GASB Identifies Key Differences Between Governmental & Business Financial Reporting

The Governmental Accounting Standards Board (GASB) released a white paper last week describing how the information needs of individuals and organizations interested in the financial performance of state and local governments differ from those following the financial performance of for-profit businesses. According to the GASB, these diverse needs result from basic environmental differences between governments and businesses.

The primary purpose of governments is to enhance or maintain the well being of citizens by providing services in accordance with the public policy goals. Instead, for-profit businesses focus on wealth creation and interact primarily with those segments of society that help them fulfill their mission to generate a financial return on investment for their shareholders.

“The standards that guide financial reporting for state and local governments reflect the unique environment of government, including different organizational purposes and special legal powers,” Robert Attmore said in a prepared statement announcing the white paper’s findings. “They also effectively address public accountability issues inherently related to the unique aspects of the government environment.”

Other critical differences generating user demand for unique information include:

• Governments serve a broader group of stakeholders, including taxpayers, citizens, elected representatives, oversight groups, bondholders, and others in the financial community.

• Most government revenues are raised through involuntary taxes rather than a willing exchange of comparable value between two parties in a typical business transaction.

• Monitoring actual compliance with budgeted public policy priorities is central to government public accountability reporting.

• Governments exist longer than for-profit businesses and are not typically subject to bankruptcy and dissolution.

According to Federal data presented in this new white paper, revenue collected by state and local governments totaled $1.8 trillion or 20 percent of the 2002 U.S. gross domestic product, while state and local governments account for 12 percent of total U.S. employment.

“These significant differences, coupled with the sizable role that state and local governments play in the U.S. economy, are the primary reasons why separate accounting and financial reporting standards for governments are necessary,” said Robert E. Denham, chairman of the Financial Accounting Foundations Board of Trustees in a prepared statement. “The information such standards foster protects the interests of citizens and other key stakeholders by enhancing their ability to hold governments accountable and make better political, social, and economic decisions.”

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