GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IS THE language of financial reporting that readers of financial statements rely on for clear communication of an entity’s financial position and changes therein. Although GAAP includes many terms commonly used in the English language, GAAP also uses many critical terms specifically defined in GAAP literature. This report focuses on some of those critical terms that financial statement preparers and auditors need to understand to properly serve the public interest. Essentially, GAAP financial statements should use GAAP language: FASB GAAP for non-governments and GASB GAAP for state and local governments. We will emphasize FASB GAAP. What’s an Asset? We’ve all probably heard entities claim that “our people are our most important asset.” OK, but people are not reported as assets in GAAP financial statements. Additionally, Warren Buffett, chairman and CEO of Berkshire Hathaway, wrote the following in his February 2023 annual letter to the conglomerate’s shareholders: “Though not recognized in our financial statements, this float* has been an extraordinary asset for Berkshire.” *Float can be thought of as money available for use by an insurance company during the period between receipt of policyholder premiums and payment of policyholder claims. Apparently, in this written assertion, Buffett is using a non-GAAP definition of an “asset” (or the implication would be that Berkshire’s financial statements contain a material GAAP departure). So, what is the GAAP definition of an asset? FASB Statement of Financial Accounting Concepts (SFAC) No. 8, Chapter 4, Elements of Financial Statements, paragraph E16 states: “An asset is a present right of an entity to an economic benefit.” Chapter 4 goes on to elaborate many things about this definition, including that it means the “right” exists at the financial statement date and, therefore, has arisen from past transactions or other past events or circumstances (paragraph E28). In business entities, “economic benefits” generally result in potential net cash inflows. In not-for-profit (NFP) entities, “economic benefits” are used to provide desired or needed goods or services to beneficiaries or other constituents (paragraph E19). Please note that while Concepts Statements are not considered part of authoritative GAAP, they are still part of GAAP, and per paragraph E2 of SFAC No. 8, Chapter 4, “definitions of elements of financial statements are a significant determinant of the content of financial statements.” Why would any preparer or auditor not want to use them? As a reminder, FASB Concepts Statements apply to both business entities and not-for-profit entities (nongovernments), and are a component of non-authoritative GAAP for state and local governments (GASB Statement No. 76, paragraph 7.) However, GASB Concepts Statement No. 4 defines the term “assets” for state and local governments as “resources with present service capacity that the government presently controls.” Authoritative FASB GAAP definitions can be found in the master glossary (as well as the “20” sections) of the FASB Accounting Standards Codification (ASC). The term “asset” appears not to be among them. An example of an item that would meet this FASB definition of an asset is an NFP’s irrevocable beneficial interest in donated assets held by a third party, even if the third party had variance power that was unexercised at the financial statement date. In fact, an NFP with which I am familiar asserted this recognition was needed for fair presentation of their financial statements. I agree. And, think about this: How can an auditor obtain sufficient appropriate audit evidence about the completeness assertion for assets presented on their client’s financial statements without knowing the GAAP definition of an asset? GAAP BY PAUL H. KOEHLER, CPA, GOVERNMENT & NONPROFIT SERVICES SPECIALIST THE LANGUAGE OF CONTINUED ON PAGE 28 27 www.nescpa.org
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