GASB 34: The Foundation of Modern Government Financial Reporting

GASB Statement 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, issued in June 1999, fundamentally transformed how governments report their financial position and results. Before GASB 34, most governments reported exclusively on a fund basis using modified accrual accounting. GASB 34 introduced the "dual-perspective model": governments now present two parallel sets of statements—one focused on fund accounting (modified accrual) and one focused on government-wide activity (full accrual)—providing complementary views of fiscal health.

Today, more than two decades after adoption, GASB 34 remains the bedrock of government financial reporting. Understanding its architecture, purpose, and implementation details is essential for accountants, auditors, analysts, and stakeholders seeking to interpret government financial statements.

The Dual-Perspective Model: Two Windows into Government Finance

GASB 34's central innovation is the recognition that governments have two distinct reporting perspectives:

Government-Wide Perspective (Full Accrual)

The government-wide perspective treats the government as a single, integrated entity—similar to a private corporation. It uses full accrual accounting, depreciation of all capital assets, and long-term liability recognition. This perspective answers the question: "What is the government's overall financial position and long-term fiscal sustainability?"

Fund Financial Perspective (Modified Accrual)

The fund financial perspective reports on individual funds (General Fund, Special Revenue Funds, Enterprise Funds, etc.) using modified accrual accounting. This perspective answers the question: "Are individual funds being managed according to budgets and legal constraints?"

Why Both?

Governments operate under legal and fiscal constraints that differ from private enterprises. A government must operate within budgets, often must segregate fund resources for specific purposes, and must comply with debt covenants and state constitutional restrictions. The fund perspective captures these realities.

However, from a long-term fiscal health perspective, fund accounting is incomplete. It excludes depreciation, ignores long-term commitments (pension liabilities, OPEB obligations), and doesn't show the full cost of services. The government-wide perspective provides this comprehensive view.

Together, the two perspectives offer a complete financial picture.

Government-Wide Statements: The Primary Drivers

The Government-Wide Statement of Net Position

This statement is essentially a balance sheet that presents the government's assets, liabilities, and net position at a point in time. It is divided into two sections: Governmental Activities and Business-Type Activities (enterprise funds).

Assets include:

Current assets (cash, investments, receivables)
Capital assets net of depreciation (buildings, infrastructure, equipment)

Liabilities include:

Current liabilities (accounts payable, current portion of debt)
Long-term liabilities (bonds payable, pension obligations, OPEB liabilities)

Net Position is categorized into three categories (per GASB 63):

Category	Definition	Example
Net Investment in Capital Assets	Capital assets less accumulated depreciation, less debt associated with those assets	A city owns $500M in buildings and infrastructure; debt associated with that infrastructure is $200M; net investment is $300M
Restricted Net Position	Constrained by external requirements (constitutional, statutory, grant conditions, debt covenants)	Bond indentures require a $5M debt service reserve; that $5M is restricted
Unrestricted Net Position	Available for any purpose within management discretion	General reserves, contingency funds

The Government-Wide Statement of Activities

This is the government's "income statement." It presents revenues and expenses, organized by function (e.g., General Government, Public Safety, Education, Utilities).

Format: For each function:

List expenses (salaries, utilities, depreciation, supplies)
List revenues directly attributable to the function (fees for permits, fines, parking revenue)
Calculate the net expense or revenue after allocating indirect (overhead) costs
General revenues (property taxes, income taxes, grants not tied to a specific function) are listed separately at the bottom
The change in net position is calculated

Key Features:

Depreciation is included (full accrual)
Interest on debt is recorded (accrual basis, not cash basis)
Pension expense is recorded using actuarial calculations, not actual contributions
Gains and losses on asset disposals are recorded
Transfers between funds do not affect this statement (they are internal, not revenues or expenses)

Distinguishing Internal vs. External Transactions

GASB 34 requires eliminating internal balances and transfers in the government-wide statements. If the General Fund transfers $2 million to the Water Enterprise Fund, that transfer does not appear as a revenue or expense in the government-wide statements—it is eliminated because it is internal to the government.

However, if a resident receives water service and is billed $500, that revenue to the Water Enterprise Fund appears in the government-wide Statement of Activities because it is an external transaction (between government and private entity).

Fund Financial Statements: The Detail Layer

Governments also present fund financial statements, which show results for individual funds on a modified accrual basis. These statements do not include depreciation (except in enterprise funds) and do not present long-term liabilities.

