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

Introduction to chapter II of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Saturday, August 02, 1997

Purpose

The configuration and content of financial reporting and accounting in government is affected in large measure by one major issue: should government follow the model used by business or does it need to develop its own model and set of principles? This issue is explored in detail both in this chapter and in various part of this text. The two different models are defined and presented in chapter 2. One model is called the compliance and liquidity model (see chapter 2, lesson 3 for details) . It assumes government information needs are different than those of business and thus there is a need for a separate and distinct model. The other, the accrual and consolidation model (see chapter 2, lesson 4 for details) , is essentially the model used by business. Those who see no basic difference between the information needs regard the accrual and consolidation model as the best and thus the one that should be used in government. The issue over the appropriate models is presumed to be important since the assessment of financial performance can differ depending on which model is adopted. The battle is both technical and political; technical in finding factual grounds and political in using power to settle the issue. The disagreement is also cast in terms of whether the environment of business is different from the environment of government. Here, differences in information and environment are assumed to have similar connotations or meanings.

Learning Objectives

  1. To show that financial reports are not derived from pure technical criteria.
  2. To discuss the major tenets of the competing models and underlying assumptions that have gone into developing these models.
  3. Be able to define the terms compliance and liquidity and the model these two concepts support.
  4. Be able to define the terms accrual and consolidation and the model these two concepts support.
  5. To define the technical terms recognition and measurement and their role in developing the competing models.
  6. To show the relationship between the conceptual framework projects started by the Financial Accounting Standards Board ( FASB ) and Governmental Accounting Standards Board ( GASB ) and the competing models discussed in this chapter.
  7. Be able to see the difference in reports generated with one set of principles or models versus another.
  8. To discuss the contention that choice of a model is not very consequential since users can discount inaccurate financial reports and can search for alternative sources of information.
See Also: a pretest , the lessons , a discussion , the study aides , a test , and your progress evaluation