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, governmental entities purpose of financial reporting. income, property and other activities. in the United States Governments are created to These types of revenues consisting of counties, provide their citizens with public are referred to as “nonexchange” municipalities,T townships, independent services that businesses are not transactions because they do not school districts and special districts. incentivized to provide. This includes result from a voluntary exchange Each government must adhere a wide variety of services from law between willing participants. In fact, to accounting and financial reporting enforcement to recreational activities the parties who provide the funding standards set by the Governmental to road repair. under nonexchange transactions are Accounting Standards Board (GASB). The users of these services are often not the same parties receiving These standards and the resulting interested in the government’s ability to the services funded – or at least they do financial statements are similar to those sustain the services and their ability to not benefit in direct correlation to the of businesses, but maintain a number do so efficiently. Further, they want to amount of funding provided. of key differences that often prompt know if the burden of paying for current As a result, the nature of individuals with business backgrounds services has already been funded or nonexchange transactions requires to ask the question: Why are the shifted to taxpayers in future years. different accounting considerations standards different for governments? Accordingly, governmental than exchange based revenues. This is a question that the GASB financial statements have been 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 answer is the standards differ because In contrast, businesses are created for manufacturing companies, buildings the environments of governments to generate wealth for owners that is for those in real estate, and vehicles for and businesses and the users of their measured by net income and earnings transportation services. financial statements differ. per share. These key components Governments acquire capital assets of business financial statements are to provide services to their residents DIFFERENT PURPOSES irrelevant to governments as they do (which may be different than the 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 Financial Accounting Standards Board In fact, in the government at the service potential of capital assets (FASB). FASB states that “the objective environment, revenues that greatly when determining if their value has of general purpose financial reporting is exceed expenses year after year might been impaired whereas businesses to provide financial information about be interpreted as evidence of over should examine the asset’s ability to the reporting entity that is useful to taxation, or a level of services not produce future cash flows. existing and potential investors, lenders commensurate with revenues, not of and other creditors in making decisions strong financial performance. INSOLVENCY about providing resources to the entity. There also are key environmental Those decisions involve buying, selling REVENUE GENERATION differences between governments and or holding equity and debt instruments, Another key distinction between businesses related to their potential for and providing or settling loans and governments and businesses is how longevity. The failure rate of restaurants other forms of credit.” revenue is generated. For businesses, and other startup businesses has been FASB has identified investors revenue is generated through sales of well publicized by the media. Even and creditors as the primary users goods and services in a competitive large, well-known corporations are of financial statements. While market. subject to a variety of business risks and governments also have creditors, there While it is true that many occasionally fail. is no equivalent of an “investor” in the governments generate at least some As a result, it is important for government world as it is not possible revenue by offering services (utilities, the financial statements of businesses to own an equity stake in a government. parks and recreation fees, for example), to contain information about the Furthermore, the primary users the revenue is not typically earned in liquidation values of assets and of governmental financial statements a competitive marketplace. The more liabilities. also include citizens and elected significant difference in revenues Conversely, the risk of liquidation representatives. As the needs of these 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 percent) as of January 2013. their management of public resources, of users of governmental financial GASB requires reporting budget versus statements to create a framework BUDGETS actual schedules for the general fund and standards that focus on sound The role of the budgets in and major special revenue funds in the management of public resources rather governments and businesses also financial statements. than the ability to generate money. differs. Most businesses rely on budgets T HOULD E IFFERENT as part of their internal management I S B D Jeffrey Winter, CPA, is partner-in-charge of structure. This tool enables the business All of these factors contribute RubinBrown’s Public Sector Services Group and to benchmark and track their progress to the need for separate accounting has been serving public sector clients for more throughout the year although there is and financial reporting standards for than three decades. His experience includes providing financial reporting and accounting no legal requirement or responsibility businesses and governments. services to municipalities, counties, school to adhere to the budget. It is impossible for governments districts and state agencies. Winter is a member In contrast, governments use to report on measures such as earnings of the Association of Government Accountants, the Government Finance Officers Association of budgets for those purposes but also per share. Likewise, it would not make the Greater St. Louis and Kansas City Areas, and to control the level of taxation and sense for their financial reports to the special review committee of the Government the spending of resources by the ignore users such as citizens and elected Finance Officers Association. He can be reached THE PERFECT SOLUTION government. Government budgets are representatives, or the implications of at [email protected] or (314) 290- legally adopted at the highest level of unique features of governments such as 3408. governance, generally in compliance nonexchange transactions, the purpose with statute, ordinance or charter, and of capital assets, the relative absence Looking for security, return, after appropriate public forums have of liquidity risk, and the role of legally and flexible access to funds? been conducted. adopted budgets. 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