This paper examines the historical tension between the Government Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) over the authority to establish generally accepted accounting principles (GAAP) for state, local, and private entities. Beginning with the creation of GASB in 1984 under the Financial Accounting Foundation, the paper traces the evolution of the GAAP hierarchy, the problems caused by duplicative and conflicting standards, and real-world consequences in areas such as cash flow reporting and pension accounting. The author argues that a single oversight organization with separate accounting staff for governmental and commercial entities would best balance the unique needs of government agencies with the practical need for consistency across similar transactions.
Up until the early 1980s, state and local governments followed disparate financial policies and systems. The problem began receiving attention in the late 1970s because of New York City's financial crisis. As a result, many began calling for the creation of an oversight body for state and local governments similar to the private sector's Financial Accounting Standards Board (FASB), which operated under the Financial Accounting Foundation (FAF). In 1984, the FAF added the Government Accounting Standards Board (GASB).
Because both boards have the authority to establish generally accepted accounting principles (GAAP), there has been significant historical conflict caused by different answers to the same questions. This paper discusses these problems and the need to integrate the two boards into a single organization with separate accounting staff for commercial and government entities.
The "Agreement Concerning the Structure for a Governmental Accounting Standards Board (GASB)" — known as the Structural Agreement — defined authority and specified a GAAP Hierarchy: the relative authority of the standards, rules, procedures, and other literature on financial accounting and reporting. This was an attempt to prevent conflict arising from two separate boards defining GAAP. It states: "The GASB will establish standards for activities and transactions of state and local governmental entities, and the FASB will establish standards for activities and transactions of all other entities."
The Structural Agreement also dictated that the GAAP Hierarchy for state and local governments would first consist of pronouncements of the GASB, followed by pronouncements of the FASB. In other words, in the absence of a GASB pronouncement, every FASB pronouncement would automatically apply to state and local governments unless exempted by the FASB or unless GASB issued a "negative standard."
The result of this initial GAAP Hierarchy was a fiasco, as GASB constantly issued negative standards for each FASB pronouncement it determined did not apply to state and local governments. For example, in 1988, GASB issued two negative standards, issued an exposure draft modifying the application of a FASB standard, and deferred action on a FASB exposure draft on financial instruments pending resolution of the jurisdiction issue.
In response, the Accounting Standards Board issued SAS No. 69, which established a completely separate hierarchy for state and local governments:
Under this framework, GASB became relatively unconcerned with FASB GAAP.
"Cash flow and pension standard inconsistencies"
"Recommendation for unified board with separate staffs"
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