Magazine article Government Finance Review

The Use of Private-Sector Standards by State and Local Governments

Magazine article Government Finance Review

The Use of Private-Sector Standards by State and Local Governments

Article excerpt

From the beginning, state and local governments have used different generally accepted accounting principles (GAAP) than their private-sector counterparts. All the same, private-sector accounting standards have played an important role in the public sector as well. This article will explore that relationship and its prospects for the future.

BACKGROUND

Some operations of a typical state or local government "are financed and operated in a manner similar to private business enterprises."1 Traditionally, the basic principle was that accounting and financial reporting for such operations should follow the same standards used by similar private-sector activities.- That is, privatesector standards were presumed to apply automatically to proprietary funds as well.

The Governmental Accounting Standards Board (GASB) put an end to the automatic applicability of private-sector standards to proprietary funds in 1993 with the issuance of GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting. That pronouncement distinguished private-sector standards issued prior to November 30, 1989, from later private-sector guidance. Specifically, proprietary funds were required to follow all private-sector standards issued prior to November 30, 1989,"except for those that conflict with or contradict GASB pronouncements."* They also were permitted to elect to consistently follow later private-sector standards, subject to those same conditions.1

GASB Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments, introduced government-wide financial reporting and required that the government-wide financial statements, like the proprietary fund financial statements, comply with all privatesector standards issued prior to November 30, 1989, that were consistent with GASB guidance. GASB Statement No. 34 did not, however, permit governments to elect to consistently follow later private-sector standards for government-wide financial reporting (other than for businesstype activities). Indeed, it actually eliminated that option for internal service funds.

PRACTICAL CHALLENGES

The Financial Accounting Standard Board (FASB) has continued to amend and supersede private-sector guidance issued prior to the November 30, 1989, "cutoff" date. …

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