Governmental Accounting

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 & Financial Reporting Standards Essential for Governments?

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 & Financial Reporting Standards Reflect the Different Needs of Stakeholders?

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.

Applications

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

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?
• Is there compliance with spending authorities?
• Does the government have the ability to raise taxes to meet resource needs?

Governments operate in noncompetitive environments and, as such, act as stewards of public resources. Governmental accounting does take into consideration nonfinancial reporting measures while businesses do not typically report nonfinancial information (for example, trade secrets), which could jeopardize competitiveness.

The following table shows a side-by-side comparison of the different needs of government versus business in accounting principals (Government Accounting Standards Board, 2006).

Government Business 1. Purpose -- enhances and maintains wellbeing of citizens. 1. Purpose -- in crease net earnings and income per share, wealth creation. 2. Revenue -- involuntary through taxation. 2. Revenue -- exchange transaction between buyer and seller. 3. Stakeholders obligation -- provides proof of accomplishment of objectives and cost of service. 3. Stakeholders -- in crease shareholder equity. 4. Budget -- express public policy priorities -- government management is accountable. 4. Budget -- is controlled by management and considered proprietary. 5. Longevity -- ongoing taxes and consistent need for services to in sure that entity will persist over time. 5. Longevity -- business operates on principal of "going concern." Business can fail or merge.

Comprehensive Implementation Guides

The GASB is acutely aware of the changing nature and added complexity associated with governmental accounting standards. GASB has publicly stated that not all transactions have documented standards, and the board has updated its standards. To support constituents, GASB has become more responsive in issuing implementation guides for standards that it issues or alters. In the past, GASB issued individual implementation guides that covered only a specific standard. These guides were generally issued only after the standard had been adopted; they were essentially static documents (Shoulders & Freeman, 2007).

GASB publishes implementation guides that are meant to be a type of Q&A guide that reflects GASB staff's understanding of board intent. The value of the implementation guides is that they contain an expanded breadth of coverage and can be (and are) updated. The guides are drafted before the standard's release date and can be quickly edited and released. Comprehensive Implementation Guidelines are released periodically and incorporate related standards that have been updated and edited.

These implementation guides are becoming increasingly important for certified public accountants who are applying standards when doing audits for state and local governments. Because the content is updated far more frequently than past GASB guides, preparers now have the burden of staying current with the latest guidelines. The responsiveness of GASB to fast-changing accounting practices has been welcomed by users of the guides.

Cost of Compliance for GASB

New GASB standards are adding to the cost and complexity for states and localities to apply Generally Accepted Accounting Principals (GAAP). Local governments are obliged to follow standards and provide stakeholders the information that they need, but managers are also obliged to provide information that is cost-effective and consistent with local norms and standards (Marlowe, 2007).

According to Marlowe (2007),

Many local governments do use various financial reporting principles collectively known as "non-GAAP" reporting. Non-GAAP reporting can take many forms, from simple cash-basis accounting where transactions are recognized when they occur (most people run their checkbooks this way), to more elaborate schemes that differ from GASB standards only on a single issue, like the previously mentioned infrastructure reporting. A local government's latitude on this issue is determined by applicable state statutes: fifteen states require full compliance with GASB standards, eleven states do not regulate local financial reporting at all, and the rest fall somewhere in between (p. 18).

There are mixed feelings about the effects of non-GAAP reporting for states and municipalities. It is widely felt that credit-rating agencies need GAAP-compliant reporting to compare government financials against one another. Another risk is that the bond market could demand higher borrowing costs to governments that are not GAAP compliant. "One study found that, all things equal, localities in states that require GAAP compliant local government financial statements pay about 20 basis points (0.20 percent) less to issue the exact same bonds as local governments in states that do not require GAAP. On a simple $25 million bond issue paid off over 25 years, that adds up to more than $1 million in interest savings over the life of the bonds" (Marlowe, 2007). Put in these terms, the findings suggest that GAAP reporting could save some governments lots of money.

