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Revised April 2013
WHY GOVERNMENTAL ACCOUNTING AND FINANCIAL
REPORTING IS—AND SHOULD BE—DIFFERENT
Executive Summary
Governments are fundamentally different from for-profit business enterprises in several
important ways. Their organizational purposes, processes of generating revenues, stakeholders,
udgetary obligations, and propensity for longevity differ. These differences require separate
accounting and financial reporting standards in order to provide information to meet the needs of
stakeholders to assess government accountability and to make political, social, and economic
decisions. Although state and local governments (herein after refe
ed to as “governments”) in
the United States have had separate standards for over 100 years, the question is sometimes
asked: Why can’t general purpose governments (cities and counties, for example) simply apply
the standards established for business enterprises?
1
The following questions and answers
iefly
address that issue, and the accompanying paper and its appendices provide an expanded
discussion.
Why Are Separate Accounting and Financial Reporting Standards
Essential for Governments?
Separate accounting and financial reporting standards are essential because the needs of users of
financial reports of governments and business enterprises differ. Due to their unique operating
environment, governments have a responsibility to be accountable for the use of resources that
differs significantly from that of business enterprises. Although businesses receive revenues from
a voluntary exchange between a willing buyer and seller, most governments obtain resources
primarily from the involuntary payment of taxes. Taxes paid by an individual taxpayer often bear
little direct relationship to the services received by that taxpayer. Overall, taxpayers collectively
1
The term business enterprise is used to refer to private-sector entities organized for the purpose of earning profit.
Business enterprises in the United States apply accounting pronouncements of the Financial Accounting Standards
Board. Business enterprise does not refer to and should not be confused with business-type activities of
governments.
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focus on assessing the value received from the resources they provide to a government.
Governmental accounting and financial reporting standards aim to address this need for public
accountability information by helping stakeholders assess how public resources were acquired
and either used during the period or are expected to be used. Such reporting also helps users to
assess whether cu
ent resources were sufficient to meet cu
ent service costs (or whether some
costs were shifted to future taxpayers) and whether the government’s ability to provide services
improved or declined from the previous year.
The longevity of most governments and their role to maintain and enhance the well-being of
citizens through the provision of public services also result in information demands that differ
from those of business enterprises. For example, most governments do not operate in a
competitive marketplace, face virtually no threat of liquidation, and do not have equity owners.
Consequently, measures of net income and earnings per share have no meaning to users of
governmental financial reports. Instead, users need information to assess the government’s
stewardship of public resources, including information to evaluate the manner and extent to
which resources are devoted to specific services and the costs of providing those services. Users
also need information to determine compliance with legally authorized spending authority.
Creditors of both businesses and governments are interested in information on the ability to
epay debt. However, government creditors focus more on information regarding the
government’s ongoing ability to generate resources and the costs of activities that could compete
for those resources, rather than on information about how earnings are generated.
How Do Existing accounting and Financial Reporting Standards
Reflect the Different Needs of Stakeholders?
The needs of the users of governmental financial reports are reflected in differences in the
components of the conceptual framework for setting accounting and financial reporting standards
and in specific accounting and financial reporting standards themselves. Although investors and
creditors are important constituencies of every standards-setting organization, the Governmental
Accounting Standards Board’s (GASB) conceptual framework also places priority on addressing
the informational needs of citizens and elected representatives, two constituencies not identified
as users of business enterprise financial statements by the Financial Accounting Standards Board
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(FASB). Consequently, the GASB’s financial reporting objectives consider accountability to be
the cornerstone on which all other financial reporting objectives should be built.
Some of the most significant examples of how GASB standards address differences between
governmental and business financial reporting include (1) the view that capital assets are
primarily used to provide services to citizens rather than to contribute to future cash flows; (2)
the measurement and recognition of certain types of revenues (for example, taxes and grants); (3)
the use of fund accounting and budgetary reporting to meet public accountability needs; (4) the
use of accountability notions rather than equity control to define the financial reporting entity;
and (5) the view that governments and their pension plans generally are ongoing entities with the
ability to take a career-long view of the employment exchange. These and other accounting and
eporting differences are described more fully beginning on page 12 and in Appendix B.
Why Is There an Ongoing Need to Set Additional Governmental
Accounting and Financial Reporting Standards?
Since its inception in 1984, the GASB has strived to meet the needs of the users of governmental
financial reports by issuing standards that reflect their particular concerns and the unique features
of the government environment. Although the GASB has established a substantial body of
standards, the need to develop and improve accounting and financial reporting standards for
governments still exists. For example, additional components of the conceptual framework,
which enhances consistency in setting government standards, are still being addressed. In
addition, governments and the governmental environment continue to evolve over time and new
types of transactions or variations on existing transactions continue to arise, resulting in an
ongoing need to update existing standards and to adopt new ones.
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TABLE OF CONTENTS
Page
Number
Introduction and Scope ............................................................................................ XXXXXXXXXX1
Why Are Separate Accounting and Financial Accounting Reporting Standards
Essential for Governments? .................................................................................. XXXXXXXXXX2
Major Environmental Differences between Governments and Businesses ...... XXXXXXXXXX3
How Do Existing Accounting and Financial Reporting Standards Reflect the
Different Needs of Stakeholders? ......................................................................... XXXXXXXXXX7
Conceptual Framework Differences ................................................................. XXXXXXXXXX7
Accounting and Financial Reporting Standards Differences ........................... XXXXXXXXXX9
Why Is There an Ongoing Need to Set Additional Governmental Accounting and
Financial Reporting Standards? .......................................................................... XXXXXXXXXX12
Conclusion ............................................................................................................. XXXXXXXXXX13
Appendix A: Distinguishing Characteristics of the Governmental Environment XXXXXXXXXX14
Appendix B: Additional Examples of How Governmental Accounting Differs from