Question

Question A: Governments are not required to accrue interest on long-term debt in governmental funds even if the interest is applicable to a current period and will be due the first day of the following year. Explain and justify the standards that permit this practice.

Question B: Per the provisions of Statement No. 34, governments must report their capital assets similar to businesses in their government-wide statements. Yet the information provided is still inadequate to facilitate the major types of decisions and judgments made by statement users. Do you agree? Explain.

Answer 1

• GASB 34 requires the reporting of general government activities in governmental funds using modified accrual accounting. GASB Intrepretation 6 futher provides the guidance on when government fund liabilities and debt service expenditures to be recognized.

  Basic concept of modified accrual accounting is to match the government fund expenditures with revenues and other resources .

  One of the key requiremet of Modified accrual accounting is debt service expenditure are recognized when they mature since the taxes are levied on debt service are levied in the year of it becoming due. Hence to match the entire financial flow( Resources in the current period and claims agains the resources) it is required to recognize the debt service expense in the period it is due.

  Exception

  However when a, payment for the debt service, is made in the current year to fiscal agent and has suffered the tax ,which is due early in the next period ,it can be accrued.