Foundations in Governmental Accounting

Are you just starting to work in the governmental arena? Have you worked in the governmental arena for years but need a refresher to keep up with recent changes? If so, this is the course for you. This course features the fundamental tenets of governmental accounting and reporting in today’s environment. Learn more than the buzz words, learn the underlying concepts and how they are applied.

Objectives:

• Understand the critical elements that make up governmental accounting and reporting
• Confidently work with or in the governmental environment
• Recognize the nuances involved in governmental accounting and reporting

Prerequisite: None

VALUE AID! State and Local Governments AICPA Audit and Accounting Guide

Chapter 1 - The Governmental Environment and GAAP Learning Objectives

After completing this chapter, you should

• Understand the unique aspects of the governmental environment.
• Know which organizations must follow GASB.
• Know where to look for authoritative guidance on generally accepted accounting principles (GAAP).

Then where are we? We are in state and local government accounting land. Several things are very different here. For example, we are not here to make a profit, but to provide a service. We have different users of our financial statements. We are even going to use different accounting. A different ruler, the Governmental Accounting Standards Board (GASB), sets the laws for this accounting land and they tend to issue two to three new rules each year.

Key Environmental Differences

The state and local government environment is different in a number of ways from the business environment and these differences influence financial reporting objectives.

• Businesses are in the business of making money. Many of the services governments provide are done so without a direct relationship to how much the recipient pays. For example, a local library is supported by revenue from taxes, not by charges to the people who actually use the library.
• The legal structure of the government is also different from a business. Each state has its own requirements as to the roles and responsibilities among the different levels and branches of government. Governments must operate within these requirements and demonstrate compliance with legal regulations.
• Another difference between government and business is how resources are provided. Many governments' resources come from taxes – provided by involuntary resource providers. Control over the level of taxes and the spending of those resources is achieved by budgets legally adopted by elected officials.
• The political process is also unique to governments. There is constant pressure on elected officials to provide more services without increasing taxes. Governments are accountable to citizens and taxpayers and must provide them information on how financial resources are used.
• Governments also make significant investments in non-revenue producing capital assets, such as libraries, jails, roads, and bridges.

Again, there are differences between business organizations and governments. The primary users of governmental financial statements are

• Taxpayers and citizens.
• Oversight and legislative bodies.
• Investors and creditors.

Although not a primary user, management often relies on the financial statements for planning and monitoring purposes.

As illustrated in Exhibit 1-2, GASB Concepts Statement No. 4, Elements of Financial Statements (issued June 2007) establishes definitions for the seven elements of historically based financial statements of state and local governments. These differ from the ten interrelated elements described in FASB Concepts Statement No. 6, Elements of Financial Statements.

Several unique accounting practices have evolved for state and local governments due to their unique environment, the need to meet the financial reporting objectives, and financial statement elements stated earlier. For the most part, accounting used by governments is similar to that used by businesses. Debits and credits, journals, and ledgers are still used and many transactions are recorded in the same manner as a business. However, there are several major differences. The key differences are as follows:

• Measurement focus and basis of accounting. The activities of government can broadly be grouped into two categories. Each category uses a different measurement focus and basis of accounting. The two categories are as follows:
• Some services of government are provided based on a fee to users that should cover the cost of providing such service. A common example is water and sewer services, these are referred to as business-type activities. Accounting for this activity is very similar to a business organization.
• Many of the services provided by government are not based on a fee to users. Police services and education are a common example of services not provided on a fee basis. These types of activities are referred to as governmental activities. Accounting for these types of activities requires a different measurement focus and basis of accounting (discussed in Chapter 4).
• Fund Accounting. To assist in demonstrating accountability, governments have long reported activities in separate funds. Funds are used to separately account for financial activities based on legal requirements or management needs (discussed in Chapter 2).
• Budgetary Reporting. To meet one of the financial reporting objectives, governments must be able to compare actual financial results with the legally adopted budget. Budgets represent much more than a plan for a government, they represent a legally binding document and are often recorded in the accounting system (discussed in Chapter 3).

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