Governmental Accounting Standards Board Statement 14, "The Financial Reporting Entity": tests and analyses for information asymmetry from alternative format options

Governmental Accounting Standards Board (GASB) Statement 14, "The Financial Reporting Entity," requires governments to report discretely presented component units in separate columns on the face of combined financial statements, which also requires a revision of the presentation options for memorandum only totals. The primary purpose of this research was to test for information asymmetry among the nine alternative presentation formats resulting from combinations of three discretely presented component unit alternatives and three memorandum only total options.

Five groups of potential readers of government financial statements—government financial officials, auditors of governments, investors and creditors, government managers, and citizenry—were identified to test the consistency of the financial message transmitted. Was a similar financial message transmitted by the nine formats within each reader group and among the five reader groups within each format? Additional tests were completed to identify factors that may have contributed to information asymmetry.

Most readers searched beyond the face of the financial statements prior to making decisions. The importance assigned component units was significantly related to the importance of the component units described in the notes—rather than to the information reported on the face of the combined statement—for all reader groups except the citizenry. A significant difference among reader groups in the importance assigned the subtotal "'income before operating transfers" was also identified. Both the citizenry and the investors viewed this subtotal differently than the other reader groups.

No convincing evidence was found that a different financial message was received by reader groups, either within or among the nine formats. Exploratory tests found the importance assigned notes was more closely related to the decisions of respondents (significant!) related in many cases) than were the original independent variables—reader groups, formats, and the importance assigned component units. The influence notes had on the importance respondents assigned financial statement information was a key finding.

The results of this study may contribute to future decisions by the GASB. The importance given notes in decision-making by the respondents was encouraging. The difference in the importance assigned the income before operating transfers subtotal among reader groups was a concern. Additional research needs to be completed to validate these findings.