Alternative Reporting Models: Compliance and Liquidity v. Accrual and Consolidation

Glossary for chapter II of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Monday, August 04, 1997

accounting rules: The phrase accounting standards or principles 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 provides an approach that recognizes transactions and events when the activity occur regardless of when the cash changes hands. As long as something is estimatable 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.
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.
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.
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.
consolidation: For sundry reasons including economic, legal or tax factors, activities are operated in separate units but essentially controlled by or accountable to one overarching unit. If all these units are summed or aggregated in the financial report (of course eliminating any double counting) then the report is said to be consolidated. In business, consolidated reports are the practice and there are specific accounting rules for consolidation. Governments, even though one unit may be accountable for many subunits or subentities, do not report on a consolidated basis. Thus, no one set of numbers exits for the entire unit or jurisdiction.
depreciate: Consists of the allocation of the cost of a fixed asset (e.g. a building) over its useful life. Use in accrual accounting to match all costs against revenue earned to determine net income.
EMH: EMH stands for efficient market hypothesis. Technically, it means that all relevant information about a firm is immediately reflected in the security prices (stocks primarily but bonds too). The hypothesis has different levels. At the most demanding level, all information (public and private) is reflected in the security's price. At a less demanding level, just the public information is included. Non technically, EMH means that stock and bond market prices cannot be fooled by manipulation of information. Trying to show a profit when one does not exits, does not work according to EMH. Since governments do not have stocks EMH may have relevance to bond prices. EMH may have a general indirect relevance in government. People may move out or not want to live in places that have poor financial success, conditions, and compliance.
FASB: FASB stands for Financial Accounting Standards Board. FASB was organized in 1974 as an independent rule making body for accounting and financial reporting in the private sector. It is overseen by the Financial Accounting Foundation and supported by private contributions. It is seen by the Securities and Exchange Commission (SEC) as the official rule making body for accounting and financial reporting in the business sector and in the nonprofit sector not controlled by government. It uses a due process procedure for making rules, that is, debate is public and interested parties have an opportunity to express their opinions about proposed rules.
full faith and credit: People who are creditors of government are often protected from loss by the full faith and credit of the government. This means that the government will either use future taxes or borrowing to pay off loans or bills. 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.
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 types of funds and specific funds within those three broad types.
GASB: GASB stands for Governmental Accounting Standards Board. It was organized in 1984. Like FASB it falls under the umbrella of the Financial Accounting Foundation. It makes rules for state and local government and nonprofits controlled by government. GASB is recognized by the Securities and Exchange Commission (SEC) as the rule making body for state and local government. It follows due process in that interested parities can comment before rules are accepted. GASB is independent in that its costs are covered by contributions.
governmental funds: Funds are divided into three categories: governmental, proprietary, and fiduciary. Governmental funds handle most of the taxes and non business like expenditures. Governmental funds are guided by the compliance and liquidity model. This governmental category includes the general fund, special revenue funds, capital project funds, and debt service funds
historical cost: Historical cost is one methods for valuing assets, liabilities, or equity. Historical cost means the price originally paid or the value given. Often auxiliary costs are included such as commission, fees, and transportation. Both business and government rely heavily on historical cost since it is usually the easiest to attach to an item. Some proponents of historical cost also argue that it is the figure with the least amount of error, but this position is open to debate. In business, the original historical cost is adjusted by depreciation or some other allocation, but not in regular government funds.
intergeneration equity: Future generations should not have to pay for benefits received by current generations.
intergeneratational: The term has a long history, going back to the early 1900's. When used as intergenerational equity, it means that costs or promises incurred in one generation should not be pushed onto future generations. The term interperiod equity is also used as a synonym.
interperiod equity: Similar to intergenerational equity but more generic. Taxpayers for future periods should not have to pay for benefits received by those living during the current period.
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.
market value: Market value is one methods for valuing assets, liabilities, or equity. Actually, there are several variations to arriving at market value, such as what is the market value if a unit is selling versus buying. More generally, it relates to what price an item would fetch in the market or in arms length bargaining when parties openly buy and sell. Since many items are not being sold, it is often difficult to place a market value on these items.
matching: In the accrual logic, a central assumption is that profits or losses are calculated by comparing or matching all revenue earned with all costs incurred. In government, this comparing or matching would be central to calculating intergenerational equity, that is, are sufficient revenue collected this period to cover all costs, whether actual outlays or promised outlays.
measurement focus: The measurement tells the accountant what to include in the financial statements. In the compliance and liquidity model, only annual or short items are included such as cash and accounts payable. This is called the flow of current financial resources model. In the accrual and consolidation model, both annual and long term items are included. Fixed assets such a buildings and any long term debt associated with it would be included in the financial statements. This is called an economic resources model since inclusion goes beyond just current financial resources.
model: A model is an attempt to capture the important elements and relationship among the elements for a given issue or task. It is a simplification of reality.
net cash flow: This concept is largely future oriented rather than past oriented. It questions whether more cash will come in than go out. It also has a timing element since cash coming in early can be invested and earn money. Thus heavy inflow early can offset lower inflow later. Since this concept is future oriented, predicting net cash flow is very difficult. Future amount, timing, and interest rates must all be predicted.
recognition and measurement: These are the general guidelines for building financial accounting and reporting systems. They refer to what to include, when to include, and at what value. They reduce the infinite amount of information to information relevant to decision makers.
subentities: Government, for a variety of reasons, may have many subunits that are accountable to a single or overarching unit. A main unit, called a primary unit, may form many other units to carryout specific tasks. A government may, for example, form a housing unit or recreation unit to operate these special functions.
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 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: The relationships that take place between the unit and units in its environment are called transactions. Events occur with the passage of time and may not involve relationships between the unit and units in the environment. Buying supplies is a transaction but using the supplies is an event.
vested right: After an individual has worked for a certain period of time for a firm or an agency, that individual keeps certain benefits even if that person leaves the firm or agency. These are called vested rights. The period is often five years and the rights can pertain to such benefits as pension rights. For example, if a person leaves a firm or agency after having worked five years, the person might be able to collect a pension upon retirement from that firm or agency if the person was vested.

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