The accounting standards issued by FASAB embody all authoritative GAAP for the financial statements of the US federal government, including all of its agencies. These standards are freely available online in a comprehensive PDF, FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as amended, which is over 2,500 pages in its most recent edition (version 19, 2020, https://bit.ly/3ILjGls) at the time of this writing. Because there is no doubt, uncertainty, or controversy as to when the FASAB standards are applicable, and because they are rarely encountered in general auditing practice, they are not discussed further in This article.
The GASB standards are authoritative GAAP for “state and local governments” only, but do not clearly define this population. In 1996, the FASB and GASB agreed on a definition of “government”, which now only appears in some AICPA auditing and accounting guides, including State and local governments (para. 101) and Not-for-profit entities (paragraph 104), which, in turn, contain only non-authoritative guidance (Category B GAAP). It appears that this definition was never intended to be incorporated directly into authoritative GASB or FASB standards.
These AICPA guides effectively define “governments” (not “state and local governments”) as “public corporations and corporate and political bodies” created for the administration of public affairs. He cites a definition of “public corporation” taken from Black’s Law Dictionary, however, as “as an instrument of the state governed by those who derive their authority from the state”. Other entities are also considered governmental under the definition agreed by the GASB and FASB if they exhibit at least one of the following three characteristics:
- Popular election of leaders or appointment (or approval) of a controlling majority of members of the organization’s governing body by officials of one or more state or local governments.
- The potential for unilateral dissolution by a government with net assets accruing to the government.
- The power to enact or enforce a tax levy.
Also, organizations are presumed to be governmental if they have the ability to directly issue (rather than through a state or municipal authority) debt that pays interest exempt from federal tax. However, organizations that possess only this ability (i.e. to issue tax-exempt debt) and none of the other governmental characteristics can rebut the presumption that they are governmental if their decision is supported by evidence. convincing and relevant evidence (https://bit.ly/3CfgzzM).
The GASB standards are authoritative GAAP for “state and local governments” only, but do not clearly define this population.
Among the series of Technical Questions and Answers (TQAs) published in 2017 containing non-authoritative guidance (discussed in more detail below), the AICPA has effectively stated that the above definition of government should be considered a definition of “state and local government”. as that term is used by the GASB, i.e. “the entities are governmental or non-governmental for accounting, financial and auditing purposes based solely on the application of the definition of a State or local government” and “an entity that meets the definition should follow the accounting standards promulgated by the GASB in preparing its financial statements” (TQA section 9160.31).
Although not defined by either FASB or GASB in any authoritative accounting standard, “state and local government” is generally understood to include, among others:
- State governments
- Local governments, such as cities, counties, towns, and villages
- Public authorities, such as housing finance, water and other utilities, economic development, and airport authorities
- Government colleges and universities
- School districts
- Pension systems for public officials, and
- Public hospitals and other healthcare providers.
Some non-profit organizations that are formed and controlled by a government entity are also considered governments, and tribal governments (see below) generally are also; therefore, their financial statements intended to comply with GAAP must be prepared in accordance with GASB standards.
Non-profit government organizations.
Generally, not-for-profit organizations are not covered by the GASB accounting standards for governments and instead follow the accounting standards prescribed by the FASB (ASC 958). In some cases, however, the distinction between a government and a non-profit organization is not so straightforward. For example, a local government may set up a corporation which may, in fact, be exempt from tax under section 501(c)(3) of the IRC and therefore exhibits many of the characteristics of a non-profit. These organizations are generally considered government not-for-profit organizations and must follow government GAAP established by GASB.
Tribal governments are technically not state or local government entities as defined above, so one could conclude that they are not under the authority of the GASB; therefore, there are no authoritative standards expressly applicable to them. The FASB (ASC 105-10-05-2) indicates that in the absence of explicit guidance in authoritative standards, entities should first draw analogies with other areas of authoritative GAAP before considering non-authoritative sources. A similar provision is found in GASB Statement 76, The hierarchy of generally accepted accounting principles for state and local governments.
