Fall 2013 Issue of Horizons

Different Purposes American businesses follow accounting standards set by the Financial Accounting Standards Board (FASB). FASB states that “the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments and providing or settling loans and other forms of credit.” FASB has identified investors and creditors as the primary users of financial statements. While governments also have creditors, there is no equivalent of an “investor” in the government world, as it is not possible to own an equity stake in a government. representatives. As the needs of these user groups differ, so too does the purpose of financial reporting. Governments are created to provide their citizens with public services that businesses are not incentivized to provide. This includes a wide variety of services from law enforcement to recreational activities to road repair. The users of these services are interested in the government’s ability to sustain the services and its ability to do so efficiently. Further, they want to know if the burden of paying for current services has already been funded or shifted to taxpayers in future years. Accordingly, governmental financial statements have been constructed to focus on the services provided by governments and the revenue sources used to provide those services. Furthermore, the primary users of governmental financial statements also include citizens and elected

measured by net income and earnings per share. These key components of business financial statements are irrelevant to governments as they do not have shareholders and owners and are not focused on generating wealth. In fact, in the government environment, revenues that greatly exceed expenses year after year might be interpreted as evidence of overtaxation, or a level of services not commensurate with revenues, not of strong financial performance. Revenue Generation Another key distinction between governments and businesses is how revenue is generated. For businesses, revenue is generated through sales of goods and services in a competitive market.

In contrast, businesses are created to generate wealth for owners, which is

www.RubinBrown.com | page 27