General Fund Balance Sheet (Modified Accrual)

A General Fund Balance Sheet presents:

Assets:

Cash and investments
Receivables (property taxes, grants)
Prepaid expenses
Inventories

Liabilities:

Accounts payable
Accrued payroll
Deferred revenues (e.g., property taxes received in advance)
NOTE: Long-term debt does NOT appear in the General Fund balance sheet (it appears only in government-wide statements or in a separate long-term debt account)

Fund Balance (analogous to equity) is presented in categories per GASB 54:

Category	Definition	Example
Non-spendable	Not in spendable form; will never be spent	Inventory, prepaid items, long-term receivables
Restricted	Constrained by external requirement	Debt service reserves, grant-restricted amounts
Committed	Constrained by management action (board resolution)	Board-approved contingency reserve, capital project appropriation
Assigned	Management intent without formal action (implied commitment)	Encumbrances (purchase orders issued), mid-year appropriations
Unassigned	Residual; available for any purpose	General operating reserve

General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance (Modified Accrual)

This statement shows:

Revenues (property taxes, sales taxes, licenses, grants) when they become "available and measurable" (modified accrual)
Expenditures (salaries, supplies, capital outlays) when the liability is incurred
NOTE: Depreciation is NOT included
NOTE: Long-term debt issuance and repayment are shown as financing sources and uses, not as revenues/expenses

Example Entry: A city council approves a $5 million bond issue to finance a new library. The $5 million appears in the General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance as a financing source, not as revenue. Later, when the city spends the $5 million on construction, it appears as an expenditure.

The library asset and the bond liability both appear in government-wide statements, but not in the General Fund statements.

Fund Classifications Under GASB 34

GASB 34 recognizes five types of funds, each with distinct accounting and reporting requirements:

Governmental Funds (Modified Accrual)

General Fund (primary operating fund)
Special Revenue Funds (specific revenue sources, e.g., gas tax revenue dedicated to roads)
Capital Projects Funds (major capital acquisitions)
Debt Service Funds (accumulate resources for long-term debt repayment)
Permanent Funds (endowments with spending restrictions)

Proprietary Funds (Full Accrual, Enterprise Fund Accounting)

Enterprise Funds (self-supporting business-type activities: utilities, airports, transit)
Internal Service Funds (support activities, like a motor pool or insurance fund)

Fiduciary Funds (Varies by Fund Type)

Pension trust funds
Investment trust funds
Private-purpose trust funds
Custodial funds

Proprietary and Fiduciary funds use accrual accounting similar to private enterprises, while Governmental funds use modified accrual.

Infrastructure Reporting: Depreciation vs. Modified Approach

GASB 34 introduced two methodologies for reporting infrastructure assets (roads, bridges, water pipes):

Depreciation Approach (Standard)

Infrastructure is capitalized and depreciated over useful life. A city's $500 million in roadway infrastructure is depreciated over 40 years = $12.5 million annual depreciation expense.

This approach:

Reflects the full cost of asset consumption
Is intuitive (similar to private-sector GAAP)
Produces depreciation expense that ties to rate-setting (for utilities)

Modified Approach (Election for Specific Entities)

A government may elect to avoid depreciation if it:

Maintains an asset management system tracking infrastructure condition
Conducts annual assessments demonstrating that the infrastructure is being preserved at a steady state
Reports the results of the assessments publicly

Governments electing the modified approach expense all maintenance costs and report any significant changes in infrastructure condition (improvements or deterioration) in a note.

Who Uses the Modified Approach? Few governmental entities qualify. The condition assessment requirement is rigorous, and most entities lack the infrastructure management systems needed to support the election. Some state transportation departments use the modified approach for their roadway networks.

The Management's Discussion and Analysis (MD&A)

GASB 34 requires an unaudited MD&A section preceding the financial statements. The MD&A is a narrative overview discussing:

Current Year vs. Prior Year Performance
- Major revenues and expenditures
- Fund balance or net position changes
- Significant variances from budget
Capital Asset and Debt Activity
- Major capital projects completed
- Debt issued or retired
- Changes in credit rating or debt service capacity
Significant Accounting Policies and Changes
- Basis of accounting
- Any changes from prior years
Financial Challenges and Future Outlook
- Upcoming budget pressures
- Rate increases anticipated
- Demographic or economic headwinds
Contacting the Government's Financial Management
- Name and phone of CFO or finance director

Purpose: The MD&A helps non-financial stakeholders understand what the numbers mean and what challenges lie ahead. A sophisticated investor might calculate a Debt Service Coverage Ratio; a citizen wants to know if the city is in good financial health and whether taxes are likely to increase.

GASB 34 Amendments: GASB 63 and GASB 65

GASB 63: Financial Reporting of Deferred Outflows/Inflows of Resources

GASB 63 (2012) introduced the concept of "deferred outflows" and "deferred inflows" of resources—items that are neither assets/liabilities nor revenues/expenses in the traditional sense.

