review article: state of the art -- non-business accounting

Review Article: State of the Art -- Non-Business AccountingAuthor(s): William J. VatterSource: The Accounting Review, Vol. 54, No. 3 (Jul., 1979), pp. 574-584Published by: American Accounting AssociationStable URL: http://www.jstor.org/stable/245982 .

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THE ACCOUNTING REVIEW Vol. LIV, No. 3 July 1979

REVIEW ARTICLE

State of the Art Non-Business

Accounting

William J. Vatter

SINCE the beginning of 1978, several publications have evidenced a re- newed interest in those areas of

accounting which are somewhat outside the purview of business-oriented thought -governments, quasi-public institutions (such as hospitals, societies, and clubs), religious organizations, universities and colleges, foundations and the like. The first to appear was a proposed revision of a chapter from Governmental Ac- counting, Auditing and Financial Report- ing, published in 1968 by the Municipal Finance Officers Association. This chapter on Principles was circulated by the National Council on Governmental Ac- counting for comments to be returned by June 15. This is an improvement on the pattern of principles that has been devel- oping since 1934, but no drastic changes in the well-established pattern are ob- servable.

Some time before this, the Financial Accounting Standards Board (FASB) had commissioned a research study by Robert N. Anthony, entitled Financial Accounting in Nonbusiness Organizations. An Exploratory Study of Conceptual Issues. This was completed and published by the FASB in May, 1978, as a Research Report, in continuation of the Board's interest in conceptual developments in accounting. Following its usual practice, the Board arranged hearings to

discuss written comments on the report on October 12 and 19, and a last one on November 3. The written comments were to be submitted by September 11. To facilitate this, a ten-page "Discussion Memorandum" was circulated on June 15: this was a statement of the issues raised in the Report with additional questions added.

At this writing (December, 1978) nothing further has been released by FASB except an 11-page "Overview" written by Anthony, entitled "Financial Accounting Concepts in Nonbusiness Organizations." This paper calls attention to the need for a unifying theme from which concepts related to both business and non-business accounting might be developed. The author suggests that "capital maintenance" could serve as a starting point to build the conceptual framework. The argument for this is that both groups must balance inflows and outflows so as to avoid the erosion of capital if they are to survive. In the business firm, this produces an emphasis on earnings to cover costs, including the

This review article was solicited by the Book Review Editor.

William J. Vatter is Professor Emeritus, University of California, Berkeley.

Manuscript received and accepted January, 1979.

574



Vatter 575

cost of capital. Capital maintenance concerns the non-business organization in the pattern of operating "within the budget"-a "break-even" case of capital maintenance. On the assumption that this unifying idea could be accepted, Anthony proceeds to show that only a few major questions would need to be resolved:

(1) A principle must be developed that will distinguish operating inflows from capital inflows.

(2) Principles are needed to establish when the non-business inflows are to be recognized; realization from sales of goods or services may not be adaptable to non-business inflows.

(3) While a business charges depreciation to match expirations of capital costs with revenue, non-business organizations acquire capital assets by grants or legislation, and principles must span this gap.

(4) There are other problems, such as volunteer services, gains and losses, and the measurement of income from endowments, but these are not difficult.

This result would be desirable, but the major difficulty lies in motivation; the business firm is motivated by the hope of augmenting its capital to produce growth from profits; the typical non-business organization has no such motivation, because its capital (indeed, practically all of its inflows except service charges) is supplied by asking for it, or having a legislature appropriate it. The basic point of California's Proposition 13 is that there is no way to provide motivation for governmental cost reduction and efficiency except to limit the supply of resources. Perhaps there is a way to con- trol motivations in non-business organizations.

The only other item which this reviewer has found in current publications is a six-page condensed (typographically as well as rhetorically) "Analysis of the FASB Anthony Report," published by the Municipal Finance Officers Associ- ation. It is a digest of the report with an appendix that adds the questions posed in the discussion memorandum to a repe- tition of Anthony's 16 issues, but it offers no evaluation or comment.

Thus, the developments of the year with respect to non-business accounting are limited to the content of the Research Report, which is reviewed at length in the following pages.

