Long term obligations can be viewed as items that will come due in more than a year from now.
Long term fixed asset are major physical items that will last longer than a year.That is to say, obligations or liabilities are future demands or sacrifices; assets are future benefits or values. Obligations are usually called liabilities. Long term assets of interest here are usually called fixed assets, or property, plant and equipment, although there are other types of long term assets, such as investments.
Long terms items are important in that they can provide significant resources, flexibility, or capacity for government. Governments can obtain needed money from loans, gain political support by making long term promises or commitments, and use the operational capacity of major physical assets to run the government.
Notwithstanding the actual importance of long term items, governmental accounting rules for governmental funds do not put a major emphasis on these items, certainly not the same type of emphasis that current items receive in the financial statements of governments of governmental funds. In the compliance and liquidity model that dominates government fund accounting and financial reporting , neither long term obligations nor fixed assets are reported in the governmental funds unless cash changes hands to acquire or pay for them. If a long term obligation (such as a bond) is not due in the current period, it is not in the governmental funds and thus does not affect fund success or conditions . The same holds for long term assets if it is not paid for during that period. Even if a long term or fixed asset is paid for during the current year only the expenditure, not the asset itself, goes in the fund statements. Both long term obligations and long term physical assets are placed in account groups , which are just lists or memorandum.
Thus, a government can hold significant long term obligations or assets and neither will help or hurt reported success or conditions of the governmental funds.
Because financial reporting for the governmental funds does not emphasize the impacts of long term items, planning becomes all the more important in handling these items. Planning involves what the government needs, what it can afford, and how to pay for the long term items. Some aspects of planning are covered in this chapter.
A government can have many types of long term obligations. These include:
Long term fixed assets can include:
It is these long term obligations (liabilities) and long term fixed assets that are the main concern of this chapter. Governments can also hold other long term assets, including intangible assets, such as stock and bond investments. These investments are discussed in lesson 5 on investment strategies in this chapter. Investment strategies can be viewed as a way to save for acquiring long term physical assets or pay off long term liabilities. The figure below (figure under construction) shows the way investments, long term obligations, and fixed assets can work together.
As with many other topics, the Governmental Accounting Standards Board ( GASB ) is considering new ways (flow of economic resources and the entity wide perspective) of how to handle accounting and reporting for long term items. Such an approach would comport with the accrual and consolidation model favored in business. However, the compliance and liquidity models still prevails -- these obligations and assets do not receive emphasis in the governmental funds of the financial statements. In an entity wide perspective ,that is, reporting on government as a whole, and in a focus where the flow of economic resources is used, long term items would play a greater role in determining financial success and conditions.
Although the financial statements for the governmental funds do not carry much information on long term obligations in any one place, relatively good information on long term obligations can be found in the notes to the financial statements , special schedules , and statistical sections . For example, data on pension obligations including the percentage of the obligation that is funded is in the notes. Additionally, some of the indicators to measure debt burden are in the statistical section and were reported in chapter 3 under the lesson, Using the Financial Statements . Less is available on long term fixed assets in the statistical section. In general, information on long term fixed assets is scant for those fixed asset obtained by the governmental funds.
In order to convey this material about long term items, this chapter is divided into five lessons: