer to the present value of expected obligations – instead of measuring liabilities based on a government’s funding plan, or the cumulative difference from actuarially determined annual required contributions compared to amounts actually contributed,
  • a project to provide assistance in accounting and reporting activities under agreements with others generally referred to as ‘public/private partnerships’,
  • a re-examination of component units requiring inclusion in the governments’ financial statements, and
  • a research project to explore the use and reporting of financial guarantees one government provides to another.

Lastly, in recent years at least one State government attempted to create their own version of acceptable governmental accounting standards by creating a state regulatory requirement to avoid adoption of a certain “liability” standard issued by the GASB. Several others considered taking a similar action. GASB 43 and 45 addressing the reporting of OPEB is an example of a recent accounting standard that some States have considered avoiding implementation. The SLGEP and I have consistently come out in favor of the use of one set of governmental accounting standards—that would be generally accepted accounting principles (or GAAP) issued by the GASB. Currently, varying from GAAP requires a modification of the auditor’s standard opinion to highlight that the entity is not following GAAP when such “regulatory” financial statements are being used for general use purposes. It would be my hope, that users of governmental financial statements, including municipal bond analysts and investors, would recognize departures from GAAP as a negative factor in their risk evaluation of the entity.

Again, thanks for the opportunity to be here to today to participate in this session, and I’ll do my best to answer questions you may have.



Modified: 09/28/2010