Chapter 4: Governmental Accounting

Unlike most private-sector organizations, governmental entities must be responsive to a number of different groups and organizations—including elected officials, other governmental entities, investors, creditors, and citizens—that monitor their activities. All forms of monitoring involve collecting and interpreting data, and this oversight function is often performed using information provided in governmental reports. Among the most important types of reports is the annual financial report, which presents the financial position, operating results, and cash flows for a particular accounting period. All governmental entities, including school districts, develop their annual financial reports in accordance with principles established by standard-setting authorities to provide consistency and comparability for users.

For governments to achieve the objective of accountability, they must provide financial reports that reasonably informed users find both relevant and reliable. They must satisfy numerous and diverse needs or objectives by presenting information about short-term financial position and liquidity, budgetary and legal compliance, and issues having a longer-term focus, such as capital budgeting and maintenance. Additionally, information must be presented at different levels of detail to satisfy the needs of various users.

Following more than a decade of research and analysis, the Governmental Accounting Standards Board (GASB) concluded that to meet the varied needs of a wide range of users, governmental reports must provide information regarding the public entity as a whole in addition to the traditional fund financial statements. Accordingly, in June 1999, GASB introduced a new financial reporting model in Statement 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments (GASB 1999). This new model integrated the traditional focus of governmental fund financial statements relating to fiscal accountability (and the modified accrual basis of accounting) with new forms of reporting (e.g., government-wide financial statements). The two levels of financial reporting are intended to

• provide more relevant information that results in greater accountability by state and local governments; and
• enhance the understandability and usefulness of annual financial reports so that users of these reports can make more informed economic, social, and political decisions.

This chapter provides an overview of governmental accounting and financial reporting and the current approaches used in compiling financial reports. In particular, it includes the following elements:

• governmental Generally Accepted Accounting Principles (GAAP) hierarchy;
• measurement focus and basis of accounting;
• fund structure;
• internal control structure; and
• other issues affecting educational entities.

It is important for governments to provide their constituencies with effective financial information presented in a consistent and clear format. Specifically, the information provided by governments should contribute to accountability in the following areas:

• financial position and results of operations;
• actual financial results compared to adopted budgets;
• compliance with finance-related laws, rules, and regulations;
• efficiency and effectiveness of operations; and
• maintenance of governmental assets.

Governments achieve consistency in financial reporting through the use of accounting standards. GASB is the standard-setting authority of GAAP for state and local governments, including school districts. In cases where no GASB pronouncement is applicable, other authoritative sources of guidance exist.

The following section presents a hierarchy of GAAP in descending order of authority. The hierarchy was originally established in the American Institute of Certified Public Accountants' (AICPA) Statement on Auditing Standards (SAS) No. 69 (AICPA 1992). In 2009, GASB issued Statement 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, which incorporated the governmental GAAP hierarchy into GASB's authoritative literature, but did not affect the hierarchy itself or change current practice.

In 2010, GASB issued Statement 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. This statement incorporated into GASB's authoritative literature certain accounting and financial reporting guidance issued either by the Financial Accounting Standards Board (FASB) or the Accounting Principles Board or contained within the Accounting Research Bulletins of the AICPA's Committee on Accounting Procedure before November 30, 1989. This furthered GASB's efforts to codify relevant governmental GAAP, but had no practical effect on the accounting or financial reporting guidance contained within. It should be noted, however, that Statement 62 allows entities to continue to apply, as does other accounting literature, post-November 30, 1989, FASB pronouncements that do not conflict with or contradict GASB pronouncements.

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