Government entities use GASB (Government Accounting Standards Board) accounting standards for creation of their financial statements; for-profit businesses use FASB (Financial Accounting Standards Boards) standards. There are numerous reasons why governments need their own set of standards for financial reporting. This essay will discuss the main differences between government and for-profit business with regard to financial reporting and the need for differing standards. The differences include: Purpose, revenue generation, stakeholders, budgetary obligations and longevity. Public accountability is at the cornerstone of governmental reporting and as such has a strong influence on GASB standards (current and future). The GASB is under pressure on several fronts as it enters its third decade as an independent agency. Funding options for the GASB are being scrutinized, while opponents of the GASB question the need for the board at all. In particular, issues such as GASB recommendations on OPEB (Other Post Employment Benefits), SEA (Service Efforts and Accomplishments), and the increasing involvement of the SEC (Securities and Exchange Commission) are topics that are being debated widely as the mission and role of the GASB is evaluated.
According to Marlowe (2007), "the GASB was founded in 1984 to bring cohesion to what was then a patchwork quilt of governmental accounting practices. Critics and advocates alike agree it has achieved that objective and, in the process, has improved the quality, transparency, and comparability of government financial information".
The GASB's mission is to be an independent standard-setting board for state and local governments and their financial statement users. While certain aspects of state sovereign power have been transferred to the federal Government, all other powers are retained by the states. The establishment of accounting principals is one such power -- the standards were created by states and are a power retained by states.
The 2012 Census of Governments reported 90,056 local governments in the United States (U.S. Census Bureau, 2013). Expenditures by state and local governments are close to 20% of the total GDP (gross domestic product) of the United States. This percentage represents a significant portion of the American economy that is translated into vital services to the public, including education, public safety, transportation, social, and environmental and housing services (Government Accounting Standards Board, 2006).
According to the GASB (2006),
"Systematic governmental financial reporting in the United States traces its beginnings to the last decade of the nineteenth century and early part of the twentieth century. At that time, the growth in the number and size of cities, coupled with corruption in municipalities, led to a demand for financial accountability. [There was a concern] that the then 'commercial accounting' was not entirely adequate for governments The lack of a profit motive is one important factor that affects financial reporting for governments; there is no need for governments to report on profit and loss" (p. 29).
"Cities financed their operations through taxes, miscellaneous revenue, and borrowing for the purpose of raising sufficient amounts to meet total anticipated expenditures, including capital items. Early standard setters believed that financial reporting should show a government's fund surplus (or balance) that represents the resources currently available for expenditure. Many advocated financial reporting using funds, which would allow readers to assess whether an executive officer of a city had properly discharged his or her duties in accordance with legal requirements" (Government Accounting Standards Board, 2006, p. 29).
Why Are Separate Accounting
The needs of those using government financial reports are different than those using for-profit financial statements. Because governments receive revenue through involuntary exchange (collection of taxes), governments must show accountability for the use of resources paid for by tax dollars. In a for-profit business, revenue is gained through voluntary exchange between willing buyers and sellers. The role of government financial reporting is to enable stakeholders to assess how well the resources, which their tax dollars are paying for, are being used.
Governments, usually, have greater longevity than businesses. Government entities operate in a noncompetitive environment and therefore are at less of a threat of liquidation or of going "out of business." Governments are put in place to deliver services over the long term with a consistent level of service and assurance that they will be available in the future.
How Do Existing Accounting
Investors and creditors are stakeholders in all standard-setting organizations, whether business or governmental. The GASB has two other important information users of their financial reports: citizens (taxpayers) and their elected representatives who act on behalf of taxpayers. There are several key areas where governmental reporting is different from that of for-profit businesses. These areas are outlined below.
- Type of revenue. Government revenue is from taxes or grants. A business sells goods or services to willing buyers.
- Government assets provide services (such as road construction). Business assets contribute to cash flow.
- The government uses fund accounting and budgetary reporting to meet public accountability needs.
- Accountability principals, rather than equity control, are used.
- Government treatment of pensions and other post employment benefits is handled differently than in for-profits.
The GASB has issued a number of new standards since it was formed in 1984. According to GASB literature, there are still "transactions" that don not have any GASB standards, which leaves gaps for stakeholders. The GASB is also aware of the changing environment in governmental accounting, and the increasing information needs of users, and is working on meeting those needs for the future.
This article expands upon the differences between government and for-profit accounting standards to give the reader a better insight about the role and necessity of GASB standards.
Questions about whether GASB has outlasted its purpose are a current topic of debate, and there are supporters and opponents on both sides of the debate. Some of the issues and pressures that are being exerted on GASB by constituents, state governments, and outsiders are also discussed.
Accounting Standards: Government versus Business
GASB published a white paper ("Why Governmental Accounting and Financial Reporting is -- and should Be -- Different," 2006) that provides an overview of the differences between governmental and business accounting principles. It is written in language that is clear and understandable. There is no question that the audience for governmental financial reports is different from that of business financial information. This article will report on the role GASB plays in helping state and local governments account for and report on their resources. Opposing views of the value of GASB standards will also be addressed.
Public accountability is the guiding principal for all government entities as they provide their financial reports. Stakeholders should have easy access to information that shows them how public resources are acquired and used. Taxpayers should also know if current resources are sufficient to meet current needs (or if the burden will be shifted to future taxpayers). Taxpayers also want to know if services have improved from the previous year or deteriorated -- and why.
Some questions that governments need to be able to answer to meet public accountability guidelines include the following (Government Accounting Standards Board, 2006):
- How and to what extent are resources devoted to specific services?
- What is the cost of providing those services?...
(The entire section is 3585 words.)