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Executive Summary
Governments are fundamentally different from for-profit business enterprises in several
important ways. They have different purposes, processes of generating revenues, stakeholders,
budgetary obligations, and propensity for longevity. These differences require separate
accounting and financial reporting standards in order to provide information to meet the needs of
stakeholders to assess government accountability and to make political, social, and economic
decisions. Although state and local governments in the United States have had separate standards
for over 100 years, occasionally the question is raised: Why can’t general purpose governments
(cities and counties, for example) simply apply the standards established for business
enterprises?1 The following questions and answers briefly address that issue, and the
accompanying paper and its appendixes provide an expanded discussion.
Why Are Separate Accounting and Financial Reporting Standards
Essential for Governments?

Separate accounting and financial reporting standards are essential because the needs of users of
financial reports of governments and business enterprises differ. Due to their unique operating
environment, governments have a responsibility to be accountable for the use of resources that is
significantly different from business enterprises. Although businesses receive revenues from a
voluntary exchange between a willing buyer and seller, governments obtain resources primarily
from the involuntary payment of taxes. Taxes paid by an individual taxpayer often bear little
direct relationship to the services received by that taxpayer. Overall, taxpayers collectively focus
on assessing the value received from the resources they provide to government. Governmental
accounting and financial reporting standards aim to address this need for public accountability
information by helping stakeholders assess how public resources are acquired and used, whether

1 The term business enterprise is used to refer to private-sector entities organized for the purpose of earning profit.
Business enterprises in the United States apply accounting pronouncements of the Financial Accounting Standards
Board. Business enterprise does not refer to and should not be confused with business-type activities of

current resources were sufficient to meet current service costs or whether some costs were
shifted to future taxpayers, and whether the government’s ability to provide services improved or
deteriorated from the previous year.
The longevity of government and its role to maintain and enhance the well-being of citizens
through the provision of public services also result in information demands that differ from those
of business enterprises. For example, governments do not operate in a competitive marketplace,
face virtually no threat of liquidation, and do not have equity owners. Consequently, information
on fair values of capital assets is of limited value and measures of net income and earnings per
share have no meaning to users of governmental financial reports. Instead, users need
information to assess the government’s stewardship of public resources, including information to
evaluate the manner and extent to which resources are devoted to specific services and the costs
of providing those services. Users also need information to determine compliance with legally
authorized spending authority. Creditors of both businesses and governments are interested in
information on the ability to repay debt. However, government creditors focus more on
information regarding the government’s ongoing ability to raise taxes and the costs of activities
that could compete for those resources, rather than on information about how earnings are
How Do Existing Accounting and Financial Reporting Standards
Reflect the Different Needs of Stakeholders?
The needs of the users of governmental financial reports are reflected in differences in the
components of the conceptual framework for accounting standards and in individual accounting
standards. Although investors and creditors are important constituencies of every standards-
setting organization, the Governmental Accounting Standards Board’s (GASB) conceptual
framework also places priority on addressing the informational needs of citizens and elected
representatives, two constituencies not identified as users of business enterprise financial
statements by the Financial Accounting Standards Board (FASB). Consequently, the GASB’s
financial reporting objectives consider public accountability to be the cornerstone on which all
other financial reporting objectives should be built.


Some of the most significant GASB standards that address differences in governmental and
business financial reporting include (1) the measurement and recognition of certain types of
revenues (for example, taxes and grants), (2) the view that capital assets provide services to
citizens rather than contribute to future cash flows, (3) the use of fund accounting and budgetary
reporting to meet public accountability needs, (4) the use of accountability principles rather than
equity control to define the financial reporting entity, and (5) the treatment of pensions and other
postemployment benefits to allocate cost of services equitably to applicable periods. These and
other accounting and reporting differences are described more fully beginning on page 11 and in
Appendix B.
Why Is There an Ongoing Need to Set Additional Governmental
Accounting Standards?
Since its inception in 1984, the GASB has strived to meet the needs of the users of governmental
financial reports by issuing a number of important standards. Although the GASB has made
progress, the need to develop and improve accounting standards for governments still exists. For
example, additional components of the conceptual framework, which enhances consistency in
setting government standards, are still being addressed. In addition, there are many important
types of transactions, such as those associated with derivatives and intangible assets, for which
there are no existing standards or for which existing standards are not comprehensive. The
GASB’s research agenda also includes, for example, a project to address additional ways to
communicate results of government activities. Finally, over time governments and the
governmental environment continue to change, resulting in an ongoing need to update existing
standards and to adopt new standards.


