GOVERNMENTAL ACCOUNTING AND WHY ITS DIFFERENT

If you are a general manager or work in an accounting department of a local government (i.e. city, county, JPA, special district) and had previously worked at a private business, you may have questions why the financial statements are different. I will endeavor to explain why governmental accounting is different and provide a few general requirements to help explain the financial statements to better understand the audited financial statements.

First and foremost a government operates differently and its stakeholders’ needs are different from a for profit business. For example, Citizens and elected representatives look for accountability and measure quality of service. For profit entity stakeholders look more at earnings and return on investment (ROI).

Thirdly, Governments normally do not bankrupt as quickly as for profit entities. The greater issue is the level of service and ability to meet future demands of the Citizens. Therefore, governmental financial statements emphasize the allocation of resources to programs, cost of services, and a longer-view of operations. Lastly, the budget is a legally mandated document and in many cases is used to show accountability and where the leadership of the government (City Council, Board of Directors, etc) is planning on spending the revenues of the government. Lastly, the budget is a legally mandated document and in many cases is used to show accountability and where the leadership of the government (City Council, Board of Directors, etc) is planning on spending the revenues of the government.

FINANCIAL STATEMENT STRUCTURE & GOVERNMENT-WIDE FINANCIAL STATEMENTS

The format of a typical government financial statement is MD&A, government-wide financial statements, government funds financial statements, notes to financial statements, and supplementary information (budget, pension, OPEB, etc). This structure fulfills the stakeholders needs for accountability, allocation of resources, and cost of services provided by the government. For example, the MD&A (Management’s Discussion & Analysis) is an analytical review of the government-wide financial statements and allows for Management to provide insight as finance managers are knowledgeable about the transactions, events, and conditions found in the financial statements. It provides Management the opportunity to present both a short-term and long-term analysis of the activities of the government.

Government-Wide Financial Statements

Remember a government operates different and is accountable to its stakeholders. The layout of these financial statements records how and why governments operate differently.

There are two statements in the government-wide financial statements: Statement of Net Position and Statement of Activities. Statement of Net Position shows the assets, outflow of resources, liabilities, inflows of resources, and the net position. These statements will include the pension liability, OPEB liability, etc and focus on the entity as a whole meaning, these financial statements focus on the full-accrual basis of accounting. The full-accrual basis of accounting include long-term debt (how much more does the government owe in respect to notes payable or a bond). Stakeholders can review the total net pension liability, net OPEB liability, etc. In addition, there should be one column for governmental activities (fire, park & rec, etc) and one column for business-type activities like sewer or water services.

The Statement of Activities shows the revenues and expenses of the government. The format is in such a way that the reviewer of the statement sees the expenses by function (i.e. fire, park & rec, etc) and by governmental activity (fire, park & rec, etc) and business-type activities like sewer or water activities. In addition, to conform to the government’s framework, the statement will show charges for services, operating grants and contributions, and capital contributions. Also, the statement shows the ‘net expense’. This net expense shows operating income (expense) of the government. If there is a negative number, then without property taxes, special assessments, interest income, etc the government could not function and operate on its own.

General revenues is the next section and this section shows the non-operating revenues like property taxes, special assessment, etc. The reviewer now can see the whole picture (so to speak) and understand whether these nonoperating revenues (expenses) are enough to cover the governments’ expenses to continue to operate into the next fiscal year.

The ‘Change in Net Position’ is equivalent to the for profit entity’s net income. This shows whether government’s operations earned money or if its operations lost money. If there is a positive ‘Change in Net Position’, the government’s assets would have increased. If there is a loss, the government’s assets would have decreased.

FUNDS FINANCIAL STATEMENTS

Governmental Funds Financial Statements

Remember how the accountability is a need of the stakeholders. The governmental funds is correlated with the budget. The budget is directly correlated with the accountability of the government.

There are two types of financial statements: Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances. These statements report on the short-term and do not report on fixed assets, net pension liability, net OPEB liability, and all other long-term liabilities and noncurrent assets. These financial statements do not record any transactions where the government did not collect monies (revenues) within 60 days after year-end or pay an expense within 60 days after year-end.

The types of funds included in these financial statements are general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. These financial statements have a correlation with the budget. Furthermore, payments on long-term debt and fixed assets are reported as expenditures and reduce revenues in the Statement of Revenues, Expenditures, and Changes in Fund Balances.

The format is in such a way that the financial statements give the readers a short-term perspective. In other words, how did the government do this year and how will it do in the coming year from a financial view.

Proprietary Funds Financial Statements

These financial statements report on enterprise and internal service funds. We’ll focus our attention on the enterprise funds as most small to medium-sized governments probably would not have internal service funds.

These financial statements focus on services like garbage, water, and sewer. Anytime a government provides a service and collects a certain amount for it and this type of revenue is the primary source of revenue, the fund is called enterprise funds. These types of services are closer to business activities. Therefore, proprietary funds are classified as Business-type activities in the government-wide financial statements. To be consistent with governmental accounting, enterprise funds conform to the way these types of funds operate. For example, since sewer and water services mainly collect revenues from services provided they are closer to a business than a fire department or park and recreation department. Therefore, the financial statements use the full accrual basis of accounting.

Fiduciary Funds Financial Statements

FINAL THOUGHTS

Let’s recap the reasons for why government financial statements differ from For Profit Businesses.

The financial statements are geared to the specific operational framework of governments and the format of the financial statements present the information in way that also complements governments’ stakeholders needs, revenue sources property tax revenue, and governments tend to not go out of business. These differences are the reason in audited financial statements of local governments, there can be multiple financial statements (i.e. government-wide, governmental funds, and proprietary funds) in one audit report.