How governmental entities will be affected by GASB pronouncement - Research Paper Example

This is done by several different types of documents and mechanisms that together comprise what is better known as GAAP hierarchy for governments. However, not all the mechanisms and documents used by the GASB to set accounting principles and standards have the same weight and importance, hence the need of the term hierarchy which implies that some are going to be more important than others (Fischer et al, 127). In the absence of a pronouncement or another source of accounting literature, the financial statement preparer may consider what is termed as “other accounting literature.

” In this category of “other accounting literature”, it includes a variety of different sources ranging from GASB Concepts Statements that are often GASB documents that describe the conceptual framework from which GASB statements arise on the more authoritative side to accounting books and articles on the less authoritative side. Accounting for leases is one of the more technically challenging areas in accounting including governmental accounting. The following explanation aims to describe the accounting and financial reporting requirements for lessees (Ruppel, 68).

Essentially, these accounting requirements depend on whether the lease is classified as a capital lease or an operating lease. This classification is made in the same manner by governmental entities as well as commercial enterprises. However, the difference between the two is whether the lease is accounted for by a governmental fund, or by a proprietary fund. Nevertheless, the reporting requirements differ significantly. The Governmental Accounting Standards Board provides guidance to state and local governments on applying the requirements of SFAS in a manner consistent with that of governmental accounting.

In other words, governmental funds need to account for the capital assets and long-standing liabilities resulting from accounting for a lease as a capital lease consistent with how capital assets and long-standing liabilities are otherwise accounted for by governmental funds. The effect of recording capital leases on the state -wide financial statements must also be considered. The requirements of GASB can be applied by proprietary funds and in the state-wide financial statements directly, since these funds and financial statements use the same basis of accounting and measurement focus as commercial enterprises.

This often results into identical accounting treatment for these leases. The accounting for leases is derived from the view that a lease that transfers substantially all the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of a liability by the lessee (Fischer, 118). In recording capital leases by a lessee, there are significant differences in the accounts used by the Governmental Accounts Standards Board and proprietary funds. In the case of GASB, the primary emphasis is on the flow of financial resources, and expenditures are recognized on the adjusted accrual basis of accounting for leases.

Therefore, if a lease agreement is to be financed from general governmental resources, it must be accounted for and reported on a basis consistent with governmental fund accounting principles. Furthermore, capital assets used in governmental activities acquired