The practice of state and local government accounting can be succinctly distinguished from that of for-profit accounting, which is already familiar to many of us. Several elements of governmental accounting are very distinct from for-profit accounting. One core difference is that the purpose of government is not to make a profit but to provide services to the citizenry. There are different users of the financial statements than in the for-profit sector. The accounting is different — there is even a different standards-setting board, the GASB, which typically issues new rules each year. Like the FASB, however, the GASB is subject to the auspices of the Financial Accounting Foundation (FAF).
This course focuses on the fundamentals of governmental accounting. Governmental accounting is the composite activity of analyzing, recording, summarizing, reporting, and interpreting the financial transactions of governments.
The state and local governmental environment is different in several ways from the business environment. These differences influence financial reporting objectives. The GASB’s white paper, Why Governmental Accounting and Financial Reporting Is — and Should Be — Different, identifies the following five environmental differences between governments and for-profit businesses1:
These and other differences in the respective environments result in governments having unique financial reporting objectives. Accountability becomes the paramount objective of financial reporting. The GASB states that financial reports should include information that can be used for the following:
These financial reporting objectives for governments are much broader than those for businesses. To meet these objectives, governments are required to produce several different types of financial statements that include an expansive amount of information.
The primary users of governmental financial statements are
Although not a primary user, the government’s management often relies on the financial statements for planning and monitoring purposes.
GASB Concepts Statement No. 4, Elements of Financial Statements, establishes definitions for the seven elements of historically based financial statements of state and local governments. See exhibit 1-2.
GASB Concepts Statement No. 4 elements differ from the 10 interrelated elements described in FASB Concepts Statement No. 6, Measurement of Elements of Financial Statements. FASB Concepts Statement No. 6 applies to business and not-for-profit organizations. The 10 interrelated elements are assets, liabilities, equity or net assets, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses.
GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. GASB Concepts Statement No. 4 introduced and defined those elements as a consumption of net assets by the government that is applicable to a future reporting period and an acquisition of net assets by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards, however, do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities.
GASB Concepts Statement No. 4 also identifies net position as the residual of all other elements presented in a statement of financial position. GASB Statement No. 63 amends the net asset reporting requirements in GASB Statement No. 34, Basic Financial Statements — and Management’s Discussion and Analysis — for State and Local Governments, and other pronouncements by incorporating deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure and by renaming that measure “net position” rather than “net assets.” GASB Concepts Statement No. 4 also resulted in the amendment of paragraph 31 of GASB Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements, to reflect all elements of GASB Concepts Statement No. 4 and to conform the language of GASB Concepts Statement No. 3 to GASB Concepts Statement No. 4.
GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, establishes accounting and financial reporting standards that reclassify — as deferred outflows of resources or deferred inflows of resources — certain items previously reported as assets and liabilities. This statement also recognizes — as outflows of resources or inflows of resources — certain items previously reported as assets and liabilities.
In addition, GASB Statement No. 65 provides that reporting a deferred outflow of resources or a deferred inflow of resources should be limited to those instances identified by the GASB in authoritative pronouncements that are established after applicable due process. Prior to the issuance of this statement, only two such pronouncements have been issued. GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, requires the reporting of a deferred outflow of resources or a deferred inflow of resources for the changes in fair value of hedging derivative instruments; GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, requires a deferred inflow of resources to be reported by a transferor government in a qualifying service concession arrangement. This statement amends the financial statement element classification of certain items previously reported as assets and liabilities to be consistent with the definitions in GASB Concepts Statement No. 4.
GASB Statement No. 65 also provides other financial reporting guidance related to the impact of the financial statement elements, deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term “deferred” in financial statement presentations.
Several unique accounting practices have evolved for state and local governments because of their unique environment, the need to meet financial reporting objectives, and the financial statement elements detailed earlier. Several aspects of the system of accounting used by governments are similar to those used by businesses, such as the use of debits and credits, journals, and ledgers. Additionally, many transactions continue to be recorded under government accounting in the same way that they are recorded in for-profit accounting. Still, there are several key differences, as follows:
The GASB is responsible for accounting standards for state and local governments. Before covering accounting standard process, let’s cover which organizations must follow these standards:
A summary of the types of governments found in the United States, based on the 2017 Census of Governments, follows:
Counties | 3,031 |
Municipalities | 19,495 |
Towns and townships | 16,253 |
Independent school districts | 12,754 |
Special districts | 38,542 |
Total | 90,075 |
Other entities also may have to follow the accounting standards for state and local governments. For example, some not-for-profit museums, colleges, libraries, commissions, and boards may meet the definition of a government and, therefore, must follow GASB standards.
Entities that meet at least one of the following criteria must follow GASB standards:
If the only criterion met is the ability to directly issue federally tax-exempt debt, the presumption that an entity is governmental may be rebutted based on compelling, relevant evidence.
For external financial statements to be useful, they must be prepared consistently over time and be comparable with those of other similar entities. To this end, external financial statements must be prepared in accordance with generally accepted accounting principles (GAAP). The following is a list of organizations that have responsibility for setting accounting standards for different types of organizations:
Additionally, a consultative body, the Governmental Accounting Standards Advisory Council, assists the GASB. The council consists of representatives who have an interest in governmental accounting and reporting.
In November 2013, the FAF adopted a new policy that clarifies the characteristics of the information that the GASB may address in setting standards for financial accounting and reporting for governments. A brief summary of the GASB Scope of Authority: Consultation Process Policy follows:
Historically, the GAAP hierarchy for state and local governments resided in the AICPA auditing literature rather than GASB accounting literature. Following a move by FASB in 2008, the GASB issued in 2009 GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, to place the GAAP hierarchy in GASB literature. In June 2015, the board issued GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, to replace GASB Statement No. 55. An important feature of GASB Statement No. 76 is the elevation of GASB implementation guides in the GAAP hierarchy. The following illustration summarizes the GAAP hierarchy for state and local governments.
GAAP Hierarchy
Category A
Officially Established Accounting Principles — Governmental Accounting Standards Board (GASB Statements)2
Category B
GASB Technical Bulletins, GASB Implementation Guides, and literature of the AICPA cleared by GASB
In searching for the proper treatment of an item under GAAP, one would start by looking at category A of GAAP and then category B. For example, if the accounting treatment for a transaction or other event is not specified by a pronouncement in category A, a governmental entity should consider whether the accounting treatment is specified by a source in category B.
If the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP as described in categories A or B, a governmental entity should consider accounting principles for similar transactions or other events within categories A or B, and then may consider nonauthoritative accounting literature from other sources that does not conflict with or contradict authoritative GAAP. A governmental entity should not follow the accounting treatment specified in accounting principles for similar transactions or other events in cases in which those accounting principles either prohibit the application of the accounting treatment to the particular transaction or other event or indicate that the accounting treatment should not be applied by analogy.
Nonauthoritative accounting literature includes the following:
The appropriateness of nonauthoritative accounting literature depends on its relevance to particular circumstances, the specificity of the guidance, and the general recognition of the issuer or author as an authority. For example, GASB concepts statements would normally be more influential than other sources in this grouping.
This course reflects GASB statements issued through GASB Statement No. 91, Conduit Debt Obligations.
Current major GASB projects include the following:
As we have established, state and local governments operate in a different environment than do businesses. Because of these differences, state and local governments have different reporting objectives, follow different accounting methods, and have an expanded list of financial statement users. Accounting standards are set by the GASB for entities that meet the definition of a government.
Please note that the following practice questions are not required reading material.
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