Finance officials from cities and states across the US have raised concerns over compliance costs for proposed updates to how governments value their bridges, tunnels, and roads in financial statements.
The Governmental Accounting Standards Board’s proposals on infrastructure assets risk unduly burdening governments that are already struggling with resource constraints, according to feedback in comment letters due last week. State associations, accounting firms, and municipal leaders pointed to the potential for increased expenses from added legwork by auditors and engineers to estimate details like a piece of infrastructure’s remaining lifespan.
Smaller governments may lack necessary expertise to perform such assessments, the Florida Institute of Certified Public Accountants said. “These governments would need to engage consulting engineers to provide such information which could be costly,” the organization’s comment letter said.
GASB released what it calls a “preliminary views” document in October with several accounting proposals concerning infrastructure assets, such as water and sewer systems. The proposed updates to the board’s existing guidelines aim to make financial reports more reflective of infrastructure’s current condition.
The board establishes accounting standards for state and local governments that follow generally accepted accounting principles, or GAAP. Municipal analysts, taxpayers, watchdog groups, and public officials look to governments’ financial statements to make decisions and assess accountability.
Current guidance details how governments should recognize and measure their infrastructure assets, as well as which information they need to provide in financial statements’ note disclosures.
Public Input
GASB declined to comment on the letters it’s received, but it said the board will consider the feedback during its deliberations at future meetings. Next month, stakeholders will have more opportunities to comment on the infrastructure accounting project in a series of hearings and forums.
The accounting specialist group of S&P Global Ratings, which publishes financial analysis on stocks and bonds, supported the project’s suggested updates, saying they would make financial reports more comparable across governments.
While infrastructure assets are commonly the largest line items on governments’ balance sheets, there are relatively few disclosures about them, the accounting technical services team for Portland, Ore. said.
Still, other stakeholders worried the board’s preliminary views could add costs as the accounting industry at-large reels from a talent shortage and resource constraints.
“Big and small governments already have staffing challenges,” the Pennsylvania Institute of CPAs said.
Useful Life
A key aspect of GASB’s project is an infrastructure asset’s “estimated useful life,” or the number of years it’s expected to remain in service.
Governments are currently required to periodically review the estimated useful lives of capital assets.
GASB proposed that governments reporting infrastructure assets measured at historical cost net of accumulated depreciation should conduct periodic reviews of estimated useful lives and salvage value.
If the useful lives of components within an asset are different, GASB suggested that governments should separately depreciate each component that’s significant to the asset’s total cost.
This is imperative because technology advancements and functional obsolescence can change infrastructures’ lives, asset valuation firm HCA Asset Management said in its Nov. 5 letter.
However, in communities with populations under 15,000 people, “it is highly unlikely that users of audited financial statements would be unaware of the condition of local infrastructure,” Kentucky-based firm Stephens & Lawson CPAs told GASB.
Added Disclosures
Government stakeholders worried that compliance burdens associated with GASB’s proposed disclosures would outweigh potential benefits.
While the board proposed removing some existing disclosures, it suggested adding four new ones in the notes to financial statements.
GASB proposed that, for infrastructure assets reported using historical cost net of accumulated depreciation, governments would disclose the historical cost of assets by major class that have exceeded 80 perfect of their estimated useful lives.
A water main with a useful life of 100 years would still have 20 years left when it hit “this arbitrary reporting threshold,” the Illinois Government Finance Officers Association said in objection to that rationale.
However, The Pew Charitable Trusts told the board the requirement would make disclosures more informative when it does research and analysis on critical fiscal issues affecting state governments.
GASB also suggested requiring details about cities and states’ policies for maintaining or preserving infrastructure.
But the Commonwealth of Virginia’s auditor of public accounts said governments may not have such formal policies in place, and it’s unclear who would be responsible for setting them. While governments may have a budget process in place that directs infrastructure’s maintenance, that may not be generally considered a policy, the letter said.
Several groups told GASB the public can already access information about infrastructure by examining capital plans and online resources.
“Anecdotally, we have heard from lenders, rating agencies, and the governing body that the length of the financial statements is more distracting than informative,” the Pennsylvania Institute of CPAs said.