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This text explores major issues and models in governmental accounting and
financial reporting, appreciating that these can change. Two models provide
the focus, the compliance and liquidity model (often called the
fund model) and the accrual and consolidation model (often referred
to as the business model). Historically, compliance and liquidity
model has been the dominant reference point. That situation is
changing. As the perference for financial reporting is altered, more attention
will be assigned to the accrual and consolidation model. Given the
historical orientation, one focus of the text is a critical analysis of
the compliance and liquidity model of governmental accounting and
financial reporting model at the state and local level. The compliance
and liquidity model emphasizes legal compliance with the yearly budget
and the amount of cash and other liquid resources flowing in and out of
most of the major funds. It has been the dominant approach for over sixty
years. Another focus, namely, the accrual and consolidation model,
is presented. This model borrows more heavily from the tenets of business
or commercial financial reporting. In actuality, the debate over appropriate
model has ebbed and flowed for at least a century and is again a point
of controversy. As a result, it is important to discuss both approaches,
as well as other emerging perpectives. Although most of the text is devoted
to state and local accounting and financial reporting, these issues and
debates permeate accounting and reporting for all government and
non profit organizations. Thus, with these issues as a foundation, other
levels or types of organizations can be introduced and reviewed.
These include private and governmental nonprofit organizations as well
as the federal government. By looking at these major issues the text will
prepare the learner not only for current standards but also for emerging
approaches and the fundamentals underlying these issues.
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Within this issues agenda, this text has several broad purposes.
The initial purpose is to define financial reporting and to examine the
difficulties associated with candid reporting about financial decisions
and performance. The second purpose is to survey the forces and pressures
shaping governmental accounting and financial reporting for states and
localities, with attention also given to nonprofit organizations and federal
entities. Another purpose is to cover the current accounting rules,
principles and standards used in state and local governmental accounting,
namely, the compliance and liquidity, or the fund model as it is often
called. A fourth intention is to consider alternatives to the current
model, particularly alternatives that are assumed responsive to the increasing
competitive pressures faced by state and local governments. As noted the
alternative model of central interest is referred to as the accrual
and consolidation model. More formally, it has taken on the name of entity-wide
perspective It emphasizes whether the government has collected enough revenue
to cover all costs and promises made during the year and does so for the
government as a whole rather than individual categories, which are usually
the major funds. Within these broad purposes many basics or fundamentals
of accounting and reporting are covered.
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The purpose of this chapter is to define and provide a basic understanding
of financial reporting in government. Financial reporting is largely
an effort to assess financial performance, that is, how well or how poorly
the government performed with money entrusted to it. Financial decisions
include raising and spending money as well making promises that have financial
consequences. Financial reporting is considered a part of governmental
accountability for financial decisions. Exactly how financial reporting
is done depends in part on the model selected. As noted two major models
are considered in the text. With either model, many types of financial
reports can be generated but a considerable amount of attention is given
to the quantitative financial statements, which are one type of
report, but usually the major report. These quantitative financial statements
are found in the Comprehensive Annual Financial Report (CAFR).
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The configuration and content of financial reporting and accounting in
government is affected in large measure by one major issue: should government
use its own model and set of principles or follow the model used by business?
This issue is explored in detail in this chapter and throughout the entire
text . The two different models introduced in the beginning of the
text are defined and presented in this chapter. The one model is
called the compliance and liquidity model. It assumes governmental
information needs are different than those of business and thus there is
a need for a separate and distinct model. It focuses on assuring
that the administration follows the legal directives of the legislature
and that enough money is generated to pay the annual cost of government.
The other, the accrual and consolidation model, is essentially the model
used by business. Many of those who see no basic difference between
the information needs of government and business regard the accrual and
consolidation model as the best and thus the one that should be used in
government. It tries to match all expenses and promises with revenue
collected so that costs are not pushed on to future generations. . The
issue over appropriate model is presumed to be important since the assessment
of financial performance can differ depending on which model is adopted.