THE ANTHONY REPORT

The report opens with a brief review of the current situation regarding the field of "non-business" accounting. There are a number of statements of accounting procedures applicable to such organizations as general or municipal governments, colleges and universities, inde- pendent schools, hospitals and other health and welfare agencies, churches, clubs, and museums. In addition, there are five AICPA Audit Guides, as well as a pending "Statement of Position," which when approved will apply to most non- profit institutions not now covered. Sev- eral states have laws which spell out the principles to be followed by their governmental units, but these are not consistent with publications of the National Coun- cil on Governmental Accounting, nor with the AICPA Audit Guides. In about half of the 50 states, the state accounting systems are on a cash basis, or some other basis not consistent with NCGA positions. A research study covering the reports of 46 cities indicated that more than half of them did not comply with NCGA principles. Some reports in the municipal area are seriously deficient. Jan Lodal is cited (p. 4):



576 The Accounting Review, July 1979

New York is perhaps the outstanding example of such a situation, having "balanced" its books according to its own self-imposed financial policies and system while accumu- lating a true deficit of $4 billion.

Anthony adds, "some users find existing financial reports deficient in that they provide fragmented information, are un- necessarily inconsistent in format and terminology with financial reports of business enterprises, and therefore are difficult to understand" (p. 4).

These and other considerations are seen as pointing to a need for action of the sort which has been the work of the FASB, and especially the need for a conceptual framework-"a set of broad, internally consistent fundamentals, and definitions of key terms." The purpose of the Anthony report is "to identify the problems that would be involved in ar- riving at one or more statements of objectives and basic concepts of financial reporting of non-business organizations."

The report does not attempt to define a "non-business organization," but the term "should be understood to include, roughly, governmental and other non- profit organizations" (p. 7). A more precise definition is deferred to Chapter 5.

The definition does not really emerge there, either, being lost in a complex of arguments concerning the criteria to be applied in establishing distinctions between business and non-business organizations.

There is, however (p. 8), a list of 25 non-profit organizations from an ex- posure draft dated April 1, 1978 of the AICPA Accounting Standards Subcom- mittee on Nonprofit Organizations. This list is fairly exhaustive, and it is "useful background for thinking about the problem." Anthony sets up two categories of non-profit organizations: Type A which includes "non-profit organizations [which] obtain their financial resources

entirely, or almost entirely, from revenues realized from selling goods or rendering services" (p. 9), and Type B which obtain "a significant amount of financial resources from sources other than the sale of goods and services" (p. 10).

By way of further clarification of the scope of the study, the author gives his reasons for excluding the subjects of in- ternal accounting, budgetary information, special purpose reports, and standards, as such. Human resource and social accounting as well as the measurement concept (departures from historical cost) are excluded, except that "depreciation on replacement cost, and the computation of endowment earnings in periods of changing price levels are exceptions to the basic approach." Issues having to do with multi-level and con- solidated reports, affiliated and ancillary organizations, or overlapping of interests are excluded as matters of standards rather than concepts. There are six pages of premises of the study, mostly concerned with the accounting model, refer- ences to earlier studies, and assumptions about users of financial information.

The plan of the report is given:

Chapter 2. Problems of identifying users and their information needs.

Chapter 3. Alternative concepts of reporting; Operating ver- sus Financial Flow State- ments.

Chapter 4. Alternative concepts regarding certain items reported in Financial Statements.

Chapter 5. Three basic issues regarding the appropriate boundaries for a set of accounting concepts for non-business organizations.



Vatter 577

A section is devoted to special terminology, but since these definitions are restated more concisely (in a longer list which does not include "spending"), we defer discussion of them here. However, we note that

Spending has to do with the resources used in an accounting period. It is an intentionally vague term, broad enough to encompass the alternative specific concepts of encumbrance, expense, expenditure, or cash disbursement. Its only purpose is to permit statements to be made that do not imply a preference for one of these specific concepts. It is not recom- mended for use in a concepts statement; a concepts statement should use one or more of the specific terms, depending on the approach that is finally decided upon (p. 30).

Chapter 2 is concerned with two of the 16 basic issues. One is identifying the principal classes of users of non-business reports; the other is identifying the information needs of these users that can be met by general purpose financial reports.

The list of users includes: (1) Govern- ing Bodies, (2) Investors and creditors, (3) Resource-providers, (4) Oversight Bodies (i.e., regulatory agencies or com- mittees of legislatures), and (5) Con- stituents (taxpayers, the general public, participants in a health maintenance organization, or members of a club or fraternal organization). The author recognizes the lack of sharp distinctions among these groups. They overlap; they are not exhaustive; not all of them are found in every organization; their importance varies as between different entities and at different times; they are not equally competent; nor do they all have sufficient time to form positive judgments from the review of financial reports. There are other groups who use financial information that are not included, because their needs are highly individual or special, and cannot be considered in formuating a conceptual framework.

