The Governmental Accounting Standards Board (GASB) describes Statement 34 as "...the most comprehensive governmental accounting rule ever developed." Unfortunately, the statement has serious defects, but they can be remedied.
In the early 20th century, many government organizations controlled spending by a system called fund accounting. In 1984, when GASB was established, state and local governments were still using the system, even though many organizations had found that an accrual accounting system provided better control at a lower cost. In 1990 GASB issued Statement 11, which required an accrual accounting system, but it was not implemented.1
In 1995 the board issued an Exposure Draft that required two sets of financial statements, one based on the accrual system, essentially as described in Statement 11 (now called the governmentwide system) and the other based on fund accounting. Statement 34 continued the requirement for two sets of statements with two sets of rules. This is the principal cause of its defects.
Government-wide Financial Statements
The rules for the government-wide financial statements are based on the interperiod equity concept2 Basically, it means that financial performance was equitable if revenues at least equaled expenses of that year. The transactions that are included in the revenues and expenses in the current year do not quite correspond to the government-wide rules in Statement 34.
Fund-Accountinq Financial Statements
Fund-accounting financial statements are based on accountability, which has several facets. One has to do with financial condition and results of operations. Another is compliance with a legally adopted budget. A third is "assisting in determining compliance with finance-related laws, rules and regulations." We believe reports on the funds named in Statement 34 are not necessary to meet the accountability objective. Accountability requires only a report of compliance or noncompliance-a yes/no statement.3
Analysis of Funds
Statement 34 requires that information on 11 types of funds be reported. Data reported in several funds are also available in the government-wide system, and in some cases, the rules are confusing.
As just one example, the rules for the general fund are significantly different from those applicable to the measurement of revenues and expenses in government-wide accounting. In the government-wide system, outflows of resources are measured as expenses, but in the fund-accounting system they are measured as expenditures. An expense is reported when a resource is consumed and charged to the agency consuming it. An expenditure is reported when the resource is received and charged to the agency receiving it. Thus, the two systems report different amounts for items with the same label. The confusion and extra bookkeeping required by the general fund are justified only if the resulting information describes an important aspect of performance that is not visible in the government-wide system; no such justification is given.
There also are differences in the measurement of revenues. Property taxes in fund accounting are measured as revenue when they are "available"during the period for which they are levied or shortly thereafter. But property taxes in the government-wide system are measured at the assessed amount, less an allowance for unpaid taxes.
Requiring both a fund-accounting system and a government-wide system requires more record-keeping.
Statement 34 is different from all other standards. Instead of stating which alternative, expense or expenditure, is the preferred way of reporting outflows, it requires both. Most standards require the use of expenses. No reason is given for believing that expenses are more important for business-type activities, and expenditures are more important for government activities. …