September 29, 2022
Director of Research and Technical Activities
Project No. 3-41
Governmental Accounting Standards Board
401 Merritt 7, PO Box 5116
Norwalk, CT 06856-5116
Submitted via e-mail to [email protected]
Re: Certain Risk Disclosures
Dear Director of Research and Technical Activities:
The Virginia Society of CPAs (VSCPA) Accounting & Auditing Advisory Committee has reviewed the exposure draft for the Proposed Statement of the Governmental Accounting Standards Board (GASB) titled Certain Risk Disclosures. The VSCPA is a leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. The VSCPA membership consists of more than 13,000 individual members who actively work in public accounting, private industry, government and education. We appreciate the work the GASB has undertaken on this effort and the opportunity to respond to this exposure draft.
Prediction of Future Events
Overall, we understand the benefits to users of financial statements of an early warning system and appreciate the Board’s efforts to make financial statements more useful. However, we are concerned that the provisions of paragraph 6b. are in direct contradiction of GASB Concept Statement 7, which provides that it is not appropriate for notes to the financial statements to disclose subjective assessments of the effects of reported information, nor predictions about the
effects of future events, on the government’s future financial position. As a result, the proposed statement introduces significant subjectivity and speculation into financial reporting. The Board should consider limiting risk disclosures to known events as of the report issuance date to preserve the reliability and verifiability of financial statements. Any predictions about future events should be reserved for inclusion in Management’s Discussion and Analysis.
Identification of Concentrations and Constraints
We believe the definition of certain concentrations in paragraph 4 as those that, “create a lack of sufficient diversity related to an aspect of a significant revenue source or expense” is subjective and unlikely to result in consistent application without additional guidance on what ordinarily may constitute sufficient diversity. The Board may consider limiting concentration risks to specific concentrations (i.e. principal employers) that are applicable to many governments to allow it to better define what it considers to be sufficient diversity. Additionally, we believe the definition of constraints in paragraph 5 should be limited only to constraints imposed by external parties since internally imposed constraints can be removed at will by the financial reporting entity’s governing body.
Prediction of Effects of Future Events
In paragraph 6c., we support the Board’s selection of ‘substantial’ as the threshold at which a risk disclosure would be required. However, consistent with paragraph 6b., we believe the likelihood criterion of ‘reasonably possible’, coupled with a three-year forward-looking evaluation period, introduces significant speculation which is not consistent with Board’s foundational principles of financial reporting. If the Board decides to retain these forward-looking risk disclosures in notes rather than Management’s Discussion and Analysis, we recommend increasing the likelihood criterion, reducing the evaluation period, or both.
Again, the Committee appreciates the opportunity to respond to this exposure draft. Please direct any questions or concerns to VSCPA Vice President, Advocacy Emily Walker, CAE, at [email protected] or (804) 612-9428.
Sincerely,
George Crowell, CPA
2022–2023 Chair
VSCPA Accounting & Auditing Advisory Committee
2022-23 VSCPA Accounting & Auditing Advisory Committee
George Crowell, CPA — Chair
Zach Borgerding, CPA — Vice Chair
Scott Davis, CPA
Tamara Greear, CPA
Josh Keene, CPA
Nick Kinsler, CPA
Daniel Martin, CPA
Michael Phillips, CPA
Chris Smith-Christian, CPA
Charles Valadez, CPA
Natalya Yashina, CPA