What it means
Every set of financial statements follows a rulebook. For US companies that rulebook comes from the Financial Accounting Standards Board (FASB), and for state and local governments it comes from GASB.
GASB was established in 1984 and, like FASB, it operates under the Financial Accounting Foundation, which is independent of the governments whose reports it governs. Government accounting is different from business accounting because governments exist to deliver services, not to make profit.
Their main questions are whether money was used in line with the budget and the law, and whether the government can keep paying for services and debts in future. GASB standards therefore cover things such as fund accounting, pensions, infrastructure assets and long-term debt.
GASB standards are not laws, but in practice they are widely required. Many states require local governments to follow them, bond investors expect them and auditors judge government financial statements against them.
A government that departs from GASB may find its audit opinion qualified, and that can raise its borrowing costs. Over the years GASB has made some important changes.
It required governments to report the full cost of their pension promises on the balance sheet, which made large unfunded liabilities visible for the first time in many places. It also set out how to report infrastructure and leases so that the public can see the true scale of what a government owns and owes.
For anyone dealing with a public body as a customer, supplier or lender, GASB-based financial statements are the starting point. Knowing that they follow a different logic from commercial accounts helps you read the numbers sensibly and ask the right questions.
One distinctive idea is fund accounting. Instead of one set of figures, a government divides its money into separate funds, such as a general fund, a road fund and a water utility fund, each with its own rules about what the money may be used for.
Readers therefore need to look at both the fund-level statements, which show whether money was spent as planned, and the government-wide statements, which show the full long-term position.
In practice
Real-world examples.
Example
A city issues $50,000,000 of bonds to build a new water treatment plant. The city's finance director follows GASB rules to decide how to report the debt and the plant on the government-wide statements, and bond investors rely on the audited statements when pricing the issue.
Example
A county's auditor reviews the year-end accounts and finds that the pension liability was not reported in line with the latest standard. The county restates its accounts, and the correction shows a much larger long-term obligation than before.
Example
A software company bidding for a contract with a school district studies the district's annual financial report. Knowing that it follows GASB standards, the company's analyst looks at the fund statements to see which budget lines pay for technology purchases.
Case study
Seen in the real world.
Riverbend County is an illustrative, fictional local government that had always reported its pension costs only when it paid them each year. When a new GASB standard required it to show the full pension obligation on its balance sheet, the finance office was concerned.
The restated accounts showed a net pension liability of $180,000,000 that had never appeared on the balance sheet before. The county's bond rating was reviewed, and the finance director explained to residents that the liability was not new, only newly visible.
The county then adopted a plan to increase contributions by $6,000,000 a year, and the story shows how reporting standards can push a government to deal with an obligation instead of postponing it. Three years later, the same county used the clearer figures to negotiate with its employee unions. Both sides could see the real size of the obligation, and that shared picture made a reform of future pension benefits far easier to agree.
Watch out
Common mistakes.
- Confusing GASB with FASB, when GASB sets the rules for state and local governments and FASB sets them for private companies and non-profit organisations.
- Assuming GASB writes accounting rules for the federal government, when federal standards come from a separate body.
- Reading government accounts as if they were company accounts, when the aim is accountability for public money rather than profit.
Questions
People also ask.
Who funds GASB?
It is funded mainly through the Financial Accounting Foundation, which gets income from sources such as sales of publications and fees from the market for municipal debt.
Do governments have to follow GASB?
The standards are not federal law, but state laws, auditors and bond investors make them effectively required for most state and local governments.
What does GASB cover that companies do not face?
It covers topics specific to public bodies, such as fund accounting, budgetary comparisons and the reporting of public infrastructure.
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