GASB's role in setting governmental standards is growing as the pace of change in accounting practices quickens. GASB's issuance of new accounting standards (focusing on user-support implementation guidelines and increased market responsiveness) are all internally viewed as positive steps within the GASB. Outside the GASB, however, critics cite instances of the board overstepping its intended mandate, the added cost to municipalities of GAAP compliance, and unnecessary duplication of effort with some FASB standards.

Issues

The Future of GASB

Years after its inception, GASB faced significant public pressure that questioned if the board should continue to operate. The most vocal critic of the GASB was the Government Finance Officers Association (GFOA). The GFOA weighed in on several GASB policy initiatives to raise public awareness of governmental accounting issues. In particular the GFOA questioned the GASB project known as SEA (Service Efforts and Accomplishments). The state of Texas threatened not to comply with GASB policies regarding Other Post Employment Benefits (OPEB) and GAAP accounting compliance. The SEC wanted to play a larger role in GASB policy-setting and raised questions about the independence of GASB as a policy-setting board. Nevertheless, GASB continued to issue new standards, including performance reporting. In 2013 a proposed economic-conditions reporting requirement, which would project cash flow over five years, sparked a counterproposal by GASB's parent, the Financial Accounting Foundation (FAF), which would rein in GASB's rule-setting process.

Service Efforts & Accomplishments (SEA)

The Service Efforts and Accomplishments (SEA) project is a voluntary proposal by GASB to help governments report on their managerial and organizational performance. GASB has long supported the need to evaluate the efficiency and economy of operations, and it considers performance reporting an important component of assessing how well governments manage and distribute public resources. While some constituents of GASB supported the inclusion of performance reporting on the GASB agenda, others were vehemently opposed.

In January, 2007, the GFOA reported that its executive board had strongly reaffirmed its longstanding position that performance measurement is beyond the scope of accounting and financial reporting, and that GASB involvement will impede rather than promote effective performance measurement in the public sector. GFOA called for the abolition of GASB, stating that GASB "is attempting more and more to find an accounting solution for every financial problem," even suggesting that the FASB should replace the GASB as the standards setter for state and local governments (Loyd & Crawford, 2007, p. 2).

In February, 2007, GASB constituents voiced their opposition to having the GASB take any official action on the SEA reporting project. Opponents included the National Governor's Association, the Nation Conference of State Legislators, the U.S. Conference of Mayors, and the National League of Cities. Public expressions of dissatisfaction with GASB and its agenda items continued to plague the board.

According to Ackerman (2007), GFOA's outgoing president, Thomas J. Glaser,

"ratcheted up GFOA's arguments that GASB has strayed well beyond its original mandate … Some other vehicle would better meet the genuine needs of state and local government for accounting standards," he said. "On its face, we do not need one set of accounting standards for derivatives and pollution remediation in the private sector and another set of standards for state and local governments" (cited in Ackerman, 2007, p. 4).

Other Post Employee Benefits (OPEB)

Post Employment Benefits are defined as nonpension benefits such as health care benefits for retirees and their families and dental, life, and term insurance. Most governments "fund OPEB on a pay-as-you-go basis, paying an amount annually equal to the benefits distributed or claimed that year. They do not prefund obligations as is the case with pension obligations" (Civic Federation, 2006, p. 3).

In 2004, GASB issued two guidelines -- Statements 43 and 45 -- that would mandate the detailed financial reporting of public-employee non-pension information. Previous to these statements, detailed financial information about employee nonpension benefits was not required. Statements 43 and 45 were phased in between 2005 and 2008.

It is important to differentiate between the types of retiree benefits. Pensions are often guaranteed by states, but OPEBs are actually considered to be part of an employee's compensation package earned in a given year. This compensation, however, would not be paid until after employment had ended, but the funding of current retirees benefits is part of the cost of providing public services today.

