CHAPTER 3
State And Local Governments:
Overview, Comprehensive Annual
Financial Reports And Governmentwide Statements


Learning Objectives
• Able to
– Identify various aspects of state and local
governments including
• Characteristics and nature
• Financial reporting objectives
• Financial reporting standards
– Familiar with management discussion and
analysis reporting requirement


Learning Objectives [cont’d]
• Know the government-wide financial
statement components
– Statement of net assets
– Statement of activities

• Understand the display used in governmentwide financial statements


Nature of Governments
• Government entities are not just federal
government
• Extensive number of state and local
governments

• These entities are governed by
GAAP(generally accepted accounting
principals) which are set GASP


Levels of Government GAAP
Level A

GASB Statements, AICPA pronouncements
made specifically by GASB

Level B

GASB technical bulletins and AICPA industry and
accounting guides and Statements of Position if
made specifically applicable and cleared by
GASB

Level C

AICPA practice bulletins cleared by GASB and
EITF consensus positions, if GASB creates such
a group

Level D

GASB implementation guides and industry
practice that are widely recognized and prevalent



Government GAAP
• Requires the display of two distinct financial
statements
– Government-wide financial statements
• Uses full accrual accounting recognition

– Fund based financial statements
• Uses both modified and full accrual accounting
recognition


Financial Report Enables User to:
• Asses the finances of the government including
the current year’s operation
• Determine whether the government’s overall
financial position is improving or not.
• Evaluate whether the government’s current year
revenues were sufficient to pay for all the
current year’s services.
• Identify the government’s cost of providing
services to its citizens


Users Abilities (cont’d)
• Determine how the government finances its
programs such as program revenues, user
fees or tax revenues.
• View the extent to which the government has
invested resources in capital assets.
• Provide the ability to compare financial data

between governments


Characteristics of Government
Entities
•
•
•
•

Organized to serve citizens in their jurisdiction
Principal source of revenue is taxes
A profit motive is rare
Each entity has an accountability and
stewardship for resources entrusted to
government
• Measuring quality or quantity of services
provided can be difficult


Characteristics of Government Entities
[cont’d]
• A government organization has one or more
of the following
– Officers elected by popular election
– Possible dissolution of organization with net
assets reverting to a government
– Organization has power to enact and enforce tax
levy
– Organization has authority to issue tax-exempt

debt


Who uses Government Financial
Statement
Financial Reporting provides information that
facilitates decision making by user groups
– Citizens of government entity
– Direct representatives of citizens
– Investors, creditors, and others in lending
process


Financial Reporting Objectives
• Accountability is paramount
– Based on transfer of responsibility for resources
or actions from citizens to some other party

• Accountability fulfilled
– Financial statement display the management of
the government
– Enable data users to determine interperiod
equity


Financial Reporting Entity
• Primary Government
– State or Local general-purpose government

• Component Units

– Legally separate organizations which
• Elected officials of primary government are
financially accountable
• Financial accountability exists
• May impose a financial burden or provide a
financial benefit


Methods for Including Components in
Financial Information
• Blending
– Adding of assets, liabilities, etc. to the primary
government financial statements

• Discrete Presentation
– Presents the financial information of the
component units in a separate discrete column on
the primary government financial statements


Governmental Financial Plan
• Financial plan of government is a budget
– Provides means of control
– Expresses public policy and financial intent of
government entity
– Enacted budgets usually considered law
– Generally must be balanced


Governmental Financial Budgets

• Criteria provided by GASB governmental
budgets includes:
– Annual budgets should be adopted by every
government entity
– Accounting system should provide basis for
appropriate budgetary control
– Common terminology and classification should
be used consistently throughout budget,
accounts, and financial reports


Governmental Budgets
• Major types
– Annual operating budget
• Estimated revenues and appropriations for a
specific fiscal period
• Provides device for management and control
– Capital budget
• Control the expenditures for construction
projects, plant, and fixed asset acquisitions

• Other types include budgets to track objects,
programs or performance


Financial Reporting Uses
• Financial reports provide data for comparing
legally adopted budgets with actual results.
• Financial reports are essential for
demonstrating compliance with legally

mandated activities


Financial Reporting Uses [cont’d]
• Displays performance effectiveness or
efficiency
• Provides the level of service efforts
– Inputs
– Outputs
– Outcomes


Revenue Recognition
• The GASB classified nonexchange
transactions into four classifications
– Derived tax revenues
– Imposed nonexchange revenues
– Government-mandated nonexchange
transactions
– Voluntary nonexchange transactions


Derived Tax Revenues
• Assessments imposed by governments on
exchange transactions
• Typically are taxes that are charged when an
event occurs
• Examples include – personal income tax,
corporate or franchise taxes and sales taxes



Imposed Nonexchange Revenues
• Assessments by the government on
nongovernmental entities
• Typically are levied taxes
• Examples include property taxes, fines,
penalties and property forfeitures


Government-mandated Nonexchange
Revenues
• A government provides resources to another government
and requires that the recipient government use the
resources for a specific use
– Typically this is resources provided by the federal government to
state government or state government to city or county
governments

• An example is the federal government providing the state
government resources to train rural fire fighters
• Another example is the state government providing the city
government resources for social work or criminal justice
programs.


Voluntary Nonexchange Revenues
• Transfer of resources from one party to
another without any expectation of receiving
anything of equal value in return.
– Can be based on on either written or oral

agreement

• Examples include gifts, grants and donations
• Recognized only if recipient is eligible to use
resources


Eligibility Recognition Requirements
• No recognition if not met
– Recipient has characteristics set forth by the
provider
– Time requirements [advance payments are
recognized as deferred revenue]
– Allowable costs have been incurred for which
the provider will reimbursement
– Contingencies outlined by the provider have
been achieved