Deferred Outflows:

Loss on debt refunding (amortized over remaining life of original debt)
Pension gains (differences between expected and actual investment returns, amortized over future periods)
Changes in pension assumptions (amortized)

Deferred Inflows:

Unavailable revenue (property tax receivable not yet collected, when using modified accrual)
Pension losses
Changes in pension liability (for example, when the discount rate assumption changes)

These items appear in the Net Position section of the Statement of Net Position:

Assets:                                    $500M
Deferred Outflows of Resources:             $15M
Total Assets and Deferred Outflows:        $515M

Liabilities:                               $200M
Deferred Inflows of Resources:               $5M
Total Liabilities and Deferred Inflows:    $205M

Net Position:                              $310M

GASB 65: Items Previously Reported as Assets and Liabilities

GASB 65 (2012) clarified the treatment of certain items that were previously reported ambiguously, including debt issuance costs (now expensed, not capitalized) and debt discounts (amortized).

Pension and OPEB Accounting: GASB 67, 68, 74, 75

While GASB 34 set the stage, subsequent standards expanded how governments account for pension obligations and other post-employment benefits (OPEB):

GASB 67 and 68 (2012):

Require pension plans to measure liabilities using actuarial valuations
Require governments to record pension liabilities in government-wide statements
Introduce "net pension liability" and "deferred outflows/inflows" for pension gains and losses

GASB 74 and 75 (2015):

Extend OPEB accounting to match pension accounting
Require measurement of OPEB liabilities on an actuarial basis
Introduce significant recognition of OPEB obligations (which many governments had deferred)

Impact: Many governments discovered they had billions in unrecognized pension and OPEB liabilities, significantly reducing reported net position when standards required their inclusion.

Future: GASB 103 and Beyond

In 2023, GASB issued Statement 103, Accounting and Financial Reporting for Certain Derivative Instruments, and is developing Statement 102 on leases (replacement for GASB 87, with refinements) and Statement 104 on fiduciary activities.

More significantly, GASB is reconsidering the fundamental structure of government financial reporting. Long-standing questions include:

Should fund accounting continue to exist? Some argue that the government-wide perspective is sufficient and that fund accounting is anachronistic.
Should governments account for accrual basis throughout? Moving away from modified accrual entirely.
Should infrastructure be presented differently? The depreciation vs. modified approach debate continues.

The Board has indicated that changes to fundamental reporting structure are unlikely in the near term, but ongoing evolution is certain.

How to Read a GASB 34 Financial Statement Package

A complete set of government financial statements following GASB 34 comprises:

Management's Discussion and Analysis (MD&A) — Read first; it explains the key metrics and changes.
Government-Wide Statements — See overall financial position and sustainability.
Fund Financial Statements — Understand individual fund performance and constraints.
Notes to Financial Statements — Critical detail on accounting policies, significant events, and assumptions.
Required Supplementary Information (RSI) — Pension funding progress, infrastructure condition, budget variance.
Supplementary Information — Additional detail on specific funds or programs.

Reading Sequence:

Start with MD&A to understand narrative context
Review government-wide Statement of Net Position to assess balance sheet health
Review government-wide Statement of Activities to understand whether the government is living within its means
Examine fund financial statements for the General Fund (and other large funds) to see near-term liquidity
Check Notes for accounting policy changes, long-term commitments, and contingencies
Review RSI for pension funding and budget performance

Key Takeaways

GASB 34's dual-perspective model is intentional. Modified accrual (fund basis) captures short-term liquidity and legal constraints; full accrual (government-wide) captures long-term sustainability. Both views are needed.
Depreciation is the bridge. Full accrual accounting requires depreciation, which fund accounting excludes. This single difference drives many divergences between the two perspectives.
Net position categories tell a story. "Restricted" and "Committed" net position are constrained; "Unrestricted" is available. The composition of net position reveals financial flexibility.
The MD&A is not just narrative fluff. It provides context that raw numbers cannot convey and is increasingly important as financial reporting audiences diversify.
Long-term liabilities matter. Debt, pensions, and OPEB are often larger than current-year expenditures. Governments that ignore long-term commitments are mismanaging fiscal health.
Fund balance categories are important in the General Fund. Unrestricted/unassigned fund balance is the government's true discretionary reserve; assigned fund balance is earmarked but not legally restricted; non-spendable and restricted are constrained.
Infrastructure reporting complexity is worth the effort. Whether through depreciation or modified approach, systematic accounting for infrastructure ensures that rate-setting and capital planning are informed by realistic asset replacement costs.

Conclusion

GASB 34 fundamentally reshaped government financial reporting by requiring comprehensive, comparative financial statements in a format accessible to non-financial stakeholders. By presenting both modified accrual (fund) and full accrual (government-wide) perspectives, GASB 34 serves diverse audiences: elected officials, creditors, citizens, and regulators.

Two decades into implementation, GASB 34 remains the foundation of government financial reporting. The ongoing development of supplementary standards (pension accounting, lease accounting, derivatives) extends GASB 34's reach. Future amendments may refine the structure, but the core model—dual-perspective, comprehensive, comparative reporting—is unlikely to be fundamentally altered.

This article was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.