Governments typically report the cash outlay (cost) of what they pay in a given year, rather than the actual cost that is being earned by a current employee. The difference between the cash outlay and actual cost of benefits is quite significant. Since there were no reporting requirements before Statements 43 and 45, most governments were under-reporting the OPEB earned by employees in that year. GASB realized that this was not providing a complete picture of the full cost of public services to the public and therefore was not meeting accountability standards.

According to Grumet (2007),

"Under GASB 45, state and local government entities are required to calculate and report a present-value dollar figure for the total cost of the OPEB obligations promised to employees in the future. They are not, however, required to set aside money to fund those benefits. In essence, GASB 45 would change a government entity's method of accounting for OPEB from 'pay-as-you-go -- in which OPEB obligations are not recognized until actually paid to government employees once they retire -- to an accrual method in which expenses are measured and recognized when they are promised" (p. 7).

The OPEB standard 45 requires that governments "account for and report the annual cost of OPEB and all outstanding obligations and commitments related to OPEB in the same way that they report pensions" (Civic Federation, 2006, p. 7).

Previously,

"OPEB expenses are included [in] a government's general fund expenditures and spelled out in an audit note as the cost is expensed in the current year, reflecting the pay as you go nature of these expenses. Under the new guidelines, OPEB financial information will be produced using actuarial valuations performed in accordance with GASB standards" (Civic Federation, 2006, p. 7).

Overview of guidelines includes actuarial valuations:

• performed every two years for plans that administer OPEB for 200 or more plan members (active or retired).
• performed every three years for plans with fewer than 200 members.

Some of the specific types of financial information that must be reported include

• other post-employment benefit assets and liabilities.
• unfunded accrued actuarial liabilities (UAAL). This is the excess of the unfunded actuarial liability over the actuarial value of assets.
• Annual Required Contributions (ARC). This is the normal cost and the portion of the unfunded actuarial accrued liability of the employer for the period being reported.
• expenses, expenditures, and net obligations of the appropriate fund or funds.
• implicit rate subsidies for retirees. In health insurance plans where retirees and current employees are insured together as a group, premiums for retirees are lower than what they would be if retirees were insured separately (Civic Federation, 2006, p. 7).

GASB statements 43 and 45 have added significant overhead to many governments as they adopted these standards.

Other opposition to Statement 45 specifically addressed the role that GASB should play in setting this policy at all. "Some believe stakeholders need this information to decide if and how a jurisdiction should provide these benefits; others agree, but say that debate should be initiated by elected officials and not by accountants" (Marlowe, 2007, p. 18).

Conclusion

Questions abound regarding the future of GASB, its role in setting accounting standards, and the necessity of the board at all.

Specific points of SEC involvement that could result in potential influences on the state and local government accounting and reporting processes are

• regulation of the municipal securities market.
• selection of FAF trustees.

One other significant threat to the continuance of GASB is the lack of ongoing funding. The SEC relies on subsidies from its governing board (FAF). However, if funding needs to be secured from elsewhere, the threat to the board's independence in standard setting could also be jeopardized.

If the future of GASB and its oversight of governmental accounting are in question, the following questions provide a good starting point for future discussion and deliberation.

According to Loyd and Crawford (2007), the logical questions to ask are the following:

• If GASB does not continue as the independent standard setter for state and local government accounting and financial reporting principles, who will take on that responsibility and what effect will it have on government entities?
• Would the FASB be asked to take over the responsibility for local government accounting and financial reporting principles? If so, would FASB adopt existing GASB GAAP or defer to its accounting principles in place for for-profit and not-for-profit organizations?
• Would the SEC be ready to assume the responsibilities of setting government accounting standards or, at minimum, perform oversight of the standards setting process?
• What changes would the SEC make to existing GAAP?

Terms & Concepts

Accountability: Accoountability is a government's responsibility to justify to its citizenry the raising of public revenues and to account for the use of those public resources (Government Accounting Standards Board, 2006).

Financial Accounting Foundation (FAF): The FAF is the oversight body for both the GASB and FASB.

