Concepts – The Financial Report
Project Objective:
The FASAB has noted that essential features of a sound framework of objectives and fundamental concepts include describing the financial statements used to present elements, identifying means of communicating information necessary to meet reporting objectives, and describing when to use a particular means of communication. This project will address these features and is the third phase of the FASAB’s five-phased Conceptual Framework Acceleration Plan (see the chart below).
The Financial Report project focuses on the financial report and its key components for communicating information, such as management’s discussion and analysis (MD&A), financial statements, notes, required supplemental information (RSI), and other accompanying information (OAI). The project will:
- describe the financial statements used to present the elements critical to meeting financial reporting objectives and explain what statements are essential to meeting the objectives; and
- provide guidance for determining when a means of communicating information should be used.
To accomplish its objective, the project includes identifying financial reporting objectives not yet addressed through financial statements and suggesting alternatives to meeting them. Two primary topics that will be studied in this area are sustainability and performance reporting. Also, the project will review prior concepts and standards and consider financial reporting issues that have developed since the FASAB issued its initial set of concepts and standards about a dozen years ago.
Ultimately, the project will help ensure that federal financial accounting standards are based on a sound framework of objectives and concepts regarding the nature of accounting, financial statements, and other communications methods.
Staff Contact:
Eileen Parlow, (202) 512-7356, parlowe@fasab.gov
Ross Simms, (202) 512-2512, simmsr@fasab.gov
History of Board Deliberations (reverse chronology)
February 13-14, 2008 Board Meeting
At the February 14, 2008 meeting, members discussed revisions to the pre-ballot draft concepts statement, Distinguishing Basic Information, Required Supplementary Information, and Other Accompanying Information. The Statement is the product of the first phase of the Financial Reporting Model project and it proposes amendments to SFFAC 2, Entity and Display. As the Financial Reporting Model project progresses to later phases, additional amendments to SFFAC 2 may be presented.
Members discussed the structure of generally accepted accounting principles (GAAP) which includes basic information and required supplementary information (RSI). However, other accompanying information (OAI) is not required by a body that establishes GAAP. Members also discussed RSI and OAI and the role of the Office of Management and Budget (OMB). The OMB has the legal authority to define form and content and prescribe the auditing procedures that auditors should apply. Auditors must apply the OMB audit requirements in addition to the American Institute of Certified Public Accountants’ (AICPA) auditing standards. The Statement allows for the OMB’s role.
Members are currently voting on ballot draft statement that incorporated their comments at the February meeting. An exposure draft will be issued before the end of March.
December 4-5, 2007 Board Meeting
At the December 2007 meeting, the Board discussed a proposed concepts statement that would amend SFFAC 2, Entity and Display. During the Board’s September 2007 meeting, members agreed that there are a number of factors to consider when determining how to communicate required information and those factors are presented in the basis for conclusions section of SFFAS 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessment (Figure 2). Members relied on the factors when developing the standard and found them helpful for distinguishing basic information from required supplemental information (RSI). The Board then agreed that a concepts statement on communication methods should include the SFFAS 25 factors.
Rather than developing a concepts statement on communications methods that would include the factors for distinguishing basic and RSI, staff proposed a concepts statement that would amend SFFAC 2. The existing FASAB conceptual framework currently includes some guidance for communication methods. For example, SFFAC 2 discusses types of financial statements, management’s discussion and analysis (MD&A), and RSI, and SFFAC 3, Management’s Discussion and Analysis further discusses the MD&A. Amending SFFAC 2 to include the factors for distinguishing basic and RSI would help reduce the likelihood of repeating existing concepts in a new standard.
The Board agreed with the staff proposal to amend SFFAC 2 and provided comments on the content of the proposed statement. Staff plans to prepare a ballot draft for the February 2008 Board meeting.
In addition, staff noted that discussing required information categories raises another matter for the Board’s consideration. Staff noted that the Required Supplementary Stewardship Information (RSSI) category remains a part of the federal financial reporting model. The Board has reclassified all RSSI items except Stewardship Investments. Stewardship Investments include investments in non-federal physical property, research and development, and human capital. Members noted that the information is currently being treated as RSI; however, when the Board originally created the category, the Board expected that the auditor would report on this information in a manner similar to basic information. Also, some members expressed concern whether the information should continue to be required. The Board agreed to consider a project on the RSSI category during its February 2008 technical agenda setting discussions.
September 19-20, 2007 Board Meeting
At the September 19, 2007 meeting, members discussed a proposed concepts statement that would provide guidance for choosing the appropriate level of assurance on information to be required by standards. This approach for the concepts statement was highlighted during the Board’s July 2007 meeting, when members discussed the Management’s Discussion and Analysis (MD&A). While members agreed that the MD&A was an important component of the financial report, they deliberated on whether the MD&A should be considered basic information subjected to audit or required supplemental information (RSI) which is not audited. The proposed concepts statement would provide criteria to assist the Board in choosing the appropriate assurance level in instances such as the MD&A.
Members discussed that the Board primarily focuses on determining what information should be reported and the means for reporting the required information. In determining the means for reporting required information, the Board considers various factors. One factor is assurance. The Board may discuss assurance and designate information as basic or RSI to help ensure that the information receives the intended level of audit scrutiny. Factors such as reliability and precision are also evaluated in determining the means for reporting required information. These and other factors were previously developed in the basis for conclusions of SFFAS 25, Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessment. The discussion in SFFAS 25 focused on distinguishing between basic and RSI. In addition, members noted that, at times, the Board may encourage the reporting of information. Information that the Board encourages may be considered other accompanying information (OAI). These notions were incorporated into a framework that staff could use in developing the concepts statement. The concepts statement will include the various factors that the Board considers in determining the means for reporting required information and the notion of encouraging information using OAI.
