GOVERNMENT ACCOUNTING

Government accounting has been viewed historically as a key element in the movement from absolute power, (i.e., the government or a king or emperor) to relative power (i.e., a shared model of government). Under the shared model of government, government accounting was used by a parliament to limit the king's power to (1) spend public money, (2) raise taxes to cover the expenditures, and (3) determine the purpose of the expenditure. The use of governmental accounting remained unchanged during the evolution into modern democratic systems.

Thus government accounting requires the executive to (1) state the amount, nature, and purpose of the planned expenditure and the taxes needed to fund it, (2) ask for and obtain approval from the legislature, and (3) comply with the expenditure authority—appropriation—granted by the legislature and demonstrate such compliance. Under government accounting, the legislature is allowed to steer and control the behavior of the government.

The basic foundation of governmental financial accounting and reporting in the United States was established by the Governmental Accounting Standards Boards (GASB) in its "Objectives of Financial Reporting," which stated that the purpose of financial reporting is to provide information to facilitate decision making by various groups (GASB, 1987). The groups were defined as (1) citizens of the governmental entity, (2) direct representatives of the citizens, such as legislatures and oversight bodies, and (3) investors, creditors, and others who are involved in the lending process. Although not specifically identified, intergovernmental agencies and other users have informational needs similar to the three primary user groups. While the three user groups have overlapping membership with corporate financial information users, citizens and legislative users are unique to governments. The use of governmental accounting information centers on political, social, and economic decisions in addition to determining the government's accountability.

Accountability (GASB, 1987, 56-58) was identified as the paramount objective of governmental financial reporting because it is based on the transfer of responsibility for resources or actions from the citizens to some other party, such as the management of the governmental entity. The assessment of accountability is fulfilled when financial reporting enables financial data users to determine to what extent current-period costs are financed by current-period revenues. Two basic types of budgets are used by governments and are the same as those used by corporate entities—an annual operating budget and a capital budget. Governmental annual operating budgets include estimated revenues and appropriations for expenditure for a specific fiscal year. Capital budgets control the expenditures for construction projects and fixed asset acquisitions. Operating or capital budgets are recorded in the accounting system as a means of control or compliance.

Many governmental entities are required by law to maintain a balanced budget in that revenues must equal or exceed appropriations; the latter situation results in a budgetary surplus. If a budgetary deficit occurs in a governmental entity with a balanced-budget requirement, additional appropriations must be enacted by the legislative process.

Governmental accounting uses a fund accounting structure as a means of controlling resources. That is, each type of financial activity is segregated into a separate set of self-balancing asset, liability, and net asset accounts. GASB codification identifies three fund groups—governmental, proprietary, and fiduciary (GASB, 1999, Sections 1100.103 and 1100.105). Governmental funds are used to account for financial resources used in the day-to-day operations of the government. Proprietary funds are those used to account for the government's business-type activities where fees are charged for the services rendered, for example, utility services. Fiduciary funds are those used to account for funds held by the government in trust for others that cannot be used to support the government's programs, for example, an employee pension fund.

State and local governments report dual-perspective financial information with both full accrual information and fund-based modified accrual information in accordance with GASB Standard No. 34, Basic Financial Statements—and Management Discussion and Analysis—for Statement and Local Governments (GASB, 1999).

The management's discussion and analysis (MD&A) is required supplementary information presented before the financial statements that is subjected to limited auditor review and presents an overview of the government's financial activities for the part year. This narrative description of the financial performance is much like the management discussion required of corporations by the Securities and Exchange Commission (SEC). The MD&A provides an objective and easily readable analysis of the government's financial activities based on currently known facts, decisions, or conditions. The discussion compares the government's current-year results with the previous year and may include charts, graphs, or tables to illustrate the discussion. The discussion is general rather than specific so that the most relevant information is provided. At a minimum, fourteen prescribed elements are a part of the MD&A discussion. These elements explain the relationship among the financial statements and any significant differences in the information provided in the financial statement.

The full accrual information reports the full cost of providing government services, with details on how much of the cost is borne by taxpayers and by specific users of the government's service. The full accrual reports are similar to those of profit-seeking corporations. The government's equity is displayed as net assets rather than stockholders' equity. The full accrual results of the government's financial activity are displayed in two government-wide reports—(1) the statement of net assets and (2) the statement of activities.

