The Business Model in Government

Purpose 

Proprietary funds, unlike governmental funds, rely on the commercial model of accounting (which is very similar to the accrual and consolidation approach discussed in this text, particularly chapter II, lesson 4). The purpose of this chapter is to examine the following elements of the commercial model which provide the basis for propriety fund accounting in government.

definitions and themes,

concepts,

tools and techniques,

rules, and

use or application

The reason for applying the business model is that certain government activities  (sale of water, motor pools, self insurance, e.g.,) are similar to those in the commercial world. As a result, proprietary funds are operated as if an owner wanted to maintain his or her investment (called capital maintenance) and earn a profit, or, as in the case of government, breakeven.

The business model follows the accrual and consolidation approach discussed in chapter 2, with the general discussion in lesson 1 of chapter 2 and the detailed examination in lesson 4. Recall that the business model was contrasted with the compliance and liquidity model, which traditionally provided the foundation for much of governmental accounting and financial reporting. The compliance and liquidity model was covered in chapter 2, especially lesson 3.

With the business model, income or results of operations are assessed by  matching all the expenses with the revenue earned during the period and by consolidating all subentities into one. The important concepts are accrual, matching, and consolidation, with the first two being central for government use of the business model. Consolidation is not used in government adaptation of the business model for proprietary funds, although consolidation is being given consideration as an important organizing concept for overall government financial reporting.

Because of reliance on the business accounting and reporting concepts, proprietary funds also depend on tools related to business, including breakeven analysis and flexible budgets. In other word, these tools help plan for breakeven (or a profit) and allow comparisons of the planned budget levels versus actual results (i.e., flexible budgets).

Two types of proprietary funds are used by government:

• internal service and
• enterprise funds.

Internal service handles situations where government units sell to or service other government units; enterprise funds tackle situations where governments sell to or service entities outside the government. A third, called permanent funds, is being considered by the Governmental Accounting Standards Board (GASB) as a proprietary fund. These are resources legally restricted to the extent that only earnings, and not principal, may be used for goods, services, or benefits.

The accounting and reporting rules for proprietary funds are made by GASB although proprietary funds have the choice to use rules from the Financial Accounting Standards Board (FASB) as long as those rules do not conflict with rules made by GASB.

In sum, one of the main reasons for using proprietary funds and the business model is to improve the efficiency in the sale of goods or services provided by the government. Theoretically, the business model requires that all costs be included in and covered by the sales price. If price is sensitive to all cost, the assumption is that cost will be managed more carefully and efficiency will be enhanced.

Learning Objectives

1. examine the extent of use or application of proprietary funds
2. understand the efficiency themes
3. gain familiarity with important concepts, including matching and accrual
4. study business tools and techniques, including breakeven, flexible budgets, and cost assignment
5. understand proprietary fund rules, including when to use these funds and how to create and report on them
6. discuss and study examples of internal and enterprise funds
7. explore the evolution of the business model and possible impacts on governmental accounting

See Also: a pretest , the lessons , a discussion , the study aides , a test , and your progress evaluation