Government financial reporting is the process whereby governments report their financial position and activities to the public at large. These reports are the standard that citizens, oversight bodies, and other stakeholders use to judge their government's efficiency, effectiveness, and over-all financial condition. This article examines government financial reporting from a historical perspective, and today; it also looks at contemporary issues and possible future trends.
Government financial reporting evolved through the twentieth century. The National Committee on Municipal Accounting (NCMA) was established in 1934 by the Government Finance Officers Association (GFOA) and began to promulgate formal standards. It issued the first "blue book" in 1936, Bulletin No. Six, Municipal Accounting Statements (GFOA, 1988). From that point, government financial reporting, along with government accounting and auditing, began to develop into what it is today.
The National Council on Governmental Accounting (NCGA), which succeeded the NCMA, initiated the basic format of the current blue book, which was later officially titled Governmental Accounting, Auditing and Financial Reporting (GAAFR). In 1968, generally accepted accounting principles (GAAP) for government were established in GAAFR (GFOA, 1988). Government accountants and financial managers use the blue book to this day as a reference for current standards and practices in government financial reporting.
In the past, some confusion existed concerning who set the standards that constituted GAAP for governments. This issue became prominent when the American Institute of Certified Public Accountants (AICPA) issued an industry audit guide in 1974 that, while endorsing most, modified some principles set forth by the NCGA (GFOA, 1988). The AICPA later recognized NCGA Statement No. One, Governmental Accounting and Financial Reporting Principles. Even after this statement was recognized, questions still arose. Conflicts with the standards set by the NCGA generally were associated with pronouncements issued by the Financial Accounting Standards Board (FASB). These conflicts were not resolved until the Government Accounting Standards Board (GASB) was established in 1984 (GFOA, 1988). From then on, the GASB was clearly established as the primary authority for setting government standards.
The GASB was created as a five-member board under the Financial Accounting Foundation (FAF). In addition to the GASB, the FAF also established the Governmental Accounting Standards Advisory Council (GASAC) to advise the GASB of its members' views and those of the organizations they represent. The GASAC assists the FAF in approving appointments of GASB members.
FINANCIAL REPORTING TODAY
Generally, government financial reporting is the process of communicating information concerning a government's financial position and activities. Financial information is often dispersed through financial reports. Government financial
reports have several uses: They can be used to compare actual financial results against the legally adopted budget; assess financial condition and results of operations; assist in determining compliance with finance-related laws, rules, and regulations; and assist in evaluating efficiency and effectiveness (GFOA, 1988). Although government financial reports cannot meet the needs of every user, they can be used in a myriad of ways to assess accountability and make effective decisions.
The GASB has the responsibility of establishing and improving financial reporting standards at the state and local government levels. Three primary user categories of government financial reports exist: citizens, legislative and oversight bodies, and investors and creditors (GFOA, 1988). The executive branch and subordinate bureaus/agencies are not identified as primary users because they have the ability to obtain this information from other sources (GFOA, 1988).
At the federal level, financial reporting wasn't required until 1996. The Chief Financial Officers (CFO) Act of 1990 was the initial legislative element requiring the federal government to provide reliable, audited financial information to taxpayers, elected officials, appointed officials, and other stakeholders. Consequently, the Federal Accounting Standards Advisory Board (FASAB) was established in October of 1990 to consider and recommend accounting principles for the federal government. The CFP Act of 1990 was expanded in 1994 and required the federal government's twenty-four major agencies to provide annual financial statements beginning with those for fiscal year 1996.
Although various internal and supplemental financial reports exist, the most common is the comprehensive annual financial report (CAFR). The GASB's 1987 Codification of Governmental Accounting and Financial Reporting Standards states that "every government should prepare and publish as a matter of public record, a comprehensive annual financial report" (section 2200.101) The CAFR normally contains three distinct sections: introductory, financial, and statistical. These sections can be supplemented with other specialized sections as necessary.
Government financial reporting should assist in fulfilling government's duty to be publicly accountable by providing users of these reports with the means to evaluate the operating results of a government and assess the level of service(s) it provides. It is imperative that these reports be reliable, understandable, relevant, and timely in order to enable informed citizens, legislators, and other stakeholders to hold government fiscally accountable.
