Have you ever looked at a governmental annual comprehensive financial report or compared it to a corporation's financial reports? You might wonder why they are different. In this article, we will discuss two of those differences, and you can decide whether the differences are helpful or destructive.
The “Government-wide” or consolidated financial statements are similar to business financial statements but with different names. For example, an Income Statement for a business is called a Statement of Activities for the government, and a Statement of Net Position for the government is called a Balance Sheet for a business.
An income statement calculates net income and revenues minus expenses for a period. In addition to general revenues, the government's Statement of Activities includes program revenues such as service charges and operating grants. Expenses are listed by program, and net expenses are included by governmental and business activities and by component units.
The government's Statement of Net Position, which is again comparable to a business's balance sheet, is divided into governmental, business, and component units.
Two items on the government's Statement of Net Position that are not on a business's balance sheet are deferred outflows and inflows.
Deferred Outflows
In the Statement of Net Position, deferred outflows are positioned right beneath Assets. Assets are those things that will provide future economic benefits to the organization—we all like assets. Deferred outflows are treated like assets but aren’t assets. What?
Examples are losses incurred when the government issues debt to pay off old debt and decreases in the market value of complicated hedging derivatives. Instead of recognizing these losses and decreases immediately, governments reported them as deferred outflows and amortized them over time. Governments are also allowed to shield their financial position and current expenses from increases in their pension debt. For example, suppose the value of pension assets decreases due to unrealized losses in the market. In that case, the majority of the decrease is reported as a deferred outflow, which is included on the asset side of the balance sheet. In some way, market losses masquerade as assets.
Deferred Inflows
Conversely, deferred inflows are resources on the Statement of Net Position below liabilities. Examples are grants received in advance when all eligibility requirements except timing requirements have been met, special assessments that have not been collected, and property taxes received for a future period. By placing these in deferred inflows, governments handle them like businesses would handle them as deferred revenues.
However, some decreases in the government’s pension liabilities are also reported as deferred inflows and amortized over time. This includes unrealized gains in pension assets. Therefore, an increase in the value of pension assets is, in essence, reported as a government liability. As a result, it decreases an entity's net position in this period when, in reality, they might improve it in the future. In this case, the deferred inflow resembles a debt yet is a future asset in sheep’s clothing.
Confusing, right?
Losses are assets, and gains are liabilities. And so it goes in governmental accounting. So, in a nutshell, those are two basic issues in government-wide financial statements.
Simple - right?