Magazine article Government Finance Review

Modified Accrual: Decision-Useful & Accountability-Centered

Magazine article Government Finance Review

Modified Accrual: Decision-Useful & Accountability-Centered

Article excerpt


Governmental Accounting Standards Board (GASB) Concepts Statement No. 1, Objectives of Financial-Reporting, states that the purposes of financial reporting are public accountability and usefulness for making economic, social, and political decisions. The concepts statement also says, "Financial reporting is not an end in itself but is intended to provide information useful for many purposes. Financial reporting helps fulfill government's duty to be publicly accountable ... financial reporting objectives should consider the needs of users and the decisions they make." Stated differently, the usefulness of accounting and financial reporting information depends on the decisions and decision-making processes it must facilitate.


Many governments engage in exchange and exchange-type activities financed by user charges levied on those receiving the goods and services provided. To the extent that the costs of these services are provided for by the user charges, a government has no reason to limit the level of services provided to users. Indeed, in situations such as modern-day lotteries--where user charges are set at a level intended to provide additional financial resources for governments to use for other purposes--governments seek to increase demand for those services and the additional financial resources.

In these situations, exchange and exchange-type information on the extent to which the charges for services cover the cost of providing the goods and services is critical to evaluating management of the operation, determining the level of services and rates charged, and judging the extent to which the activity is fulfilling its intended purpose. It long has been accepted by those that set standards for governments (including the GASB) and others that the primary information needed to manage and evaluate these business-type activities, accounted for in proprietary funds, is information on the flow of their economic resources (revenue and expense information) based on accrual accounting. Modified accrual information is not used to report these activities publicly, though it or similar information often is used in managing and internal reporting on such activities.

Governmental Activities. Most state and local government activities are not financed through user charges that are intended to cover the cost of the services Rather, they are financed primarily through taxes and similar revenues raised from the constituency. The appropriate levels of sources of revenues raised and the types and levels of services to be provided cannot be determined directly by the willingness and ability of the individuals receiving the services to pay for them. The key decision-making, control, and accountability mechanism in these non-exchange activities is the legally adopted annual budget. The flow of economic resources measurement focus and accrual basis of accounting are not designed to provide the information required for the most fundamental decision and accountability needs associated with these activities.

Budget Process Is the Key Decision-Making Process. The budget process is the basis for deciding the types and amounts of revenues to be raised and the uses to which resources will be put to accomplish various general government objectives. The GASB's recognition of this decision model and context pervades the general government discussion in its objectives concept statement, which indicates that the legally adopted budget is a government's most significant financial document. Further, the concept statement says:

      Budgets result from the legislative process and require
   resolution of conflicting views about the way in which and extent
   to which financial resources will be raised and used. The citizenry
   participates in the budget process either directly or indirectly,
   through elected representatives of advocate groups. … 
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