Question

1–11. Research Case—GASB. (LO1-1) Access the Governmental Accounting Standards Board website at www.GASB.org. Find the GASB White Paper on “Why Governmental Accounting and Financial Reporting Is—and Should Be—Different.” There are numerous differences between governments and for-profits in the accounting and reporting of financial transactions. Two accounting and reporting differences between governments and for-profit organizations relate to capital assets and major revenue sources. Using the information in the White Paper and your knowledge from your financial accounting courses (refer to a financial accounting textbook or the FASB website [www.FASB.org] if you need a refresher), discuss why there are accounting and reporting differences related to capital assets and the organizations' major revenue sources (sales and property tax revenues).

Answer 1

Only some of the topics covered in the White Paper have been identified for this assignment.

Capital assets – for-profits acquire capital assets to generate future cash flows (revenues that create wealth); whereas, the capital assets of a government are used to provide services to citizens. As a result, the valuation of capital assets is reported with different objectives in mind. If a capital asset of a for-profit experiences a reduction in service potential it is assessed and measured for possible impairment. With a government the valuation of the capital asset will be assessed and measured for impairment if the asset experiences a reduction in service potential.

Major revenue sources – for-profits’ major revenue is generated from the goods or services provided in exchange transactions. As a result, the principle for recognizing revenue under the FASB standard is: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” This is unlike governments that depend heavily on taxes or non-exchange revenues. Since property taxes are non-exchange transactions the same rules as are used for recognition of revenue by for-profit organizations cannot apply in that there is frequently no transfer of promised goods or services. For this reason, the government will recognize and report tax revenue in the period that the costs of providing the services for which the taxes were levied are provided.