Fall 2013 Issue of Horizons

PUBLIC SECTOR

Capital Assets The purpose of capital assets also differs between governments and businesses. Capital assets are purchased to help businesses generate future cash flows. These assets include machinery for manufacturing companies, buildings for those in real estate, and vehicles for transportation services. Governments acquire capital assets to provide services to their residents (which may be different than the taxpayers in some instances). Therefore, it makes sense for governments to look at the service potential of capital assets when determining if their value has been impaired whereas businesses should examine the assets’ ability to produce future cash flows. differences between governments and businesses related to their potential for longevity. The failure rate of restaurants and other startup businesses has been well publicized by the media. Even large, well known companies are subject to a variety of business risks and occasionally fail. As a result, it is important for the financial statements of businesses to contain information about the liquidation values of assets and liabilities. Conversely, the risk of liquidation for governments is extremely low due to their ability to tax citizens. While government bankruptcies are currently at all time highs, they still only occur with one of every 1,668 governments (or 0.06%) as of January 2013. Budgets The role of budgets in governments and businesses also differs. Most businesses rely on budgets as part of their internal management structure. This tool enables the business to benchmark and track their progress throughout the year although there is no legal requirement or responsibility to adhere to the budget. Insolvency There are also key environmental

While it is true that many governments generate at least some revenue by offering services (utilities, parks and recreation fees, for example), the revenue is not typically earned in a competitive marketplace. The more significant difference in revenues is governments’ ability to generate revenues through taxes on sales, income, property, and other activities. These types of revenues are referred to as “nonexchange” transactions because they do not result from a voluntary exchange between willing participants. In fact, the parties who provide the funding under nonexchange transactions are often not the same parties receiving the services funded—or at least they do not benefit in direct correlation to the amount of funding provided. As a result, the nature of nonexchange transactions requires different accounting considerations than exchange-based revenues.

page 28 | horizons Fall 2013