The Governmental Accounting Standards Board has issued new guidance requiring governments to disclose information related to their own vulnerability, asking governments to disclose certain heightened risks related to concentrations and constraints in government revenue sources and defines those terms to help them do that.
“It was in 2020 that we started this project and we focused pretty quickly on concentrations and constraints as risks that we could get our arms around and establish a framework for and require some additional disclosure that we thought would be beneficial to users of financial information,” said Joel Black, chair of the Governmental Accounting Standards Board.
GASB standards are not strictly requirements under the law, but are generally treated as such because compliance with GASB standards is necessary in order for an issuer to receive a clean audit.
Governments would be generally on the hook to disclose such information if the concentration or constraint is known to the government prior to the issuing of financial statements, if the concentration or constraint puts the government at risk of it having a substantial impact, or if the event associated with the concentration or constraint has occurred or is expected to occur within 12 months of the date the financial statements are issued.
The new disclosure rules, or GASB statement No. 102, defines concentration as a “lack of diversity related to an aspect of a significant inflow or outflow of resources,” GASB said, citing as an example a small number of companies that represents the majority of employment in a government’s jurisdiction, or a government that relies on one source for most of its revenue.
A constraint is defined as “a limitation imposed on a government by an external party or by formal action of the government’s highest level of decision-making authority,” GASB said. They also give the example of a voter-approved property tax cap or state-imposed debt limit.
“GASB is proposing that certain types of assets be disclosed separately in the note disclosures about capital assets,” the statement said. “This would allow users to make informed decisions about these and to evaluate accountability.”
Black noted that they are trying to avoid over-disclosure and that the idea behind the standard is to only require disclosure of the risk when it is heightened, or when it’s really important that analysts hear about it.
“I do think that this is going to be a little bit of a new way to think about risk, or at least from a financial reporting perspective, include disclosures related to this, even though governments largely think about these concentrations and constraints in managing their operations,” Black said. “That’ll be a little bit of a challenge for preparers to understand the first time through but once they kind of get their arms around where their risks are, I think it will become a pretty routine part of their process.”
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Lisa Washburn, managing director of Municipal Market Analytics who also serves on the Government Accounting Standards Advisory Council, said since GASB is using this to define only a certain, narrow group of risk disclosures, the framework could be used in other ways.
“I’m hoping that this is the model that will be used for other types of risk disclosures that I think are becoming increasingly important, whether that be climate related disclosures or disclosures related to cybersecurity, or anything else that comes our way that we don’t know about quite yet,” Washburn said.
Early application of this standard is encouraged but it will be required beginning June 15, 2024.