The Association between Deferred Outflows of Resources and Deferred Inflows of Resources and Municipal Bond Borrowing Cost

• In Event: Issues in the Municipal Debt Market

Abstract

The Governmental Accounting Standards Board (GASB) under Concepts Statement No. 4, Elements of Financial Statements (2007) and Statement No. 65, Items Previously Reported as Assets and Liabilities (2012) identified two new balance sheet elements not previously used in government or private-sector financial reporting. The two elements are deferred outflows of resources and deferred inflows of resources. Of interest in the current study is whether these unfamiliar elements are impounded by users in their analyses of new debt issue risk. Given the extremely large size of the municipal bond market and that FASB has also considered changes to conceptual elements, it is important to have a greater understanding of how changes to the conceptual framework influence markets.

Our results indicate that even when provided with these unfamiliar balance sheet elements the municipal bond market impounds the information into interest costs of new issues. Further, we find that financial condition of the government can moderate the association of deferred inflows of resources and interest costs. Our findings should be useful to GASB, other standard-setting and regulatory bodies, and the extremely large municipal bond market. Overall our findings counter some arguments made at the time of GASB adoption that such classifications would create complexity and not be useful.

Authors

• Jacqueline Reck, University of South Florida

• Linda Ragland, University of New Hampshire