This lecture covers free practice CPA questions on the FAR section covering objective of financial reporting for state and local governmental unit.
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Objectives of Accounting and Financial Reporting for State and Local Governmental Units
GASB has issued six concept statements. Concepts Statement No. 1 identifies three primary user groups of government accounting information: creditors, citizens, and oversight bodies (including granting agencies and the legislature). The information needs of government creditors are not greatly different from their counterparts in the corporate world, namely to evaluate the likelihood the government will continue to make its debt payments as they come due. Citizens and oversight bodies have a very different purpose, which is to determine whether elected officials have raised and expended the public’s money in a manner consistent with law and the public’s best interest. Satisfying this citizen “right to know” objective is not easily accomplished and commonly requires government financial reports to provide much greater detail than can be found in corporate annual reports.
One difficulty governments have in meeting the information needs of citizens is that traditional financial statements, which measure events in dollars, are not well designed to evaluate the government’s effectiveness in delivering services. For example, consider a public school system. A traditional financial report will show the sources of revenues and amounts expended, but does little to tell the reader whether the schools are doing a good job. In many cases nonfinancial measures are better indicators of performance. These might include the number of students advancing to the next grade, graduation rates, and scores on college entrance exams. Concepts Statements No. 2 and No. 5 relate to the reporting of nonfinancial measures, called service efforts and accomplishments reporting.
Concepts Statement No. 3 defines methods of presenting information in financial reports and develops the following disclosure hierarchy:
- When items (assets, liabilities, revenues, etc.) can be measured with sufficient reliability, they should be reported in the basic financial statements.
- The notes to the financial statements are intended to enhance the understanding of items appearing in the financial statements but are not a substitute for recognition when a transaction or event can be measured with sufficient reliability.
- Occasionally the GASB determines that additional information is necessary to provide context and understanding of information in the statements or notes. page 10In such cases, the GASB requires the presentation of required supplementary information (RSI). RSI appears most commonly in the form of schedules or tables. Management’s Discussion and Analysis is also an example of RSI.
- The final level of disclosure includes other supplementary information that is not required by GASB standards but which the reporting government feels is useful in understanding the operations of the government.