Based upon this configuration of users, the general nature of user needs for information is set up in four categories: (1) Financial Viability, (2) Fiscal Com- pliance, (3) Management Performance, and (4) Cost of Services Provided. Finan- cial viability comprises more than the usual tests of solvency and liquidity; also involved are (a) the nature of resource inflows (the degree of confidence that the resource-flows from given sources may be depended upon to con- tinue at given levels) and (b) resource transferability (whether resources can be transferred to achieve various purposes, or whether they are restricted to specified activities). In part, viability

is indicated by the relationship between resource inflows and resource outflows during a period. This is analogous to the concept of "earnings" in a business enterprise, which also shows the difference between resource inflows (i.e., revenues and gains) and resource outflows (i.e., expenses and losses) (p. 49).

But on the immediately preceding page, the "earnings" concept was re- jected:

In analyzing the type of information needed by those interested in nonbusiness organizations, this approach [earnings] seems inadequate for two reasons. First, earnings, or profitability, as such is not an appropriate concept in a nonbusiness organization, almost by definition. Second, the groups of users identified in the preceding section have needs that cannot be satisfied by an "earnings" amount, or by a number that is analogous to it (p. 48).

Fiscal compliance refers to the spending mandates legally prescribed, (appropriations, or conditions with respect to grants) or by expressed intentions of the governing body. Users seek assurance that these mandates have been complied with, and that resources have been used for the intended purposes. Management performance is a matter of




how well the money was spent, to the extent that accounting can shed light on this. (The terms "stewardship" and "accountability" are often used for this idea, but these terms are used by some people to refer to compliance only.) (p. 50).

Thus, user needs for information about management performance are merely mentioned; since budgetary information has been excluded from consideration, it is difficult to see how users could appraise performance except by using cost of services performed, which is discussed as follows:

Citizens are interested in how much their government spends for recreational facilities as compared with roads. Prospective donors may be interested in the amount a college spends for its library compared with its athletic program. . . . Creditors, for example, may have doubts as to the long run viability of an organization that spends what is be- lieved to be an inordinate amount for adminis- tration. . . . [U ]sers also need program spending information that has a time dimension. They need to know whether current constituents receive an equitable amount of services as contrasted with that which is to be provided to future constituents (pp. 50-52).

To the writer, it seems obvious that this emphasis on comparison really suggests the clear superiority of expense (rather than expenditure) as a measure of current period costs. The report, however, passes over this point in the attempt to remain "neutral."

The chapter closes with some observa- tions on the difficulty of measuring goal attainment as expressed in money; the lack of unanimity as to the items included in user needs and their relative importance; and the limitations of financial reports in the attempt to report such things as the reputation of the organization, the ability of its personnel, and the quality of the services provided.

Chapter 3 is concerned with how financial reports can best meet the needs of

users. First, there is a summary of the general contents of the three basic financial reports used in the business area- the Income Statement, the Statement of Changes in Financial Position, and the Balance Sheet. The Balance Sheet is here viewed as of minor importance; when that issue is raised (No. 14, discussed at p. 114f.), Anthony concludes:

In short, no conceptual issue that is peculiar to the balance sheet has been identified. This may, however, be an oversight. In order to provide an opportunity to raise and discuss issues that may exist, the following is included in the list of issues: . . . Are there conceptual issues related to the balance sheet? (p. 115).

The author's position is that a thorough consideration of the various flow statements would answer the question of how things might appear (and what should appear) on a Balance Sheet.

Ten definitions are presented as special terminology (four of which were discussed at length in Chapter 1 (pp. 30- 31). These are condensed here. Financial Resource Inflows are all financial resources made available, [reviewer's italics] during an accounting period that increase an organization's equity. They consist of Operating Inflows and Capital Inflows. Operating Inflows are related to operations of the current period and include (1) Revenues and (2) Other Operating Inflows. (Gains and losses are excluded for simplicity.) Revenues are amounts realized in exchange for goods and services during the current period. Other operating inflows (Non-revenue inflows) include "all operating inflows other than revenues." (After giving examples, the author adds, "to the extent that these inflows are related to the operating activities of the current period") (p. 61). Capital Inflows include "all financial inflows other than operating inflows" but again, after giving examples,



