The Governmental Accounting Standards Board (GASB) establishes generally accepted accounting principles (GAAP) for state and local governmental entities.
The audit law (Louisiana Revised Statute 24:514) requires the reports of local governments to be prepared in accordance with GAAP. There is an exception in the law for local governments that, under Louisiana law, cannot issue bonds.
Local governments report in accordance with GAAP to ensure consistency and comparability between their financial statements and those of other entities with similar characteristics. For example, the financial statements of a town should have similar elements to the financial statements of other towns.
The financial statements of most local governments include the following elements:
1. Government-wide financial statements, which have these characteristics:
- Are comprised of the statement of net position, which shows the balances of the local government’s asset, liability, and equity accounts as of the last day of the fiscal year; and the statement of activities, which shows the accumulation of the financial activity that occurred in the local government’s revenue and expense accounts during the year
- Are presented on the accrual basis, which means that all revenues earned and expenses incurred by the local government are included in the financial statements, regardless of when the actual cash was received or expended by the local government. For example, a utility district would include in its current year revenue the utility bills it sends out on the last day of its fiscal year, regardless of when it expects the bills to be paid by its customers. This is the same way that private businesses report.
- Divides the financial activity between that which is associated with services traditionally provided by government, such as police and fire protection (referred to as governmental activities), and the financial activity that is associated with activities of the government that are financed, in whole or in part, by fees charged to customers (referred to as business-type activities).
- Includes the financial activity of the local government’s component units
2. Fund financial statements, which have these characteristics:
- Are comprised of the balance sheet and the statement of revenues, expenditures, and changes in fund balance. These are the disaggregated funds that are rolled up, with adjustments, into the government-wide financial statements.
- The balance sheet in the fund statements corresponds to the statement of net position in the government-wide financial statements; and the statement of revenues, expenditures, and changes in fund balance corresponds to the statement of activities.
- A reconciliation is presented in the local government’s financial report between the government-wide and fund financial statements.
- Like the government-wide financial statements, fund financial statements divide the financial activity between that which is associated with services traditionally provided by government, and the financial activity that has more of the characteristics of a business (proprietary or enterprise funds)
- Are presented on the modified accrual basis, which means that revenues and expenditures are included if they meet certain criteria for recognition
3. Notes to the financial statements. This is additional information regarding the numbers in the financial statements and other matters that the local government is required by GAAP to disclose, such as additional information about the bonded debt that the local government has issued
4. Management’s discussion and analysis. This is a narrative that summarizes and analyzes the information in the local government’s financial statements, and gives additional information about the financial outlook for the government
There may also be fiduciary fund financial statements (if the government holds money in a fiduciary or custodial capacity on behalf of another party); and/or supplementary or additional information in the financial statements.
The information in the financial statements is derived primarily from the local government’s financial records. Louisiana Revised Statute 24:515 authorizes the Louisiana Legislative Auditor (LLA) to prescribe the form in which a local government’s financial records are to be kept. This uniform chart of accounts is available on LLA’s website, and should be used as a basis for developing the chart of accounts specific to each local government.
- Why do local government reports have two different sets of financial statements on two different bases?
- Why do the financial statements of a local government need to look different from the financial statements of a business enterprise? Wouldn’t it be better if governments acted like businesses, beginning with the way they report?