Alternative Reporting Models: Compliance and Liquidity v.
Accrual and Consolidation
Lessons in
chapter II
of
Financial Reporting in Government
By
Dr. John Sacco
,
George Mason University
Revised
Saturday, April 12, 1997
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What goes into a financial report depends on the model
or accounting rules used. The model determines:
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which items are included in the report
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when to include the items
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how to value them
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whether to report by subentities or the
government as a whole
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One major assumption in the existence or presence of
these models is that government needs different types of
information than business and thus should have a
different model or set of principles. The competing
assumption is that both need the same type of
information and that there is one best model for both.
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The purpose of the compliance and liquidity is to make
sure that the government raises and spends money as
legally authorized (compliance) and that there is enough
money to cover the spending for the period (liquidity).
Two principles are at the heart of implementing the
compliance and liquidity model. One is the fund; the
other is cash basis.
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The accrual and consolidation model is considerably
different from the compliance and liquidity model. It
requires that all cost be covered, that both annual and
long term items be included, and that all subentities be
aggregated. It is widely used in business financial
reporting and accounting. In business it is basically
designed to measure profit; in government, it would be
used to assess intergenerational equity or interperiod
equity.
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Technically, the different choices that go into making
up the distinct models are called recognition and
measurement choices, or when to recognize an item and
how to measure it? Recognition or when to recognize an
item is usually called the accounting basis. The cash
basis versus accrual basis is the issue in government.
Measurement refers to what items to include or emphasize
in the financial reports. In government, the issue is
whether to emphasize annual items or both annual and
long term items. Sometimes the terms current and total
resources are used instead of annual and long term. One
other broad issue is also contained in the government
debate. It is partitioning versus consolidation, with
partitioning referring to reporting by subentities or
subunits and consolidation referring to reporting on an
aggregate basis. A fourth accounting issue in building
models or conceptual frameworks is how to value the
items. This is a major issue in business but not so in
government. Government relies heavily on historical
cost. Businesses often get into the market value of
items.
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Having said all this about models, some analysts feel
that the impact of different models is exaggerated.
These people feel that interested parties obtain
information from many sources and will discount the
information from a particular model if the model
produces poor or inaccurate information.
See Also: the
introduction
, a
pretest
, a
discussion
, the
study aides
, a
test
, and your
progress evaluation