Governmental
Accounting and
Reporting Concepts
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Governmental Accounting
Governmental accounting is different
than for-profit entity accounting.
Finding out what the rules of governmental
accounting are and how they are
different is the key.
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Objectives of Governmental Reporting
Designed to demonstrate the accountability of each organization for the stewardship
of the resources in its care.
Focused on providing efficient and effective delivery of services with public resources
in compliance with applicable laws.
Identifying and displaying the accountability objectives of governmental organizations
is integral to related accounting.
Different from the objectives of a for-profit entity
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Objectives of Fund Accounting and Reporting
The concept of fund accounting is foundational to governmental accounting.
Enables service and mission-driven organizations to easily monitor and
report compliance with:
Spending purposes (fund restrictions);
Spending limits (budget); and
Other fiscal accountability objectives.
Governments use fund accounting to demonstrate fiscal accountability in their
external reporting and use funds for internal accounting.
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Basis of Organization
Governmental, not-for-profit, and commercial accounting are applied to entities
B
consistent A not their industries.
with their basis of organization and their funding sources,
Illustration: Basis of Organization
Beginning Balance
Hospitals could be:
Governmentally funded and accounted for
using an enterprise fund;
Organized as a not-for-profit organization; or
S Organized as private businesses that report
income and profitability to their shareholders.
Although this can be confusing in practice, the CPA Exam
Subtractions
is generally very clear as to the manner in which an entity is
organized and the applicable accounting principles.
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Industries That Use Governmental Accounting
and Principles
The following industries commonly have the organizational
characteristics and funding streams that lend themselves to the
accountability objectives met by governmental reporting models:
Governmental units:
Run by governments
Use governmental accounting and reporting principles
Include federal, state, county, municipal, and a variety
of local governmental units and entities
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Industries That Use Governmental Accounting
and Principles
The following industries commonly have the organizational
characteristics and funding streams that lend themselves to the
accountability objectives met by governmental reporting models:
Colleges and universities:
May be governmental entities or nongovernmental entities,
depending on whether they are financially accountable
to a primary government
Follow FASB standards for commercial entities rather than
the standards developed for governmental entities when
operating to earn a profit
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Industries That Use Governmental Accounting
and Principles
The following industries commonly have the organizational
characteristics and funding streams that lend themselves to the
accountability objectives met by governmental reporting models:
Health care organizations:
Include hospitals, nursing care facilities, home health
agencies, and clinics
Can be organized as governmental, not-for-profit, or
commercial entities
If financially accountable to a primary government, could
be classified as a component unit of the government
If organized as a not-for-profit or commercial organization,
it follows applicable FASB standards
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Industries That Use Governmental Accounting
and Principles
Pass Key
Not-for-profit organizations not run by governments (e.g., hospitals, universities,
voluntary health and welfare organizations, and research organizations) do not
use governmental accounting and reporting principles.
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Key Concepts in Governmental Accounting
and Reporting
What makes governmental accounting so different?
Governmental accounting generally revolves around three themes that differentiate
it from commercial and not-for-profit accounting:
1. Fund structure
2. Fund accounting
3. External reporting
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Key Concepts in Governmental Accounting
and Reporting
What is a fund?
Pass Key
A fund is a sum of money or other resource segregated for the purpose of carrying on a specific activity
or attaining certain objectives in accordance with specific regulations, restrictions, or limitations,
constituting an independent fiscal and accounting entity.
Each fund is a self-balancing set of accounts.
The accounting for a fund is fundamentally different than the accounting for the government as a whole.
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Key Concepts in Governmental Accounting
and Reporting
Fund Structure
GASB 34 defines a fund structure for governments.
Eleven fund types are classified in the following three generic categories:
1. Governmental funds
2. Proprietary funds
3. Fiduciary funds
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Key Concepts in Governmental Accounting
and Reporting
Fund Structure
Fund financial statements should be separately presented for governmental,
proprietary, and fiduciary funds to report additional and detailed information about
the primary government.
A government is not required to have a specific number of funds.
A government will establish the minimum number of funds consistent with legal
requirements and sound financial administration.
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Key Concepts in Governmental Accounting
and Reporting
Fund Accounting
Fund classifications within the fund structure defined by the GASB affect:
The basis of accounting; and
The measurement focus principles associated with each fund category.
The application of different accounting principles to the funds in each generic fund
grouping provides financial data consistent with the reporting accountability
objectives of each fund.
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Key Concepts in Governmental Accounting
and Reporting
External Reporting
GASB 34 (as amended) establishes minimum reporting requirements to be
in compliance with GAAP.
Reporting requirements include both fund-based and government-wide
financial statement presentations supported by:
Notes to the financial statements; and
A variety of required supplementary information.
Presentation of a reconciliation of fund financial statements
to government-wide financial statements is also required.
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Generally Accepted
Accounting Principles
for Governmental
Entities
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Governmental Accounting Principles and Standards
• The Governmental Accounting Standards Board (GASB) establishes accounting
and reporting standards for governments.
• The hierarchy of GAAP as it relates to governments was established by GASB 76
as follows:
The GAAP
hierarchy
GASB Accounting Standards Board
1
Statements (most authoritative - Category A)
GASB Technical Bulletins, GASB
Consult guidance in Category B documents in
2 Implementation Guides, and literature of
the event treatment for a transaction is not
the AICPA cleared by the GASB (Category B)
specified by a pronouncement in Category A.
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GASB Conceptual Framework
• The GASB has outlined its conceptual framework for governmental financial reporting in
GASB Concept Statements Nos. 1–6. These concept statements:
o Do not establish standards for governmental financial reporting
o Establish the objectives and concepts that underlie governmental financial reporting
• According to the conceptual framework, governmental financial reporting communicates
financial information to users and fulfills a government's duty to be publicly accountable.
