A paper from the Governmental Accounting Standards Board has outlined key differences between the needs of users of state and local government financial information and users interested in for-profit businesses.
According to the paper, the primary purpose of governments is to enhance or maintain the well-being of citizens by providing services in accordance with public policy goals. In contrast, for-profit business enterprises focus primarily on wealth creation, interacting principally with those segments of society that fulfill their mission of generating a financial return on investment for shareholders.
"These significant differences, coupled with the sizable role that state and local governments play in the U.S. economy, are the primary reasons why separate accounting and financial reporting standards for governments are necessary," said the chairman of the Financial Accounting Foundation's Board of Trustees, Robert Denham, in a statement.
Among the other crucial differences that generate user demand for unique information:
- Governments serve a broader group of stakeholders, including taxpayers, citizens, elected representatives, oversight groups, bondholders and others in the financial community.
- Most government revenues are raised through involuntary taxes rather than a willing exchange of comparable value between two parties in a typical business transaction.
- Monitoring actual compliance with budgeted public policy priorities is central to government public accountability reporting.
- Governments exist longer than for-profit businesses and are not typically subject to bankruptcy and dissolution.
GASB is a nonprofit, independent organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments.
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