Learners will have an opportunity to use both models to assess financial
performance. The battle over the models is both technical and political;
technical in finding factual grounds for the choice and political in using
power to settle the issue. In fact, the battle continues as the Governmental
Accounting Standards Board (GASB) for state and local accounting and reporting
considers whether to add an accrual and consolidation perspective (called
the entity wide perspective by GASB) to the compliance and liquidity model
(which the board refers to as the fund model). If GASB decides to require
reporting under both models, the board will call the approach the dual
perspective. A similar confrontation has been a part of deliberations for
nonprofit organizations and for the federal government.
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The purpose of this chapter is to examine and critique the formal approach
(i.e., the compliance and liquidity model) used by state and local governments
to prepare their financial statements, particularly governmental funds.
For the most part, this will entail looking at the financial statements
as they appear in the Comprehensive Annual Financial Report (CAFR) or financial
statements released separately. The rules and format for these statements
are established by the Governmental Accounting Standards Board (GASB).
Given the nature and emphasis of the compliance and liquidity model, this
chapter concentrates on the annual financial performance as reported in
the financial statements in contrast to long term issues or consequences.
In the compliance and liquidity model, costs or promises that go beyond
one year are not given the same attention in the financial statements as
are current inflows and outflow of money. How the compliance and liquidity
model deals with long term obligations is covered in the next chapter.
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One intent of this chapter is to examine how long term items are handled
in the present governmental accounting and financial reporting, in particular,
long term obligations and long term fixed assets. In the prevailing compliance
and liquidity model, long term items are given a different treatment than
short term items. Records are kept of long term items but they do not affect
financial statement performance unless and until cash is involved. For
example, fixed assets are listed but not depreciated and bonds payable
are listed but do not count as a liability in the balance sheets of governmental
funds. The prior chapter, chapter 3, centered mainly on short time items
which are at the core of the compliance and liquidity model. Topics in
the chapter will include acquisition and funding of property, plant and
equipment; pensions and other deferred compensation; and investing. Time
value of money will play an important role since these topics often cover
periods well beyond a year's period of time. Many fundamental issues related
to long term items are presented independent of fund accounting.
Good management requires prudent decisions on these potentially costly
endeavors. Changes in accounting and reporting standards can alter the
way results and conditions related to long term items are tracked and displayed.
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This chapter moves from the big picture of the alternative models and the
prevailing reporting approach to the details of generating the financial
statements under the current model. These details are called the accounting
cycle. The purpose of this chapter is to introduce and cover the features
of the accounting cycle. In short, the accounting cycle is the process
that takes the detailed day-to-day transactions and events and
converts them to the aggregate level financial statements and also closes
the so-called books in order to ready the process to start again.
The role of the accounting equation as a link between the big picture and
the details in introduced. The coverage of the cycle is done by discussing
and defining the steps in the cycle and by offering simple and complex
examples of the cycle. The cycle is briefly presented for the commercial
model. It is done more thoroughly for governmental funds which would include:
general, special revenue, capital projects, and debt service. The
cycle is also covered for account groups which include fixed assets and
long term debt. The emphasis is on the accounting cycle for the current
compliance and liquidity model.
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This chapter is under construction. When completed it will have
a discussion of the proprietary or business like funds as opposed to the
governmental funds, which were of interest in chapter 3 and chapter 4.
These discussions will cover general tenets of business financial reporting
and the specifics of the various proprietary funds, namely, internal service
funds and enterprise funds. For the most part these funds follow the accrual
logic of the alternative model discussed in chapter 2. As such it also
provides a preview of what governmental accounting might look like if GASB
follows the dual perspective by adding an accrual assessment of financial
performance. It also introduce subjects common to business operations such
as flexible budgets, breakeven analysis, and cost assignment.
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This chapter is under construction. When finished it will cover
topics such as nongovernment (i.e., private) nonprofit organizations, federal
accounting, and auditing. Additionally, as the Governmental Accounting
Standards Board (GASB) progresses with its proposed reporting model that
includes many of the concepts introduced in the chapter covering the accrual
and consolidation model and the prior chapter on business accounting, those
concepts will be discussed. If GASB adopts its so called dual perspective
(actually the two competing models at the core of this text) a separate
chapter will be added to accommodate this dramatic change.
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