Definition and Elements of Financial Reporting

Glossary for chapter I of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Monday, October 13, 1997

account groups: Because governments make a sharp distinction between current and long term items, governmental financial statements need a place to put long term activities (i.e. assets and liabilities). Account groups are used for this purpose. Since account groups are considered memoranda, they do not need to follow strict accounting rules. For example, long-term debt may be backed only by the full faith and credit (i.e. the taxing and borrowing power), not any current assets.
accounting rules: The phrase, accounting standards, is also used; however, the purpose is the same. In order to increase compatibility among governments issuing financial reports, rules or standards are established so that similar transactions and events will be handled similarly. For instance, what is the rule for handling real estate property tax? Is it included at the beginning of the year before the tax is actually collected, or only as the tax is collected?
accrual: In developing a conceptual framework for accounting and financial reporting, accrual recognizes transactions and events when the activity occur, regardless of when the cash changes hands. As long as something is estimable and probable, it is recognized. Estimating how much pension a person is due from working one year, even though the person might not receive the pension for many years, is an example of accrual.
annual: Annual is a period of one year. In government, much of the accounting and financial reporting is geared to things that will happen and involve cash during the fiscal year.
audit: Many types of audits can be done, but financial audits attempt to determine whether management adhered to GAAP in publishing official financial statements. Government audits include not only adherence to GAAP, but also government laws and regulations.
bond holders: Bond holders are the people who buy the bonds. These people will be paid the interest rate stipulated, and, if they hold the bonds to maturity, they will get the principle too. Bonds can be traded prior to the maturity date, but the amount received will depend on a comparison between the contract interest rate and the market or current interest rate for bonds with similar risks.
bonds: Officially called debt securities, bonds provide ways for governments to raise large sums of money by borrowing. Bonds usually have a principle amount and a contract interest rate. The principle can be paid at maturity while the interest is generally paid semi-annually as a percent of the principle. For example, a government could see $10,000,000 in bonds with a 5% interest rate. If the bonds matured in five years, then the $10,000,000 would have to be paid to the bondholder. During that period, $500,000 would have to be paid in interest each year or $250,000 semi- annually. These bonds would be called term bonds, since they are due at a fixed point in time. Serial bonds come due at different points in time.
budget: The budget covers the governmental decisions on how to raise money and where to spend it. Traditionally, one of the most public decisions in government. A government may have several budgets for the different funds in government. The budget for the general fund is usually the largest. Financial reports, which should assess financial performance, including compliance with budget, are not nearly as widely debated or circulated.
cash basis: In developing a conceptual framework for accounting and financial reporting, a cash basis recognizes transactions and events only when cash changes hands. The cash basis is the opposite of the accrual.
combined: A combined financial statement is the highest level of summarization or aggregation. For example, a government may have two or more capital project funds. In the combined statement, these would presented in one column as capital projects.
compliance: Compliance assesses whether actual money- raising and spending adhere to budget mandates set by the legislative body. All the financial statements can help judge compliance, but one in particular, called budget versus actual, is used to assess compliance. Historically, annual compliance with the budget has been the main factor shaping governmental financial reports.
components (component units): Because of the complexity of governments and government organizations in a single jurisdiction, financial reporting must be designed to capture this complexity. A component unit is a legally separate or significant unit vis a vis the primary reporting jurisdiction. A water authority may be legally separate from a county but the board of the authority may be appointed by the elected officials of the county. In this case, the authority is a component unit and its financial statements must be summarized in the CAFR.
conditions: Financial conditions or position or health go mainly with the balance sheet. The idea behind the financial conditions is an assessment of whether the government has sufficient assets to cover its liabilities. Since governmental balance sheets are mainly for current or annual activities, conditions refer to whether current assets can cover current liabilities. However, long term liabilities can be introduced in a variety of ways to assess conditions. Long term debt can be compared to indicators of tax capacity to determine if a government is putting too much pressure on its capacity. Debt as a ratio of total real estate value is sometimes used to assess long term financial conditions.
current: Essentially, the same as annual. In government, much of the accounting and financial reporting is geared to things that will happen and involve cash during the fiscal year.
efficiency and effectiveness: Efficiency should be a measure of how much input was required to achieve a certain amount of output. It is a productivity measure. Effectiveness assess how much of a problem or opportunity was handled. It measures amount or degree of accomplishment.
subentities: Unlike businesses, governments do not report for the entire unit, but rather for subunits that can be called subentities . Technically, the subentity can be the primary government, organizations (perhaps component units) for which the primary government is financially responsible, or organizations which the primary government influences and ought not be excluded. The notion of subentity or subunit can also be extended to funds. Funds are subentities set- up to show the source of money and how the money was spent. Subunits also include account groups. These are used to keep track of certain long term transactions and events until the transaction or event becomes a current item. One reason for the complex expanse of subentities is the detailed, legal nature of government. Another reason is the pressure of interest groups to have governmental action protected or ear marked by giving those actions special status. Thus, a municipality can have recreation authority which it controls financially and have separate financial statements with funds and accounts for that recreation authority. The Governmental Accounting Standards Board (GASB) is considering a report on the government body or jurisdiction as a whole. This view will likely be called the entity wide perspective.
