How did I miss this one? Apparently State Comptroller Nancy Wyman got legislators to vote on a bill adopting GAAP. GAAP, one of my pet accounting issues, stands for Generally Accepted Accounting Principles, and is a framework used to generate financial statements. The chief benefot of the state adopting GAAP is that it will findamentally change how revenue is reported. Currently, the state accounces revenue projections as actual revenue. This causes the legislature to spend money it thinks it has. The reality is that until revenue is collected, under GAAP, it is not used in financial statements.

CFO magazine details the bill and an accounting controversy stemming from the change.

What started out as a plan to cut Connecticut’s budget deficit has turned into a clash between the state comptroller and the Government Accounting Standards Board. The main trigger of the clash occurred on June 6 when the Connecticut legislature passed a bill that put the comptroller, not GASB, in the driver’s seat as the prime arbiter of how generally accepted accounting principles are used in the state.

At issue is whether a state can pick and choose among which GAAP standards to apply or adopt the accounting standards wholesale. The Financial Accounting Foundation, the parent organization of the Financial Accounting Standards Board as well as GASB, worries that states will adopt an a la carte approach to installing accounting rules.

The bill clearly states that as of July 1, 2009, GAAP will be “prescribed by the [c]omptroller” rather than GASB. The change did not sit well with the standards setter, whose members believe that the proposed law is an attempt to wrest rulemaking control from what they see as an independent standards board and place it in the hands of politicians.

“I think this is a disturbing reminder of what can happen when politicians get involved in a process that investors depend on to protect them from self-interest,” asserted Gerard Carney, GASB spokesman. “Investors need an independent standard-setting system to get unbiased information,” Carney told CFO.com.

The concern by GASB is somewhat valid, until you consider that Connecticut doesn’t even follow GAAP right now. That obstacle has been because the legislature has refused to enact legislation to adopt it. By shifting that responsibility to the Comptroller, they are in effect conceding the move to GAAP, as Nancy Wyman has been a strong proponent of adopting the standards.

But Wyman, who says that the state will continue paying GASB membership dues, thinks the standard-setter’s assertions about Connecticut are off base. “I’ve been trying to implement GAAP for years,” says the controller, who claims she was held back by lawmakers who feared the switch to GAAP would force the state to recognize a $1 billion deficit and pay it down immediately to balance its budget. The state constitution requires a balanced budget.

Forcing lawmakers to vote for paying down the deficit, instead of spending state funds on education, health care, and infrastructure, would have meant political suicide for many state senators and house representatives. So Wyman came up with a solution that the legislature could live with: Switch accounting methods, thereby “freezing” the GAAP deficit and current levels, and pay off the liability a little at a time over the next 14 years. By switching from the current “modified” cash accounting method to accrual accounting in this way, Wyman will keep the budget deficit at its current level. Then she will amortize the billion-dollar deficit and pay it off at $150 million per year—an arrangement the legislature said they would accept.

If the bill is signed into law by Connecticut’s governor, Wyman will begin report financial results to the legislature under the accrual accounting system starting in 2009. The switch would not require additional costs or time since Wyman already uses accrual accounting to report Connecticut’s financial results to the ratings agencies.

The comptroller has been advocating the use of accrual accounting for more than a decade. To be sure, this GAAP method of accounting is said to be more complex than non-GAAP cash accounting. But it’s also more transparent and tougher to manipulate than cash accounting, and generally provides a more accurate snapshot of an entity’s financial health. That’s because revenues and expenses are recognized when sales are made and expenses are accrued, respectively, thus eliminating much of the mismatches that occur under cash accounting, where revenues and expenses are booked as they’re collected and dispersed.

By contrast, Connecticut’s current modified cash method often promotes mismatches between, for example, tax revenues and outlays, according to Wyman. Tax revenue is recognized when assessed, but expenses are booked only when the state makes a payout, a system that has previously made the state budget look as if there were fewer expenses than there would be under GAAP.

Ratings agencies are big backers of Connecticut adopting GAAP. Connecticut is rated lower than most other states because of the huge budget deficit Connecticut has and the way the state uses the “rainy day funds” to to pay for many things. Lower ratings mean higher interest rates.