Summary: Governmental Accounting

Read the summary and the most important questions on Governmental Accounting

• Chapter 1 > Introduction and Background

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• It is important to know that the accounting principles of GAAP come from a variety of sources. Broadly speaking there are two forms.Between the two extremes are various authoritative accounting resources that provide interpretations and analyses of applying these rules to various types of transactions.Elaborate on the two different sources of accounting principles:   

  • General acceptance.
    
    May result from common practices that have been used by financial statement preparers over a long period of time. You cannot go to an authoritative accounting rule book and find an accounting rule that results in that specific accounting principle.
    
    
  • Accounting standards.
    
    Accounting rule makers issue accounting standards that specify accounting treatments for specific types of transactions. 

• More often than not, GAAP consists of accounting principles rather than specific rules or accounting for specific types of transactions. Recent accounting scandals have influenced a debate whether or not this should remain the same or change. Define the arguments of both sides:

  Principle-based > In some instances, the accounting scandals involved transactions that were accounted for technically within the letter of the law known as Gaap.
  
  

  • In other words, transactions were structured in ways that met the technical requirements of GAAP but were accounted for in misleading ways. 

  
  Rules-based > To avoid financial statement preparers circumventing (ontwijken) accounting rules, what is needed are better and tougher rules, rather than increased flexibility afforded by a principles-based approach. 
  
    

• GAAP diversity. There is more than one way to account for a specific type of transaction. Accounting for capital assets that are depreciated. There are two methods acceptable under GAAP. Define these two methods:

  • Straight-line depreciation.
    
    The value of a fixed asset is reduced gradually over its useful life.
    
    Example: 2000 depreciation expense each year.
    
    
  • Accelerated depreciation.
    
    More depreciation expense in the early years of a capital asset's life and less depreciation expense each year in the later years of a capital asset's life. 
    
    Example: year 1 > 3000, year 3 > 2000

• Materiality is a concept that accountants have long struggled to define. Applying this concept to individual circumstances in practice results in the need for a good deal of judgement. Define the broad concept of materiality:

  • An item is material to the financial statements if its improper recording would have an impact on an informed reader of the financial statements. 

  
  It is not easy to try to anticipate what an "informed reader" of the financial statements will be affected by in reading the financial statements. 

• Accountants and independent auditors have attempted to provide quantitative measurements to determine when a misstatement of the financial statements would be considered material to those statements.   Describe the two quantitative measures to define if a misstatement is material: 

  • To determine whether the amount of the misstatements was more than five per cent of the net increase or decrease in net assets (similar to what is often referred to as net income). 
    
    
  • Whether the amount of misstatement was more than ten per cent of total assets. 

  
  
  Accountants have come to recognize, that materiality also has qualitative aspects. In other words, misstatements that do not meet quantitative measures, such as the fice and ten per cent measures described above, may still be considered material because of one or more qualitative aspects. 

• Who sets the Generally Accepted Accounting Principles for governments?

  • GASB - Governmental Accounting Standards Board. 
    
    The GASB is a private organization that is financially controlled by the Financial Accounting Foundation, which is a not for profit organization. 

• Who sets the Generally accepted Accounting principles for commercial accounting?

  • Financial Accounting Standards Board - FASB. 
    
    The GASB does for governments what the FASB does for commercial and not for profit organizations. 
    
    
  • The GASB was created in 1984 and is currently located in Norwalk, Connecticut. 

• GAAP uses a hierarchy to indicate that some documents are more important than others. The GASB recently issued Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments which formally brings the hierarchy of those pronouncements and documents comprising generally accepted accounting principles into the GABS's purview. The hierarchy remains essentially the same as used in the past and is lettered A through D. Describe the documents of A until D: 

  Level A: 
  
  

  • Statements and interpretations of officially established accounting principles of GASB. 

  
  Level B: 
  
  

  • GASB technical bulletins > To provide guidance on applying an existing accounting principle, AICPA (Industry Audit and Accounting guides). 

  
  
  Level C: 
  
  
  

  • AICPA practice bulletins if specifically made applicable to governmental entities and that have been cleared by the GASB. 

  
  
  Level D: 
  
  

  • Implementation guides by GASB staff. > in question and answer format.  
    
    
  • Practices that are widely recognized and prevalent in state and local governments. 

  
  
  
  
    

• Why is governmental accounting and financial reporting different from commercial and not-for-profit accounting and financial reporting? (part 1). This is an important question for someone trying to understand the basic concepts that underlie the accounting used by governments and governmental entities. In fact, it was one of the earliest questions addressed by the GASB soon after its creation in 1984.  

  • The primary characteristics of a government's structure and the services it provides. > Governments derive their authority from the citizenry and are commonly based on ta separation of power from three branches. 
    
    - Authority from the citizenry. 
    - The flow of resources between layers. 
    - Taxpayers and relationship with services they receive. 
    
    
  • Control characteristics resulting from a government's structure. > Governments usually prepare a budget for the general or main operating fund. This budget is an expression of public policy as well as a control mechanism for operating the government. 
    
    - Underspending budget. 
    - Legal authority. 

• Why is governmental accounting and financial reporting different from commercial and not-for-profit accounting and financial reporting? (part 2).This is an important question for someone trying to understand the basic concepts that underlie the accounting used by governments and governmental entities. In fact, it was one of the earliest questions addressed by the GASB soon after its creation in 1984. 

  • Dissimilarities between similarly designated governments > Comparing the financial statements of two different governments at the same level such as the financial statements of two counties may be the equivalent of comparing apples to oranges.
    
    
  • Significant investment in non-revenue-producing capital assets. > Capital assets of a government usually include its buildings, equipment, vehicles and so on. 
    
    
  • Nature of the political process. > There is an inherent conflict in governments between the citizens' demand for services and the citizens' willingness to pay for those services.