Defining the Fundamental Elements

Defining the Fundamental Elements 2

The GASB has a mission to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for those utilizing financial reports and guide and educate the public.

The "Plain-Language Article" I decided to review is entitled "Defining the Fundamental Elements of Financial Reporting" published in 2007. This article outlines the fundamental elements of financial statements, including assets and liabilities. This is included under Concept Statement 4. Concept statements create a standard-setting framework in order to guide the Board and help maintain a consistent approach from standard to standard.

Concept Statement 4 "establishes definitions for seven basic elements of historically based financial statements of state and local governments" (gasb.org, 2007). This statement defines the fundamental components of a statement of financial position. The fundamental components of a statement of financial position include assets, liabilities, a deferred outflow of resources (consumption of net assets by the government), a deferred inflow of resources (an acquisition of net assets by the government), and net position (residual of all other elements outlined).

Defining the Fundamental Elements 3

Other organizations such as the FASB, IASB, and FASAB, are finalizing their definitions of elements in financial statements. The GASB has developed definitions of individual elements that are independent from each other. It is common to build definitions of financial statement elements based on definitions of an element or elements, however the GASB does not believe any elements should be treated as if it is more important than the others.

Other organizations have used a definition that would cause revenues to be seen as an inflow of, or an increase in, assets. By this definitions expenses are seen as an outflow, or using up of an asset. However in order to understand revenues and expenses you must first understand assets and liabilities. The GASB considers the independent definition approach more appropriate due to the importance of the resource flow statements to state and local governments.

The importance of the interperiod equity concept caused the GASB to decide that deferrals should be defined as separate elements. Interperiod equity is a government's obligation to disclose whether current-year revenues were sufficient to pay for current-year benefits,