Financial Accounting Standards Board (FASB): Designated by the SEC, the FASB is a nonprofit organization that develops accepted accounting principals (the GAAP) for the public interest.

Government Accounting Standards Board (GASB): The GASB is a private, nongovernmental organization with the mission to improve standards of state and local governmental accounting and financial reporting.

Government Financial Officers Association (GFOA): The GFOA is a professional association of finance officers in the United States and Canada that works to identify and promote sound, professional management practices in government.

Infrastructure: Infrastructure is long-lived capital assets that normally are stationary and can be preserved for a significantly greater number of years than most capital assets (Government Accounting Standards Board, 2006).

Operational Accountability: Operational accountability is the responsibility of governments to report how they have met their operating objectives efficiently and effectively, using all resources available for that purpose, and whether they can continue to meet their future objectives (Government Accounting Standards Board, 2006).

Other Post Employment Benefits (OPEB): OPEBs are nonpension benefits such as health care benefits for retirees and their families and dental, life, and term insurance.

Service Efforts & Accomplishments (SEA): SEAs are that which are reported to provide more complete information about a governmental entity's performance than can be provided by the traditional financial statements (Government Accounting Standards Board, 2006).

Bibliography

Ackerman, A. (2007). NFMA to review GASB standards in wake of GFOA comments. Bond Buyer, 361(32670), 4-4. Retrieved August 24, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25809501&site=ehost-live

DePaul, J. (2013). S&P: Pensions face bumpy road, GASB changes will add volatility. Investment Management Mandate Pipeline, 7. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89589774&site=ehost-live

Government Accounting Standards Board. (2006; rev. 2013). Why governmental accounting and financial reporting is-and should be-different. Retrieved November 24, 2013, from http://www.gasb.org/cs/ContentServer?c=Document%5FC&pagename=GASB%2FDocument%5FC%2FGASBDocumentPage&cid=1176162354189

Grumet, L. (2007). The importance of financial transparency. CPA Journal, 77(6), 7-8. Retrieved August 24, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25357513&site=ehost-live

Loyd, D., & Crawford, M. (2007). GASB's future as the independent standards setter for state and local governments. Governmental GAAP Update Service, 7(12), 1-5. Retrieved August 24, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25576532&site=ehost-live

Marlowe, J. (2007). Costs of compliance with Generally Accepted 'Accounting Standards. Public Management (00333611), 89(7), 17-20. Retrieved August 24, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25939707&site=ehost-live

Native American Finance Officers Association. (2007). GASB adds project on performance reporting. Retrieved August 27, 2007, from http://www.nafoa.org/assets/r-5.pdf

Pounder, B. (2013). Post-implementation reviews of accounting standards. Strategic Finance, 95(2), 17-18. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=85354174&site=ehost-live

Shoulders, C. & Freeman, R. (2007). Closing the gaps in GAAP. Journal of Accountancy, 203(6), 62-68. Retrieved August 24, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=26165770&site=ehost-live

The Civic Federation. (2006). Other post employment benefits. Retrieved August 27, 2007, from http://www.civicfed.org/articles/civicfed%5F202.pdf

United States Census Bureau. (2013). Government Organization Summary Report: 2012. Retrieved November 24, 2013, from http://www2.census.gov/govs/cog/g12%5Forg.pdf

Suggested Reading

Cheney, G. (2007). GASB defines basic elements of gov't financial statements. Accounting Today, 21(14), 5-5.

Loyd, D., & Crawford, M. (2007). GASB issues statement No. 51, accounting and financial reporting for intangible assets. Governmental GAAP Update Service, 7(15), 1-3. Retrieved August 24, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=25999649&site=ehost-live

Roybark, H. M., Coffman, E. N., & Previts, G. J. (2012). The first quarter century of the GASB (1984-2009): A perspective on standard setting (part one). Abacus, 48(1), 1-30. Retrieved November 24, 2013, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=73284793&site=ehost-live

Solnik, C. (2007). CPA board sharpens focus on municipal accounting. Long Island Business News, 54(26), 3B-15B.