Naked Truth - government finance accounting

California CPA, Nov, 2000 by Robert V. Stout

GASB 34's REPORTING MODEL REQUIRES A BIG PICTURE ANALYSIS. NOW IT'S EASIER TO SEE JUST HOW GOVERNMENT IS SPENDING YOUR MONEY.

iNDUSTRY WATCHERS ARE CALLING GASB 34 the most significant change to occur in the history of governmental accounting. One of GASB's objectives in writing KY this new statement was to encourage more citizens to read and understand their government's financial statements.

GOVERNMENT MODELS ARE DIFFERENT

Since early in this century, governments have used a different financial reporting model than the private sector uses. Governments face important legal restrictions on how they can use resources. Unlike the private sector, a government's budget is not just a financial plan. The budget sets public policy and serves as a controlling document with legal sanctions to ensure compliance.

Because accountability and the need to demonstrate stewardship of public resources are so important, a major goal of governmental accounting and financial reporting is to demonstrate compliance with such finance-related legal and contractual restrictions.

In the governmental sector, nearly all financing decisions are made in the context of an annual or biennial appropriation budget. The emphasis on a government's financial reporting, therefore, has been to help decision-makers, whether legislators or citizens, understand how the money was spent. This is in marked contrast to the private sector where the emphasis is on an organization's ability to meet its operational costs and generate a profit. Government financial statements, in other words, focus on short-term financing while the private sector's emphasize an organization's ability to enhance its economic resources over the long-term.

To meet these needs, the governmental model has evolved with three distinct differences from the private sector's model. These differences are:

* Short-term emphasis on financial rather than economic resource flows.

* Fund accounting.

* Budgetary reporting.

Governments have traditionally reported on the financial resources they receive and how they were spent, rather than on revenues earned and costs incurred. Thus, for example, a government would report an expenditure for the entire cost of a vehicle when the vehicle is purchased rather than allocating the cost of that vehicle over its useful life.

Governments use separate funds to segregate financial resources that are subject to special regulations or restrictions. State and local government financial statements report these funds to demonstrate legal compliance.

Because governmental budgets are backed by legal sanctions and because of the importance governments have placed on demonstrating compliance with legal provisions, governments traditionally have presented budgets to actual comparisons in their financial statements.

But the segregation of assets into different funds, while useful for demonstrating compliance, made it difficult to assess the financial position of the government as a whole. The emphasis on flows of spendable resources meant that there was no information on the cost of governmental activities. Finally, many felt that budgetary reporting should be improved. GASB 34 addresses these concerns.

MORE USER-FRIENDLY

The first striking difference is that governmental financial statements prepared under GASB 34 report on the government as a whole rather than just a collection of funds and fund types. A common complaint for those deciphering government financial statements was that the multiple columns for each of the different fund types that the governments use was confusing. A reader trying to understand the operating results of the government as a whole would be confronted with three different operating statements: two for the governmental funds and one for the business-type activities, and each of those could contain multiple columns.

GASB 34 requires consolidated government-wide statements with a single statement of net assets and a single statement of activities. The objective is to help readers easily evaluate the financial condition of the complete governmental entity. For the first time, readers will be able to readily assess whether their government is better off at the end of the year than it was at the beginning.

The new statement of activities can only be called breathtaking in its scope. It attempts to show not only whether the government's revenues were sufficient to pay for all the services it delivered during the year, but also the gross and net economic costs of its major functions or activities.

OPERATING-COST ACCOUNTABILITY

The changes required in the new statement are driven by GASB's belief that there are two forms of accountability--fiscal and operational. Fiscal accountability is the need for governments to justify that their actions complied with public decisions. Operational accountability is defined as the need to report on how effectively governments met their operating objectives as well as their ability to continue to meet these objectives in the future.