Introduction and Scope
From time to time, the question is raised as to why general purpose state and local
governments (herein after referred to as “government”) cannot simply apply the same set of
accounting standards that business enterprises2 apply. This paper explains why separate
standards for governments are needed. It illustrates some of the differences between standards
for governments and those for business enterprises using standards for governments issued over
the past twenty years, and explains why the process of standards setting for governments is an
ongoing process.
In addition to providing greater detail about the questions in the Executive Summary, this
paper also presents several appendixes. Appendix A provides an expanded discussion of the
environmental differences between governments and business enterprises. Appendix B provides
additional examples of standards that illustrate the differences between governments and
business enterprises and expands upon the discussion of examples presented in this paper.
Appendix C provides a historical perspective on the development of governmental accounting
standards. Appendix D provides details on the significance of state and local governments in the
United States. A brief glossary of governmental accounting terms is also included and begins on
page 33. Terms defined in the glossary are printed in boldface type when they first appear.
The scope of this paper is limited to comparing general purpose governments to business
enterprises. From time to time, the issue arises as to whether separate accounting standards are
needed for other types of organizations, such as not-for-profit organizations. This paper neither
supports the existing method of standards setting for other organizations not covered in the scope
of this paper nor suggests that standards for those organizations should be set separately.

2 See footnote 1 regarding the meaning of the term business enterprises.


Furthermore, governments in other countries may have different characteristics than
governments in the United States; therefore, the paper does not address international differences.
Why Are Separate Accounting and Financial Reporting Standards
Essential for Governments?
Accounting and financial reporting requirements focus on the needs of the users of
financial reports. Citizens and their elected representatives, such as legislatures, and other
oversight organizations, as well as creditors, are primary beneficiaries of the information in
governmental financial reports. Financial reports of business enterprises generally are used by
creditors and by equity investors and their regulators, but not by a type of stakeholder equivalent
to citizens and their elected representatives.3 The needs of citizens and oversight organizations
emphasize accountability for resources entrusted to the government, and the needs of equity
investors emphasize information necessary to make rational investment, credit, and similar
decisions. Accountability, in a general sense, is a responsibility of stewards or agents to provide
relevant and reliable information relating to resources under their control. For governments,
accountability is the government’s responsibility to justify to its citizenry the raising of public
revenues and to account for the use of those public resources. Accountability information can be
used to support decision making, but it also fulfills the citizenry’s “right to know” how public
resources have been spent.
Creditors are a type of user of both governmental and business enterprise financial
reports. Although they are generally looking for assurance that sufficient cash flows will be
available to meet debt service requirements, certain information they seek from governments and
from business enterprises is different because the source of debt repayment is different. Creditors
and potential creditors of business enterprises seek information about how earnings are
generated. Creditors and potential creditors of governments seek information about the ability
and willingness to levy taxes to finance debt repayment and the costs and obligations of those
activities that could compete for those resources.

3 Elected representatives, such as legislators, are considered external users of financial reports because in many
cases these individuals do not have access to the same internal financial data as do officials in the executive branch.


