The Governmental Accounting Standards Board (GASB) under Concepts Statement No. 4, Elements of Financial Statements (2007a) introduced two new elements to government financial reporting: deferred outflows of resources and deferred inflows of resources. Given the large size of the municipal bond market, and the debate surrounding the GASB’s development of financial reporting requirements for these new elements, we investigate the associated changes to governments’ financial statements and the extent to which these changes may have influenced municipal borrowing costs. Our findings indicate that many governments were impacted by the introduction of the new financial statement elements, and the amounts reported as deferred outflows (inflows) of resources are negatively (positively) associated with interest costs on newly issued general obligation bonds. These findings should be informative to the GASB and users of municipal financial reports, such as bond market participants. Overall, our findings counter arguments made that the new financial statement elements would create needless complexity and confusion by suggesting a potential benefit of the financial statement changes.
