Governmental financial reporting objectives are influenced by the characteristics of the state and local governmental operating environment and by the needs of those who use governmental financial reports. The activities of governmental entities have traditionally been divided into two categories--governmental-type activities and business-type activities.
The significant characteristics of the governmental environment that affect financial reporting of governmental-type activities and that need to be considered when establishing financial reporting objectives are:
The Board has identified three groups as the primary users of external state and local governmental financial reports: the citizenry, legislative and oversight bodies, and investors and creditors. Financial reports are used primarily to compare actual financial results with the legally adopted budget; to assess financial condition and results of operations; to assist in determining compliance with finance-related laws, rules, and regulations; and to assist in evaluating efficiency and effectiveness.
Governmental business-type activities frequently operate in an environment that differs to a certain extent from the environment in which governmental-type activities operate. For example, business-type activities are generally characterized by an exchange relationship, manifested by user charges that may be based on the costs of providing a particular service. On the other hand, some business-type activities receive significant operating subsidies, capital grants, or taxes from the general government, diminishing the role of costs in establishing user charges. All governmental business-type activities, whether performed through separate, legally constituted entities or as departments of government, are nevertheless a part of government and are publicly accountable. The Board concluded, therefore, that the financial reporting objectives established for governmental-type activities are generally applicable to business type activities. Environmental and user need differences will be taken into account in developing specific financial reporting standards.
The Board believes that financial reporting plays a major role in fulfilling government's duty to be publicly accountable in a democratic society. Public accountability is based on the belief that the taxpayer has a "right to know," a right to receive openly declared facts that may lead to public debate by the citizens and their elected representatives. Use of financial reporting by citizens and legislative and oversight officials to assess accountability is pervasive and is implied in the uses noted above. The Board also believes that financial reporting should provide information to assist users in assessing interperiod equity by showing whether current-year revenues are sufficient to pay for current-year services or whether future taxpayers will be required to assume burdens for services previously provided.
State and local governmental financial reports should possess these basic characteristics: understandability, reliability, relevance, timeliness, consistency, and comparability.
The financial reporting objectives set forth in this concepts Statement (which are best understood in the context of the full Statement) are: