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WHY ACCOUNTING and FINANCIAL REPORTING for GOVERNMENTS IS DIFFERENT THAN BUSINESSES by Jeffrey Winter

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WHY ACCOUNTING AND FINANCIAL REPORTING FOR
GOVERNMENTS IS DIFFERENT THAN BUSINESSES

by Jeffrey Winter

here are more than 80,000 user groups differ so too does the revenues through taxes on sales, income, property and other activities.
T h e s e t y p e s o f r e v e n u e s

T

under nonexchange transactions are often not the same parties receiving the services funded – or at least they do not benefit in direct correlation to the amount of funding provided.
As a result, the nature of

to ask the question: Why are the shifted to taxpayers in future years. standards different for governments?
This is a question that the GASB financial statements have been different accounting considerations than exchange based revenues.
Accordingly, governmental

The purpose of capital assets recently tackled in its White Paper constructed to focus on the services also differs between governments and titled, “Why Governmental Accounting provided by governments and the businesses. Capital assets are purchased And Financial Reporting Is – And revenue sources used to provide those to help businesses generate future cash

  • Should Be – Different.” In short, the services.
  • flows. These assets include machinery

for manufacturing companies, buildings for those in real estate, and vehicles for transportation services. answer is the standards differ because the environments of governments and businesses and the users of their financial statements differ.
In contrast, businesses are created to generate wealth for owners that is measured by net income and earnings

  • per share. These key components
  • Governments acquire capital assets

of business financial statements are to provide services to their residents irrelevant to governments as they do (which may be different than the

Different PurPoses

American businesses follow not have shareholders and are not taxpayers in some instances). Therefore,

  • accounting standards set by the focused on generating wealth.
  • it makes sense for governments to look

at the service potential of capital assets when determining if their value has been impaired whereas businesses should examine the asset’s ability to produce future cash flows.
Financial Accounting Standards Board (FASB). FASB states that “the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.”
FASB has identified investors and creditors as the primary users of financial statements. While governments also have creditors, there is no equivalent of an “investor” in the government world as it is not possible to own an equity stake in a government.
In fact, in the government environment, revenues that greatly exceed expenses year after year might be interpreted as evidence of over taxation, or a level of services not commensurate with revenues, not of strong financial performance.

insolvency

There also are key environmental differences between governments and businesses related to their potential for longevity. The failure rate of restaurants and other startup businesses has been well publicized by the media. Even large, well-known corporations are subject to a variety of business risks and occasionally fail.
As a result, it is important for the financial statements of businesses to contain information about the liquidation values of assets and liabilities.

revenue Generation

Another key distinction between governments and businesses is how revenue is generated. For businesses, revenue is generated through sales of goods and services in a competitive market.
While it is true that many governments generate at least some revenue by offering services (utilities, parks and recreation fees, for example), the revenue is not typically earned in a competitive marketplace. The more significant difference in revenues
Furthermore, the primary users of governmental financial statements also include citizens and elected representatives. As the needs of these
Conversely, the risk of liquidation is governments’ ability to generate for governments is extremely low due

6 / November 2013

The Missouri Municipal Review

www.mocities.com

to their ability to tax citizens. While significantly modified without formal with the primary responsibility for government bankruptcies are currently action of the governing body. Because setting accounting standards for states at all-time highs they still only occur in governments are legally required to and local governments. one of every 1,668 governments (or 0.06 adopt and adhere to budgets as part of
GASB has evaluated the needs

of users of governmental financial statements to create a framework and standards that focus on sound management of public resources rather than the ability to generate money.

  • percent) as of January 2013.
  • their management of public resources,

GASB requires reporting budget versus actual schedules for the general fund and major special revenue funds in the financial statements.

BuDGets

The role of the budgets in governments and businesses also differs. Most businesses rely on budgets as part of their internal management structure. This tool enables the business

it shoulD Be Different

Jeffrey Winter, CPA, is partner-in-charge of

All of these factors contribute RubinBrown’s Public Sector Services Group and has been serving public sector clients for more

to benchmark and track their progress to the need for separate accounting throughout the year although there is and financial reporting standards for no legal requirement or responsibility businesses and governments.

than three decades. His experience includes

providing financial reporting and accounting

services to municipalities, counties, school districts and state agencies. Winter is a member of the Association of Government Accountants,

the Government Finance Officers Association of

the Greater St. Louis and Kansas City Areas, and the special review committee of the Government

to adhere to the budget.
It is impossible for governments

In contrast, governments use to report on measures such as earnings budgets for those purposes but also per share. Likewise, it would not make to control the level of taxation and sense for their financial reports to the spending of resources by the ignore users such as citizens and elected Finance Officers Association. He can be reached government. Government budgets are representatives, or the implications of legally adopted at the highest level of unique features of governments such as

at [email protected] or (314) 290- 3408.

governance, generally in compliance nonexchange transactions, the purpose with statute, ordinance or charter, and of capital assets, the relative absence after appropriate public forums have of liquidity risk, and the role of legally been conducted.
Furthermore, expenditure budgets generally cannot be exceeded or independent, standards-setting body adopted budgets.
As a result, GASB operates as an

8 / November 2013

The Missouri Municipal Review

www.mocities.com

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