CONTEMPORARY ISSUES/THE FUTURE
There seems to be a current trend toward fiscal discipline in government that has generated a demand for better information on which to base decisions. Consequently, state and local governments must change their financial reporting from basic stewardship reports on the various government funds to a more corporate-style report that offers analysis of the long-term impact of financial management decisions (Klasney and Williams, 2000). Currently, from annual financial reports, state and local governments focus on the individual "funds" of government. These reports can be difficult for readers of financial statements to understand because the number of funds can run into the dozens or hundreds. As a result of GASB Statement No. Thirty-Four, financial reports must begin to include comprehensive information about the cost of providing government services and show all of a government's liabilities and assets, including infrastructure (Allen, 1999). This new approach calls for government wide reporting, enhanced fund reporting, and management's discussion and analysis (MD&A).
The concept of government wide reporting is the most dramatic change in the new approach. This is a significant move because, until now, government followed only the modified-accrual basis of accounting. The change is important to potential lenders and taxpayers because of the need to capitalize and depreciate general capital assets or infrastructure (Klasney and Williams, 2000). Information concerning infrastructure will include the cost and anticipated life of roads, bridges, sewer and water systems and other capital assets. Since state and local governments invest $1 out of every $10 dollars ($140 billion to $150 billion annually) in the construction, improvement, and rehabilitation of capital assets, that information should be very interesting to local taxpayers (Allen, 1999).
The elements of fund reporting have not changed much. Fund categories will continue to apply their current measurement focus and basis of accounting; however, reporting fund types (such as special revenue and capital projects) is no longer required for governmental funds in the basic financial statements. The new approach will also establish two new fund typesermanent funds (governmental) and private-purpose trust funds (fiduciary). Governments must provide a summary reconciliation to the government wide financial statements at the bottom of fund financial statements or in a separate schedule. This will be an extensive undertaking for government funds because of the difference in the measurement focus and basis of accounting (Klasney and Williams, 2000). In addition to government wide reporting and enhanced fund reporting, each government entity's financial management will now present an MD&A as required supplementary information before the basic financial statements. In response to users' demand for a summary of a government's operations and financial situation, the GASB expanded the number of issues that the MD&A must address. They include the following:
- An objective discussion of the basic financial statements and condensed financial information comparing current and prior years
- An analysis of the overall financial position and results of operations
- An analysis of balances and transactions of individual funds
- An analysis of significant variations between the original and final budget and the final budget and actual results for the general fund
- A description of significant capital asset and long-term debt activity during the year
- Known facts, decisions or conditions expected to have a significant impact on financial position or results of operations (Klasney and Williams, 2000).
The implementation of this new approach to government financial reporting will be challenging at best. Some governments will find themselves gathering information they haven't tracked before and, in some cases, reconstructing information as far back as twenty-five years (GASB, 1999). This is precisely why the GASB established a phased implementation plan based on each government's total revenues (Klasney & Williams, 2000). Implementation will begin on June 30, 2002, for the largest governments (at least $100 million in revenues), with one additional year for medium-sized governments ($10 million to $100 million), and two additional years for smaller governments (less than $10 million) (Allen, 1999; GASB, 1999). Although implementation may be rigorous, this new method is essential for enabling decision makers to overcome the challenges of a new, global society.
The process of government financial reporting evolved during the twentieth century. The blue book, or GAAFR, was established and continues as the primary reference for government financial reporting standards at the state and local levels. The Government Accounting Standards Board (GASB) was established in 1984 and is the authority for setting those standards. The Federal Accounting Standards Advisory Board (FASAB) was established in 1990 and prescribes financial reporting standards at the federal level. Citizens and other stakeholders use government financial reports to assess a government's performance and overall financial position in order to hold that government accountable for its actions. The most common type of government financial re port is the comprehensive annual financial report (CAFR). A current trend toward fiscal discipline is the driving force behind many contemporary issues. Chief among these issues is the GASB requirement that all state and local government financial reports begin to include information concerning capital assets and debts. This changes the essence of government financial reports from basic fund stewardship to comprehensive, corporate-style reporting.
Allen, Tom. (1999). "GASB Issues New Reporting Rules." American City and County, 114 (8): 8.
Government Accounting Standards Board (GASB). (1987). Codification of Governmental Accounting and Financial Reporting Standards. Stanmford, CT: Author.
Government Accounting Standards Board (GASB) (1999). "GASB Overhauls Reporting Model". Journal of Accountancy 188 (2):4.
Government Finance Officers Association (GFOA). (1988). Governmental Accounting, Auditing and Financial Reporting. Chicago: Author.
Klasney, Edward M., and Williams, James M. (2000). "Government Reporting Faces an Overhaul". Journal of Accountancy, 189 (1): 49.
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