Recognition and Measurement Foundations for the Models

Lesson five presentation, from chapter II of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised

Technical Definition

Technically, the different choices that go into making up the distinct models are often 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 generally refers to how to measure. Historical cost is the most frequently used in governmental funds, although both business and government (especially business) are paying attention to measuring or valuing using some type of current value. 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. In government, another issue is very important and that is called the focus, sometimes the measurement focus. Focus refers to 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. Current would include only those that last or have effect during the year. Cash, short term investments, and supplies are generally current. Total would include current and long term. As such, debt that matures in five years from how would be included in the total approach. 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. Building the models from recognition and measurement choices: It is possible to see how the two competing models are built from these recognition and measure issues. Combining the cash basis, the annual focus, and partitioning yields the compliance and liquidity model . The cash and annual orientations are important to liquidity; partitioning is critical to compliance. Combining the accrual basis, both annual and long term, and consolidation obviously yields the accrual and consolidation model . That is, all cost (whether due during the year or later) must be matched against revenue for all subentities to assess financial success, conditions, and compliance.

GASB Uses Recognition and Measurement

The Governmental Accounting Standards Board (GASB) used variants of the recognition and measurement concepts in writing one of its accounting standard statements -- statement 11. In fact the title of the standard included the phrase: Measurement Focus and Basis of Accounting. The issues addressed were broad. Should the government continue using a focus for its governmental funds that included only current items and use a modified accrual (in reality, very much like cash)? Or should it more to the business model, with total focus, accrual basis, and consolidation approach? Although this particular standard was never implement, it was an important effort to provide a conceptual foundation to the development of governmental accounting and financial reporting. The present debate can be found in GASBs exposure draft often referred to as the government reporting model, but formally titled: Basic Financial Statements -- and Management Discussion and Analysis -- for State and Local Governments. GASB is supposed to decide on the focus (what to include) and basis (when), plus whether to add a consolidated or entity wide perspective before the beginning of 1998. Essential GASB is recommending the business model (total or economic focus and accrual basis) for the entity wide report (the government as a whole) and continuation of the current focus and modified accrual (or cash) basis.

Terminology

The terminology can be confusing since different sources use recognition, measurement, focus and basis different. GASB tends to stay with focus (what to include) and basis (when to include something).

See Also: the examples and visual aides and a quiz