Although certain types of information in business enterprise financial reports could
satisfy some needs of certain governmental financial report users, other users require different
information. The accountability focus of governments and the broad range of sources of a
government’s resources lead to the conclusion that ideally governmental financial report users
should be able to find additional information that will help answer questions such as the
• Did the government’s ability to provide services improve or deteriorate from the previous
• Were the government’s current-year taxes and other sources of resources sufficient to cover
the cost of current-year services? Was part of the burden of paying for current services
shifted to future-year taxpayers?
• How did the government finance its activities and meet its cash requirements? Does the
government have the capacity to meet future obligations?
• What are the government’s spending priorities? What sources of resources support the
various programs? Has the government obtained and used resources in accordance with its
adopted budget and other legal requirements?
• What resources currently are available for future expenditures and to what extent are
resources reserved or restricted for specified uses?
• Has the government provided its services in an efficient and effective manner?
Major Environmental Differences between Government and Businesses
The differing needs of the users of governmental and business enterprise financial reports
reflect the different environments in which the organizations operate. Some of the principal
environmental differences are:
Organizational Purposes. The purpose of government is to enhance or maintain
the well-being of citizens by providing public services in accordance with public policy goals.
Major public services provided by state and local governments include public safety, education,
health, and transportation. Among other reasons, government provides these services because the
economic incentives are not sufficient for business to provide them at the quantity, quality, and


price considered appropriate by public policy. Return on investment is not a goal for
governments, so they need to develop and report other measures of accomplishment. The
predominant business enterprise performance measures—net income and earnings per share—
have no meaning in a governmental environment. Instead, governments focus on providing
services and goods to constituents in an efficient, effective, economical, and sustainable manner.
A government’s financial reports should give creditors, legislative and oversight officials,
citizens, and other stakeholders the information necessary to make assessments and decisions
relevant to their interests in the government’s accomplishment of its objectives.
In contrast, business enterprises focus on wealth creation, interacting only with those
segments of society that fulfill their mission of generating a financial return on investment for
shareholders. Historically, the primary focus of reporting has been on earnings and its
components, with little or no explicit focus on nonfinancial measures of performance.
Sources of Revenue. The principal source of revenue for government is taxation,
which is a legally mandated involuntary transaction between individual citizens and businesses
and their government. The principal source of revenue of business enterprises is voluntary
exchange transactions between willing buyers and sellers.
Because the assessment and the collection of taxes are not transactions in which equal
values are exchanged at arm’s length and are not the culmination of an earnings process as are
most transactions of business enterprises, transactions involving taxes require specialized
accounting treatment. For example, governments may collect property taxes in a period prior to
the period for which the taxes legally apply. The question then arises whether governments
should record the taxes as revenue in the year collected or attribute them to the year for which
the taxes apply. The GASB has addressed this issue by requiring that property taxes be reported
as revenue in the period for which levied. This promotes assessment of interperiod equity by
associating costs of services with revenues collected to finance those services.
Potential for Longevity. Because of their ongoing power to tax and because of
the ongoing need for public services, governments rarely liquidate. The possibility of achieving
longevity, however, is not as likely for business enterprises. Business enterprises will go out of


existence if, for an extended period of time, they are unable to sell their products or services for
more than it costs to produce them. Further, a business may also cease to exist if it is acquired by
another entity. Financial statements of business enterprises generally are prepared using a
“going-concern” assumption, meaning that assets and liabilities are not adjusted to their
liquidation values; however, this is not equivalent to a presumption of extended longevity. Users
of business enterprise financial statements may use those statements to assess longevity. In
financial statements of business enterprises, emphasis is placed on the recoverability of assets,
such as through future sales, and on the fair values of certain assets and liabilities. In contrast, the
ability of governments to exist in the future generally is not in doubt, but rather the question is
the sustainability of the level of services provided and the ability to meet future levels of demand
for services. As a result, the emphasis generally has been on the allocation of resources to
government programs, the determination of the cost of services (as noted above), and providing a
longer term view of operations.
The longer term view of operations of government is consistent with focusing on trends
in operations, rather than on short-term fluctuations, such as in fair values of certain assets and
liabilities. Immediate recognition of changes in fair values of assets set aside in employee benefit
plans is appropriate accountability reporting in the employee benefit plans that hold those assets.
However, it is not appropriate for government employers to immediately recognize those fair
value changes or changes in accrued actuarial liabilities resulting from a change in benefit plan
terms. These short-term fluctuations could produce a measurement of the period’s employee
benefit costs, which are included in cost of services, that may be less decision-useful for
governmental financial report users. Financial reporting by business enterprises is more likely to
recognize such changes in fair value because of the importance of the current value of equity.
Relationship with Stakeholders. Individual citizens must pay taxes as agreed
to by the citizenry collectively through elections or decisions of elected representatives, and as
previously noted, individual taxes paid are not directly correlated with services received.
Accordingly, governments should meet a standard of accountability that is broader than for
business enterprises. Furthermore, citizens are interested in evaluating interperiod equity by
determining whether current taxpayers and users of government services fully financed the costs


