Uses of financial reporting

The use of financial reporting by governments center upon economic,

political, and social decisions, as well as assessing accountability. These uses
are accomplished by the following means:

Comparing actual financial results with the legally adopted

budgetSpending in excess of budget may indicate poor financial
management, weak budgetary practices, or uncontrollable, unforeseen
circumstances. Under spending may indicate eective cost
containment or that the quality or quantity of services provided by the
government could have been increased without going over budget.
Assessing financial condition and results of operationsEach of
the
three
user
groups described above has a dierent primary reason for assessing a
governments
financial condition and results of operations. For example, investors
and
creditors
are interested in the financial condition of a government in order to
assess
whether
the government will be able to continue to pay its obligations and meet
its debt service requirements. Similarly, these users look to a
governments
results
of
operations
and cash ows for indications of whether the financial condition of the
government
is likely to improve or worsen. As another example, the citizenry is
interested
in
the
financial condition and operating results of a government as
indications
of
the
need
to change the rate of tax levies or increase or decrease the levels of
services
provided
in the future
Assisting in determining compliance with finance-related laws,
rules,
and
regulationsGovernmental financial reports can demonstrate
compliance
with
legally mandated budgetary controls and controls accomplished
through
the
use
of
fund accounting. For example, if the government is legally required to
have a debt service fund and the existence and use of such a fund is
clear from a financial statement presentation, compliance is

demonstrated. Similarly, compliance with debt covenants, bond

indentures, grants, contracts, and taxing and debt limits can also be
demonstrated by governmental financial reporting.
Assisting
in
evaluating
efficiency
and
effectiveness
Governmental
financial
reporting may be used to obtain information about service eorts,
costs,
and
accomplishments. Users of this information are interested in the
economy, eectiveness, and efficiency of a government. This
information
may
form
the
basis
of
their
funding or voting decisions.

Accountability and interperiod equity.

GASBCS 1 describes accountability as the cornerstone of all financial
reporting in governments. Accountability requires that governments answer
to the citizenry in order to justify the raising of public resources and the
purposes for those resources. Accountability is based on the general belief
that the citizenry has a right to know financial information and a right to
receive openly declared facts that may lead to public debate by the citizens
and their elected representatives.
Interperiod equity is the concept underlying many of the balanced budget
legal requirements found in governments, which intend that the current
generation of citizens should not be able to shift the burden of paying for
current-year services to future-year tax payers. GASBCS 1 states that
interperiod equity is a significant part of accountability and is fundamental to
public administration. As such, it needs to be considered when establishing
financial reporting objectives. Financial reporting should help users assess
whether current-year revenues are sufficient to pay for the services provided
that year and whether future taxpayers will be required to assume burdens
for services previously provided.
Characteristics of information in financial reporting
In order for financial information to be an eective method of
communication, it must possess certain characteristics that improve its
eectiveness.

The following are the financial reporting objectives contained in GASBCS 1:

1. Financial

reporting should assist in fulfilling governments duty

to
be
publicly
accountable
and
should
enable
users
to
assess
that
accountability.

Financial reporting should provide information to help determine

whether current year revenues were sufficient to pay for current year
services.

Financial reporting should demonstrate whether resources were

obtained and used in accordance with the entitys legally adopted
budget. It should also demonstrate compliance with other financerelated legal or contractual requirements.

Financial reporting should provide information to assist users in

assessing the service eorts, costs, and accomplishments of the
governmental entity.

2. Financial

reporting should assist users in evaluating

operating results of the governmental entity for the year

the

Financial reporting should provide information about origins and uses

of financial resources.
Financial reporting should provide information about how the
governmental
entity financed its activities and met its cash requirements.
Financial reporting should provide information necessary to determine
whether the entitys financial position improved or deteriorated as a
result of the years 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.
Financial reporting should provide information about the financial
position and condition of a governmental entity.
Financial reporting should provide information about a governmental
entitys physical and other non financial resources having useful lives
that extend beyond the current year, including information that can be
used to assess the service potential for those resources.
Financial reporting should disclose legal or contractual restrictions on
resources and risks of potential loss of resources