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GASB Conceptual Framework
Information Used by Financial Report Users
• Financial statements are a part of the overall financial reporting done by governments.
• Information needs of users of governmental financial reports include all of the following:
All Information Used to Assess Accountability
All financial reporting
General purpose external financial reporting
GASB 34 reporting requirements
Basic financial Required Comprehensive Budgets and Other information
Statements Supplementary annual financial other special (e.g., economic
(including notes) information reporting purpose reports indicators)
(e.g., to grantor
agencies)
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GASB Conceptual Framework
Information Used by Financial Report Users
Financial reporting objectives identified by the framework:
• Pertain to general purpose external financial reporting, which includes the basic
financial statements and required supplementary information, as well as
Annual Comprehensive Financial Reporting (ACFR)
• May not fully address budgets, other special purpose reporting or other information
(such as stand-alone budget documents or reports to grantor agencies)
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GASB Conceptual Framework
Governmental-Type and Business-Type Activities
• Government entities engage in both governmental-type and business-type activities.
• Each type of activity requires accounting and reporting standards that address their
individual characteristics and user needs.
• Governmental-type activities are typically supported by taxes.
• Business-type activities are supported by user fees.
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GASB Conceptual Framework
Users of Governmental Financial Reports
Primary users of governmental financial reports include:
• Citizens, including taxpayers, voters, recipients of services, the media, researchers, etc.
• Legislative and oversight bodies, including state legislators, county and city commissioners,
and executives with oversight authority.
• Investors and creditors, including institutional investors, bond rating agencies, bond insurers,
financial institutions, etc.
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GASB Conceptual Framework
Uses of Governmental Financial Reports
Used to make economic, social, and political decisions and to assess accountability by:
• Comparing actual financial results to budget
• Assessing financial condition and results of operations
• Assisting in determining compliance with finance-related laws, rules, and regulations
• Assisting in evaluating operating efficiency and effectiveness
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GASB Conceptual Framework
Accountability and Interperiod Equity
Accountability Interperiod Equity
• Accountability is the cornerstone of • Interperiod equity is a significant part of
governmental financial reporting accountability
• Governments provide financial information • Balanced budgets contribute to interperiod
to the citizenry to justify the raising of equity by enabling a government to meet its
resources and demonstrate the purposes for commitment to live within its means
which they are used
• Financial reporting should help users assess
• Financial reporting plays a major role in whether:
fulfilling a government's duty to be publicly
accountable o Current year revenues are sufficient to pay
for the services provided that year; and
• Minimum disclosure includes whether the
government operated within the legal o Future taxpayers will be required to assume
constraints imposed by the citizens burdens for services previously provided.
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GASB Conceptual Framework
Characteristics of Information in Governmental Financial Reports
Financial information should have the following characteristics:
Understandability
• Should be expressed as simply as possible so the reports can be understood
by individuals who may not have detailed knowledge of accounting principles
Reliability
• Should be verifiable and free from bias and should faithfully represent the
subject matter
• Does not imply precision or certainty
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GASB Conceptual Framework
Characteristics of Information in Governmental Financial Reports
Financial information should have the following characteristics:
Relevance
• Should have a close logical relationship to the purpose for which it is needed
• Implies reported information will make a difference to users
Timeliness
• Should be issued in time to have an effect on decisions
• May supersede absolute precision or detail
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GASB Conceptual Framework
Characteristics of Information in Governmental Financial Reports
Financial information should have the following characteristics:
Consistency
• Accounting principles used to prepare financial reports should not change
year over year
• Accounting principles relate to such issues as transaction valuation, basis of
accounting, and the determination of the financial reporting entity
Comparability
• Financial reports should be comparable
• Differences between financial reports should be due to substantive differences
in underlying transactions or government structure rather than the selection of
methods
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GASB Conceptual Framework
Characteristics of Information in Governmental Financial Reports
Pass Key
Remember the characteristics in financial reporting for government.
U R MICE
• Understandability
• Reliability
• Make a difference—relevance
• In timeliness
• Consistency year over year
• Entity-to-entity comparability
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GASB Conceptual Framework
Limitations on Governmental Financial Reporting
There are some limitations on the information that governmental financial reporting
can provide:
• Financial reports use approximate measures that are often based on judgments or estimates.
• Financial reporting is only one source of information for users and might be more useful
when used in combination with other pertinent data.
• Financial reports may not meet the diverse needs of all users.
• Cost-benefit relationships must be considered.
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GASB Conceptual Framework
Financial Reporting Objectives
The primary objective of governmental financial reporting is accountability.
Accountability is implicit in the following main objectives of governmental financial reporting:
• Financial reporting should assist in fulfilling a government's duty to be publicly accountable
and should enable users to assess that accountability by:
o Demonstrating whether current year revenues were sufficient to pay for current year services
o Demonstrating budgetary and legal or contractual compliance
o Providing information that allows users to assess service efforts, costs, and accomplishments
of the governmental entity
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GASB Conceptual Framework
Financial Reporting Objectives
Accountability is implicit in the following main objectives of governmental financial reporting:
• Financial reporting should assist users in evaluating the operating results of the governmental
entity for the year by providing information about:
o Sources and uses of financial resources
o How the governmental entity financed its activities and met its cash requirements
o Whether financial position has improved or deteriorated
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GASB Conceptual Framework
Financial Reporting Objectives
Accountability is implicit in the following main objectives of governmental financial reporting:
• Financial reporting should assist users in assessing the level of services that can be
provided by the governmental entity and its ability to meet obligations as they come due by
providing information about:
o The financial position and condition of the governmental entity
o Noncurrent physical assets available to the government and their service potential for
future periods
o Legal or contractual restrictions on resources and risks of potential loss of resources
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