Question
Municipal bond analysts calculate a variety of ratios when analyzing the creditworthiness of governmental debt issuers. Many of these ratios include asset and liability amounts,
Municipal bond analysts calculate a variety of ratios when analyzing the creditworthiness of governmental debt issuers. Many of these ratios include asset and liability amounts, such as assets divided by liabilities, liabilities divided by net position, and liabilities divided by revenues. What do you think the effect wason ratio analysis when governments implemented GASB Statement 65? Please explain your answer.
Main Question: What is the opinion on this student's response? Please see below.
My initial instinct about the change of the inflows and outflows of resources from the ratios was the effect that was intended to give a better picture to stakeholders about the true creditworthiness of the government at hand.This has a twofold effect, the government can see the results and make corrective or 'stay-the-course' actions and the stakeholders can see the truer picture and make demands or applaud the government, depending on the outcome.I was thinking about what William said that if you remove deferred inflows/outflows and current inflows/outflows from these ratios you get a better entity to entity comparison but you lose some of the historical comparison.My guess is that you may have to run parallel ratios for a few years while you wait to build the historic records using the new standards. This would mean careful analysis of the data to compare the historic to the modified ratios using the inflows/outflows as assets or liabilities.And then running the ratios as Statement 65 suggests to get an entity to entity comparison. Is it a growing pain worth having? If the analysis of multiple ratios is too costly or too confusing I would say you just have to draw a line in the sand and go with the new ratios knowing that there is an anomaly at the fiscal year it was converted.Probably not ideal either, but this may be the more practical approach.
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