of providing current-period services or whether taxes and user fees from prior or future periods
were, or will be, needed to finance the current services provided. Consequently, one important
focus of governmental financial reporting is on providing systematic and rational cost-of-service
information. Additionally, users of financial reports may wish to evaluate the combination of
taxes, user fees, grants, and borrowings used to finance current services. In contrast, because
business enterprises focus primarily on increasing shareholders’ equity, their financial reports
show changes in equity of the enterprise during the current period. Except for those with large
blocks of shares, public company shareholders typically can easily end their relationship with
any individual business enterprise by selling their shares and, consequently, focus on the current
and future value per share.
Role of the Budget. For governments, a budget takes on a special legal
significance. Governmental budgets are expressions of public policy priorities and legally
authorize the purposes for which public resources may be spent. In fact, governmental budgets
can be the primary method by which citizens and their elected representatives hold the
government’s management financially accountable. For business enterprises, the budget
represents an internal financial management tool that is controlled entirely by management and is
considered proprietary in nature.
How Do Existing Accounting and Financial Reporting Standards
Reflect the Different Needs of Stakeholders?
The differences in the needs of users of financial reports of governments and business
enterprises are reflected both in differences in components of the conceptual framework for
accounting standards and in the individual accounting standards set by the GASB and the
Conceptual Framework Differences
Both the GASB and the FASB have developed Concepts Statements setting forth the
objectives of financial reporting. The objectives are the central core of the conceptual


frameworks for standards and reflect the differing needs of users of financial reports of
governments and business enterprises.4 Reflecting the needs of their stakeholders, including
citizens and their elected representatives, governments predominantly focus on accountability in
financial reporting. For governments, information necessary to make political and social
decisions is as important as information necessary to make economic decisions in shaping
accounting and financial reporting objectives. Reflecting the needs of the stakeholders of
business enterprises, including equity investors, financial reporting of business enterprises
predominantly focuses on financial performance—earnings and its components. For business
enterprises, information for making economic decisions is most important in shaping accounting
and financial reporting objectives.
In recognizing that users of governmental financial reports are also interested in assessing
nonfinancial performance of governments, the GASB recognized the importance of these
measures in Concepts Statement No. 1, Objectives of Financial Reporting. The objectives,
elements, and characteristics of service efforts and accomplishments (SEA) reporting were
expanded on in GASB Concepts Statement No. 2, Service Efforts and Accomplishments
Reporting. The objective of SEA reporting is to provide more complete information about a
governmental entity’s performance than can be provided by the traditional financial statements
and schedules to assist stakeholders in assessing the economy, efficiency, effectiveness, and
sustainability of services provided. To promote achievement of the objective of SEA reporting,
SEA information focuses primarily on measures of service accomplishments (outputs and
outcomes) and measures of the relationships between service efforts and service
accomplishments (efficiency). On the other hand, business enterprise financial reporting
objectives do not recognize nonfinancial reporting measures. Although some believe that it
would be beneficial to require business enterprises to report certain nonfinancial measures,
competitive considerations of business enterprises may limit the amount of information that

4 The conceptual framework of the GASB is not yet complete, although the GASB recently issued Concepts
Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic
Financial Statements
, and is currently developing another Concepts Statement to define the elements of financial
statements. The conceptual framework of the FASB is currently being revisited in conjunction with considerations
for convergence with the International Accounting Standards Board.