Issue Paper for September 2007
July 25-26, 2007
At the July 26, 2007, FASAB meeting, staff provided the Board with an overview of the project and stated that staff planned to develop concepts that would:
- Establish criteria for determining when financial statements, disclosures, management’s discussion and analysis (MD&A), required supplementary information (RSI) other than MD&A, and other accompanying information (OAI) should be used in meeting the reporting objectives (communication methods); and
- Describe the financial statements used to present the elements critical to meeting financial reporting objectives and explain what constitutes a full set of financial statements (overview of basic financial statements).
Regarding the first objective, communication methods, staff prepared a proposed concepts statement for the Board’s review. Staff prepared the proposed concepts statement using the outline presented to the Board during the November 2006 meeting. The proposal described each communication method and established a hierarchy for choosing among them. Concerning the second objective, overview of basic financial statements, staff recommended that: (1) SFFAC 2 be amended as needed rather than being superseded and (2) amendments related to ongoing standards projects be accomplished as those standards are developed.
The Board agreed with the staff’s plans and provided comments on the proposed communications methods concepts statement. Some expressed concern about the added value of the proposed concepts and how the document should depict the unique role of the MD&A in federal financial reporting. The MD&A is an important communication method and, in some cases, the only method that users will read. However, currently, the MD&A is not audited. Instead, it is treated as RSI for audit purposes. Staff will revise the proposed concepts statement based on the Board’s comments.
May 23-24, 2007
The Financial Report Project was not an agenda item at the May 2007 meeting. Staff continues to research topics initially presented during the November 2006 board meeting and will draft proposals for consideration by the Board. Staff will present an update at the July 2007 Board meeting.
March 21-22, 2007
During the March 2007 FASAB meeting, the Board discussed whether performance information was an integral part of financial reporting and general purpose federal financial reports (GPFFR). In reviewing the scope of the existing GPFFR, staff noted that the report includes non-financial performance information such as performance goals and levels of achievement. However, some standards-setters focus on financial information and do not necessarily consider non-financial performance as integral to financial reporting and constituents have raised concerns regarding the voluminous size and understandability of agency Performance and Accountability Reports (PAR). In earlier statements, such as Statement of Federal Financial Accounting Concepts 3, Management’s Discussion and Analysis, the Board stated that performance information was an integral part of the GPFFR, and staff asked whether the Board believed that performance information is an integral part of financial reporting and of GPFFRs, currently. In addition, because the area of performance reporting is still evolving and more time may be needed to allow on-going programs to accomplish their intended goals, staff suggested that the Board continue to monitor the progress in performance reporting rather than exploring the topic at this time.
While Board members agreed that the term “integral” does not indicate the audit status or the scope of audit work that should be conducted regarding performance information, members discussed agencies’ concerns about audits of performance information. The Board agreed that performance information was integral to financial reporting and the GPFFR, but this does not preclude pursuing alternative formats. In addition, the Board members determined that staff should participate in work groups engaged in reviewing PAR formats and developing strategic directions for a financial reporting model. This will permit the Board to continue monitoring the progress in performance reporting rather than exploring the topic at this time.
Staff also noted that the existing GPFFR includes financial statements, disclosures, management’s discussion and analysis, required supplementary information, and other accompanying information. FASAB literature discusses these components and the financial reporting community is familiar with them. Staff suggested that the Board limit the GPFFR components to the existing ones, rather than exploring other possibilities. Board members acknowledged that the components indicate audit status categories and agreed to limit the GPFFR components to those currently discussed in FASAB literature.
Issue Paper for March 2007 (PDF)
January 17-18, 2007
Staff presented the Board with an update on the status of the financial reporting model project. Staff incorporated the Board’s previous comments on an outline of a proposed concept statement regarding key components of the federal financial report. One key change to the outline was the addition of a discussion on management’s responsibility for financial reporting. The Board discussed the notion of adding management’s responsibility for financial reporting to the proposed concepts statement and determined that management’s responsibility for financial reporting, along with the notion of fair presentation, should be discussed in possibly another vehicle rather than the proposed concepts statement on key components of the financial report. However, additional research is needed to determine the appropriate means of articulation.
In addition, at the November 2006 meeting, Board members believed that the Board could begin to consider how to report performance information and staff could address the issue as part of the project. Accordingly, staff discussed plans for how to proceed with the project. The staff plans included two types of outreach activities - roundtable meetings to discuss agency Performance and Accountability Report (PAR) issues and an educational session on cost accounting. Constituents had recently raised concerns that PARs have grown too voluminous and that agencies are not developing cost information to integrate with performance reporting, such as reporting the cost of specific programs and the amount spent on achieving results. Staff proposed the outreach efforts as a way to inform constituents on existing FASAB guidance and to gather information on whether additional FASAB guidance is needed.
The Board noted that the financial reporting project involved many broad subjects which required analysis. Consequently, members believed that the project needed further development before proceeding with outreach activities, and staff should proceed with the project by reviewing the concepts supporting the existing general purpose federal financial report (GPFFR). Also, in the meantime, staff plans to serve as an observer on existing work-groups focusing on streamlining the PAR and integrating financial and performance information and inform the Board of areas where FASAB could provide a comparative advantage.
Issue Paper for January 2007 (PDF)
September 27-28, 2006
Staff is developing an outline for a new Concepts Statement that will address the key components of Federal financial report. The Board will review the outline at the November 2006 Board meeting.