The statement of net assets displays information about the government as a whole, reports all financial and capital resources, and assists the financial statement user in assessing the medium- and long-term operational accountability of the government. Separate columns are used to distinguish between the financial data for the governmental activities and the business-type activities that comprise the total primary government. As the term statement of net assets implies, the statement format presents the assets minus liabilities that equal the total net assets, that is, equity. Assets and liabilities are presented in their order of liquidity. That is, assets are presented in the order to their nearness to producing cash, and liabilities are presented in the order to their nearness to consuming cash. Assets and liabilities may be displayed in a classified, current, and noncurrent format if desired. The government's net assets are presented in three components: (1) capital assets net of related accumulated depreciation and debt, (2) restricted net assets with constraints imposed on their use by parties outside the government, and (3) unrestricted net assets.

The statement of activities reports the net expense over revenue of each individual function or program operated by the government. The net expense over revenue format reports the relative financial burden of each of the programs on the government's resource provides—taxpayers. The format highlights the extent to which each program directly consumes the government's revenues or is financed by fees, contributions, or other revenues.

In addition to the government-wide full accrual information, state and local governments present financial statements on the fund-based modified accrual basis. In the modified accrual basis of accounting, revenues are recognized only when they become both measurable and available to finance expenditures for the fiscal period. Expenditures are recognized when the related liabilities are incurred, if measurable, except for unmatured interest on long-term debt, which is recognized when legally due.

Fund-based financial statements assist in assessing the government's short-term fiscal accountability. Most funds are established by governments to show restrictions on the planned use of resources or to measure, in the short-term, the revenues and expenditures of a particular activity.

Fund activity displayed in the fund-based financial statements is grouped by governmental, proprietary, and fiduciary categories as identified by the GASB codification. The equity component of modified accrual fund-based financial statements is reported as fund balance rather than net assets, which is used in the full accrual statement.

A balance sheet and a statement of revenues, expenditures, and change in fund balance are required for each of the three fund groups. Because the fund financial statements are prepared using the modified accrual basis, a required reconciliation is prepared that explains the differences between the net change in fund balances and the change in net assets in the government-wide statement of activities. The proprietary funds also present a statement of cash flows. Unlike corporate cash flow statements, the governmental cash flow statement is prepared using the direct method and has four categories—operating, noncapital financing, capital financing, and investing activities.

Although some similarities exist between accounting for state and local governments and accounting for the federal government, there are selected areas specific to each. For example, federal agencies account for quarterly apportionments to procure goods and services, a process that is generally ignored by state and local governments. The head of each agency in the executive branch of the federal government has the responsibility for establishing and maintaining accounting and control systems in conformity with principles, standards, and requirements established by the Federal Accounting Standards Advisory Board and the Federal Financial Management Improvement Act of 1996.

Federal accounting provides the information needed for financial management as well as the information needed to demonstrate compliance with budgetary and other legal requirements. Thus, federal accounting is based on a two-track system. One track is a self-balancing set of proprietary accounts intended to provide information for management. The other track is a set of self-balancing budgetary accounts that assure that available budgetary resources and authorities are not overexpended or overobligated and assist in budgetary reporting requirements.

Like its state and local government counterpart, the federal financial statements include an MD&A that provides a clear and concise description of the reporting entity and its mission, activities, program and financial results, and financial condition (OMB, 1996). Federal financial statements are less prescriptive than state and local financial statements because federal agencies are permitted significant latitude on the level of aggregation presented. The six statements in the federal financial report include a (1) balance sheet, (2) statement of net cost, (3) statement of changes in net position, (4) statement of budgetary resources, (5) statement of financing, and (6) statement of custodial activity.

see also Government Auditing Standards; Government Financial Reporting; Governmental Accounting Standards Board; Not-for-Profit Accounting

bibliography

Federal Financial Management Improvement Act (1996). Public Law 104-208.

Governmental Accounting Standards Board (GASB) (1987). Objectives of Financial Reporting. (Concept Statement No. 1). Norwalk, CT: GASB of the Financial Accounting Foundation.

Governmental Accounting Standards Board (GASB) (1999). Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments (Statement of Governmental Accounting Standard No. 34). Norwalk, CT: GASB of the Financial Accounting Foundation.

Governmental Accounting Standards Board (GASB) (2005). Codification of Government Accounting and Financial Reporting Standards. Norwalk, CT: GASB of the Financial Accounting Foundation.

Office of Management and Budget (OMB) (1996). Bulletin 97-1, Form and Content of Agency Financial Statements. U.S. Government, Washington. DC.

Mary L. Fischer