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Summary of Concepts Statement No. 1
Objectives of Financial Reporting
(Issued 5/87)

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:

1. Primary characteristics of government's structure and the services it provides:
   1. The representative form of government and the separation of powers
   2. The federal system of government and the prevalence of intergovernmental revenues
   3. The relationship of taxpayers to services received
2. Control characteristics resulting from government's structure:
   1. The budget as an expression of public policy and financial intent and as a method of providing control
   2. The use of fund accounting for control purposes
3. Other characteristics:
   1. The dissimilarities between similarly designated governments
   2. The significant investment in non-revenue-producing capital assets
   3. The nature of the political process.

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:

1. Financial reporting should assist in fulfilling government's duty to be publicly accountable and should enable users to assess that accountability by:
   1. Providing information to determine whether current-year revenues were sufficient to pay for current-year services
   2. Demonstrating whether resources were obtained and used in accordance with the entity's legally adopted budget, and demonstrating compliance with other finance-related legal or contractual requirements
   3. Providing information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity
2. Financial reporting should assist users in evaluating the operating results of the governmental entity for the year by:
   1. Providing information about sources and uses of financial resources
   2. Providing information about how it financed its activities and met its cash requirements
   3. Providing information necessary to determine whether its financial position improved or deteriorated as a result of the year's operations
3. Financial reporting should assist users in assessing the level of services that can be provided by the governmental entity and its ability to meet its obligations as they become due by:
   1. Providing information about its financial position and condition
   2. Providing information about its physical and other nonfinancial resources having useful lives that extend beyond the current year, including information that can be used to assess the service potential of those resources
   3. Disclosing legal or contractual restrictions on resources and the risk of potential loss of resources.