According to the AICPA auditing and accounting guide, State and local governments, the federal government considers federally recognized tribes to “look like state governments,” and they generally report today using GASB standards (para. 12.91). It should also be noted that many tribes typically report their casino and other significant business operations as corporate funds from a general-purpose government (i.e. the tribe), as mentioned in the guide. (par. 12.09, 12.93). (GASB standards for enterprise funds differ from FASB standards only in limited respects, primarily with respect to the measurement of post-employment benefit liabilities and some minor presentation and disclosure issues .) However, other tribal governments prepare their financial statements on a non-GAAP, statutory or regulatory basis, which is considered a special purpose framework. A standard for presentation of financial statements prepared under a special purpose framework is provided in GAAS (AU-C 800).
Notwithstanding the above, some entities have requested the option of preparing their financial statements in accordance with FASB rather than GASB for the following reasons:
- Banks or other third parties have requested it.
- Finance and accounting staff know them best.
- Tribes and other government entities consider them preferable for certain business-type activities (e.g., casinos, utilities, hospitals) because their financial statements would be more comparable to those of other private companies operating in the industry.
Although not expressly acknowledged by the GASB in its standards or other documents, NAFOA has indeed expanded the scope of GASB’s authority and has recognized it on its website without qualification or exception as applicable to “tribalStates and local governments.
In a series of Technical Questions and Answers (TQAs) published in 2017, the AICPA provided non-authoritative guidance for issuing audit opinions on the financial statements of tribal governments that choose to prepare them in accordance with the FASB standards rather than GASB standards. In these guidelines, auditors were asked to evaluate whether the accounting principles and presentation used in the financial statements and related notes were materially different from those required by the GASB. Only when it has been determined that the presentation and disclosure differences are not material can an auditor consider providing an unmodified audit opinion regarding compliance with GAAP. If the differences are determined to be material, the auditor should modify their opinion because the financial statements, or an element thereof, contained material misstatements or misstatements from GASB GAAP.
This non-authoritative guidance also cautioned auditors against reporting tribal entity financial statements prepared using FASB standards as a special-purpose framework; instead, they provided the alternative of issuing a so-called “dual audit opinion”. Under the dual opinion option, when the financial statements are prepared in accordance with FASB principles (although an adverse opinion is always issued with respect to non-compliance with GASB GAAP in the audit report, the case applicable), additional wording may be added, including an unmodified opinion on whether the financial statements comply with FASB standards. An illustrative report with a double opinion is presented in the TQA (articles 9160.32, .34–35).
In this author’s view, the dual opinion approach is conceptually flawed and should be highly controversial. In this regard, the Native American Finance Officers Association (NAFOA), which sits on the GASB Advisory Council (GASAC), a body responsible for consulting the GASB on tribal government concerns and other technical matters, objected in 2018 to the double possibility of opinion. He claimed that “confused opinions run counter to the objectives of accounting standards and therefore impact the economic health of the Indian country” (https://bit.ly/3HCpkoE). Specifically, NAFOA further asserted that “negative audits, in the form of double audit opinions, can impact federal funding, bank lending, the ability to raise capital, and the potential loss of ‘economic opportunities’ (https://bit.ly/3hLbbuB).
Although not expressly acknowledged by the GASB in its standards or other documents, NAFOA has indeed expanded the scope of GASB’s authority and has recognized it on its website without qualification or exception as applicable to “tribal, States and local governments [emphasis added]” (https://bit.ly/3IIKOBu).
To add to the confusion, the AICPA audit guide recognizes that some tribes do not meet the FASB/GASB agreed-upon definition of a government; it refers users to Section 9160 of the TQA (discussed above) for additional guidance (par. 1.03).
In view of the above analysis, notwithstanding the non-authoritative guidance contained in the AICPA TQAs and Guide, in the opinion of this author, the FASB standards are currently neither generally accepted nor widely used. for financial statements of tribal governments or their components (except for corporate funds, such as casino operations where FASB/GASB differences are not material). Therefore, an auditor should find it difficult to justify issuing an unqualified opinion as to GAAP compliance on financial statements that deviate materially from GASB standards.