external users: One of the main users of financial reports. In fact, financial statements are produced for people outside the government, that is, external users. These people have little control over what goes into the statements, thus statements should be audited by an independent auditor.
financial performance: Performance is used as an all-embracing term to include financial success, conditions, and compliance. It is historical in perspective, referring to performance during a period (perhaps a year) just past.
fixed assets: They are also called property, plant, and equipment. These are assets used to help run or operate the government. Specifically, they many include vehicles, buildings, and machines. Under ordinary circumstances, they are not expected to be converted to cash to pay bills.
fund balance: When liabilities are subtracted from assets, there is a fund balance. A positive fund balance means there are more assets than liabilities; a negative fund balance means just the opposite. Fund balance can be complicated by the fact that part of the fund balance is reserved and part unreserved. The difference between reserved and unreserved is that the unreserved can potentially be authorized for future expenditures while the reserved cannot. Additionally, the fund balance is a residual and not necessarily a cash amount.
funds: One of the fundamental principles of governmental accounting is the fund. Funds are usually established by legislation and provide an accounting mechanism for keeping track of money raised and spent for a specific activity or set of activities. Governments have three broad type of funds and specific funds within those broad type of funds.
GAAFR: Governmental Accounting, Auditing, and Financial Reporting, or blue book, which is now published by the Governmental Finance Officers Association. The book is widely used by state and local governments and prior to 1980 these books were often considered an official statement of GAAP.
GAAP: GAAP means Generally Accepted Accounting Principles . These are the principles that practitioners use to produce financial statements. They can become accepted via due process or via long term practice or both. It is the GAAP that help make financial statements compatible from year to year and jurisdiction to jurisdictions.
income statement: One of the financial statements used in business is the income statement. It is commonly referred to as a bottom line type of statement. It shows whether the business earned a profit or incurred a loss for a given period. Some government programs are carried out like business operations, and in those cases, a statement similar to the income statement is produced.
interest: Interest is the cost for using money. In the case of bonds sold by government, there will likely be a contract interest rate. For instance, if the contract interest rate is 5% and the amount of bonds sold is $1,000,000 then the annual interest is $50,000.
interperiod equity: This goal has been adopted by GABS in its objectives of financial reporting. The idea is that governments should raise enough revenue to cover all services for a given period, generally a year. Services should not be provided that will put a burden on future taxpayers or generations.
links: Link is a term used in hypertext or hypermedia to convey the notion that the user of a document can move from part to another if the word or phrase of interest is connected to the other section. The other section is usually some sort or form of elaboration on the original word or phrase of interest. In hypertext, it is more text; in hypermedia it could be voice, video, graphics, or animation.
liquid assets: Essentially the same as liquidity. Liquidity refers to how quick an asset can be converted to cash. A three-month treasury note is probably more liquid than a backhoe, but probably less liquid than money in a checking account.
liquidity: Liquidity refers to how quick an asset can be converted to cash. A three-month treasury note is probably more liquid than a backhoe, but probably less liquid than money in a checking account.
long term: Long term refers to a period lasting more than a year. Bonds, pensions, and even vacation benefits are often long term items.
principle amount: When bonds or other debt securities are sold, there is usually a principle amount, or the amount to be paid at maturity. If a government borrows $5,000,000 then the principle amount is $5,000,000.
required supplementary information: This is information that GASB has determined to be an essential part of financial reporting and should be reported with, but not a part of, the financial statements.
rating agencies: A number of companies assign a risk level to the bonds or debt issued by a government. Risk means the likelihood of default or nonpayment. The lower the risk of nonpayment, the lower the interest the government must pay. Some rating agencies give a AAA rating to the least risky government bonds.
retained earnings: Retained earnings is a phrase that is more commonly used in business financial reporting. However, it is used in government when a government has operations that are to be accounted for in a fashion similar to business financial reporting. These operations are referred to a proprietary funds. Technically, retained earnings equal any contributions made to the proprietary funds, plus any profits, minus any losses, and minus any distributions.
schedules: Schedules present data in greater detail than it is presented in the financial statements.
statement of cash flows: Cash flow statements are part of the statements produced when government operates on business accounting rules. The cash flows show where the cash originated and where it was paid, showing also how the change occurred between the beginning and ending cash amounts.
statistical tables: Presents comparative data, often for ten year periods, and can include property values and population data.
success: Financial success goes with the operating statement or operating results. It is measured by whether the government was able to raise enough money during a given period to cover its outlays. In government, success is affected by annual and cash nature of the accounting rules. Inflows of money can include borrowing; outflow include only those due and payable, not those promised but not payable this period.
transactions and events: These are the activities that the government captures or records in order to produce financial reports. Transactions are usually activities or exchanges between the government and outsiders or exchanges among funds. Events are things that occur but are not immediately recorded. A employee earns salary or wages every minute on the job, but this event is only recorded at set times.
transfers among funds: Since governmental financial statements are based on funds, there is often a transfer among the funds. For example, the general fund may transfer money to the debt service fund so that fund can pay interest due on bonds. Because funds are the main accounting entity in government no effort is made to eliminate any double counting among funds and produce a consolidated statement for the entire government.

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