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 differs significantly from that of business enterprises. Although businesses receive revenues from a voluntary exchange between a willing buyer and seller, most 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 a government. Governmental accounting and financial reporting standards aim to address this need for public accountability information by helping stakeholders assess how public resources were acquired and either used during the period or are expected to be used. Such reporting also helps users to assess whether 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 declined from the previous year.

The longevity of most governments and their 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, most governments do not operate in a competitive marketplace, face virtually no threat of liquidation, and do not have equity owners. Consequently, 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 generate resources and the costs of activities that could compete for those resources, rather than on information about how earnings are generated.

Read T.I.A.'s CEO Sheila Weinberg, talk about the philosophy behind Truth in Accounting.

Read the full revised GASB whitepaper "Why Governmental Accounting and Financial Reporting is—and should be—different" here.