Background
Governmental entities create large amounts of financial statement information consumed by users including government managers and employees, policymakers and certain regulators, investors, the research community, the media, and the general public. This information is found on a number of public sources, including a governmental entity’s own website and other information repositories run by state and federal oversight entities.
However, each of the various information repositories has its own data medium requirements for giving users the ability to look at submitted filings and search for key data points used in a desired analysis. An example of a common data format is Portable Document Format (PDF). PDFs can be created to allow users to search filings for data points, but PDFs also can be created in a manner that is not searchable. Filings that do not have search functionality can cause significant increases in time and effort to aggregate data into other formats (also increasing the risk of error if data is required to be manually extracted from filings).
The FDTA was introduced as Senate Bill 4295 in the 117th Congress and signed into law by President Biden on Dec. 23, 2022, as part of the NDAA for fiscal year 2023. The law’s intent was to adopt specified standards for data reporting formats including nonproprietary electronic searchability and transparency capabilities.
FDTA scope
The FDTA requires entities that file financial information with the EMMA website, which is the official source of municipal securities data from the Municipal Securities Rulemaking Board (MSRB), to comply with the FDTA provisions. The MSRB is under the supervision of the Securities and Exchange Commission (SEC), meaning that the primary focus of the FDTA is on governmental entities that have offered municipal securities on the public market (in the form of municipal bonds) and have filed periodic update information in accordance with offering statement covenants. There could be other non-EMMA website filers subject to the provisions of the FDTA, but this is pending final rulemaking by the SEC.
The financial information data subject to the FDTA includes official statements for securities offerings as well as annual financial statements that many governmental entities file with the EMMA website to comply with covenant requirements in securities offerings. Governmental entities that prepare an Annual Comprehensive Financial Report (ACFR) and use it for filings also are subject to this requirement. The rule mandates that governments put their financial information in a machine-readable format.
Crowe observation: While PDFs are widely used to generate electronic versions of financial statements and other filings, the use of PDFs alone would not be considered sufficient to comply with the provisions of the FDTA.
The FDTA includes a specific provision that the adoption of these reporting standards for filings will not require any new disclosures, as these changes are to data standards as opposed to the accounting standards promulgated by the GASB.
FDTA implementation
Implementation of the FDTA will be done in stages.
- Stage one is the creation of draft rules by the SEC that will be subject to a comment period. The draft rules are required to be released for review and comment by stakeholders no later than 18 months from the date of the FDTA’s enactment.
- Stage two is the promulgation of the final rules. This will occur no later than two years from the date of the FDTA’s enactment.
- Stage three is the required implementation of the final rules, which will be no later than two years from the date of the promulgation of the final rules.
Preparers and auditors of governmental entity financial statements have noted an ever-present challenge in that, while the GASB has a prescribed reporting model, each entity can have different fund structures and variations of the GASB reporting model for special purpose enterprise funds, school districts, and airport authorities, to name just a few. Additionally, some governmental entities do not report information in accordance with GASB-prescribed GAAP, as certain oversight entities permit alternative reporting and others are transitioning to mandating GAAP only. Finally, certain preparers and auditors have cited potential increased costs for financial statement preparation (in both time and dollars) to comply with these new requirements.
However, proponents of the FDTA have noted that the use of the taxonomy does not restrict the layout of governmental entity financial statements and allows for significant flexibility to report information for relevant standard requirements. Proponents also note that the use of a machine-readable format would promote greater financial transparency, giving financial statement users better access to information that could influence policy or investment decisions.
Crowe observation: Public company financial data filings and other informational filings with the SEC currently use the extensible business reporting language (XBRL). It is not known if the SEC will mandate the use of XBRL for FDTA-compliant filings.
Next steps
The SEC must now begin the rulemaking process to develop the data standards required by the FDTA, with final rules to be issued no later than Dec. 23, 2024. In addition, certain not-for-profit organizations and policy groups supporting the implementation of digital business reporting standards have begun to establish working groups to provide information to the SEC to assist in formulating the proposed rules, and they plan to provide comments on draft rules. This likely will include the GASB, which has been monitoring the development of electronic financial reporting by state and local governments for years, including the effects of related legislation such as the FDTA.
Stakeholders should continue to monitor information from the SEC regarding the rulemaking process to get the latest updates and should stand ready to comment on draft rules when they are released.
Finally, financial statement preparers should begin planning for the adoption of the FDTA, including:
- Determine the financial reporting subject to the FDTA and how often compliance is required (for example, annually for EMMA website submissions, quarterly for required nonaudited information submissions, or periodically upon filing of material events as mandated by offering statement covenants).
- Assess the governmental entity’s current information technology systems to determine the potential applications needed to comply with the new data standards.
- Based on the previously mentioned assessments, determine the level of service needed to complete initial implementation and subsequent compliance, including development and implementation of any potential changes to internal control over financial reporting.