Vatter 579

a phrase is added: "to the extent that these [capital] inflows are intended for the benefit of activities of future periods" (p. 61). Asset Conversions are transactions that "convert an asset or liability into another asset or liability but that do not result in a change in the organization's equity" (p. 61). Expenses are the "'monetary measure of the amounts of goods and services used for operating activities of the current period" (p. 61). Expenditures are the "monetary measure of the [total] amounts of goods and services acquired during the current period, whether or not used in operating activities of that period" (p. 61). Oper- ating Statement A report showing "operating inflows, expenses, and the difference between them during the current period" (p. 61). A Financial Flow State- ment reports "some or all [reviewer's italics] of the financial resource inflows, expenditures, and/or asset conversions during the current period" (p. 61). (The italics added by the reviewer cover the case illustrated as Statement F (p. 65) and further discussed herein, below, p. 581 of this paper.) The definitions of expense and expenditure are worth a comment. The cost of goods and services used during a period would include depreciation as a cost of using an asset during the period, as well as the cost of future payments which will be required to compen- sate employees for vacations, leave pay, or pensions earned during the period even though they may be payable in the future, one or many periods hence. Expenditure would not include these items, but would include purchased goods in inventory at the end of the current period.

This terminology is applied to a number of illustrative reports, the first of which is an Operating Statement which is not a "financial flow statement," i.e., one which recognizes current period costs

measured as expenses. To distinguish this from the other (financial flow) reports, the operating statement has no identifying symbol other than its title, while the financial flow statements are lettered A, B, C . . . F.

The Operating Report shows Revenues (400), Endowment Earnings (80), Grants for Operations (60), and Total Operating Inflows (540). This amount is reduced by Expenses (510) to arrive at "Operating Excess" (30). "Operating Excess" un- fortunately suggests redundance, indul- gence, or superfluity. It might have been replaced by "increase in Current Equity from Operations," or, more simply, "Operating Margin."

Financial Flow Statement A begins with the "Operating Excess" from the operating statement and adds "Noncash Expenses" (20) to obtain 50 as Total from Operations. To this are added Increase in Borrowing (38) to show Total Sources (88). Additions to Inventory (55) and Transfers to Plant (40)-a total of 95- are subtracted from the Total Sources (88) to arrive at a Decrease in Cash (7). The "Transfer to Plant" suggests that there may be a plant "group of accounts," but there is no other mention of that possibility.

Financial Flow Statement B is one that could be used to replace the operating statement by integrating its content within it. But the expense data in the first operating statement are replaced by expenditure data. Thus, while the Oper- ating Inflows remain at 540, total Ex- penditures are 545, and the Inflow from Operations becomes an Outflow of 5. This outflow is covered by the Increase in Borrowing (38), making the net Total Sources (33). Deducting the Transfers to Plant (40) (but not the Addition to Inventory (55), which was included in operating expenditures), the Decrease in Cash is again 7.




Financial Flow Statement C is in another form, showing three funds. The Operating Fund is represented only by the label, "Same as A or B." But State- ment A showed Inflow from Operations (50)-adding Depreciation (20) to Oper- ating Excess (30), while Statement B showed Operating Outflows of 5. State- ment B omits Additions to Inventory (55) since it is included in Operating Ex- penditures. These items offset each other, but it is confusing to treat them this way, having the remainders taken care of in a separate report.

Statement Cis different from the earlier ones, as transactions are added to the discussion. There are now Endowment Gifts (140) added to the Monetary Capi- tal Flows Fund, together with Endow- ment Income (70), and Endowment Gains (20), which total to 230 of Inflows to that Fund. The outflow consists of only the 80 previously included as En- dowment Earnings in the Operating Inflows. The Plant Fund also has two additional transactions, Additional Bor- rowing (25) and Grants for Plant (70). Thus, the "Plant Fund" part of State- ment C combines the Additional Bor- rowing (25) and Grants for Plant (70) with the Transfers of 40 shown in earlier reports to get Total Sources of 135. A deduction for Depreciation of (20) re- duces the Plant Increase to 115. Note that the 20 of depreciation is an expense in the plant group of accounts, but does not affect operations in any way. Oper- ating expenditures in Statement B were 545, which is expense of 510 plus inventory additions of 55 minus depreciation of 20. This is the correct expenditure figure, but it does not include depreciation.

There is still another difficulty here. The reader may have noticed that En- dowment Earnings (80) (in the operating statement) has become Endowment In-

come (70) in the Monetary Capital Flows. Evidently some of the 70 income plus 20 gains was retained in the Mone- tary Capital Flows Fund, in the form of cash.

Financial Flow Statement D arranges Revenues (400), Endowment Income and Gains (90), Endowment Gifts (140), both Operating and Plant Borrowing (63), and both Current and Plant Fund Gifts (130) to produce Total Sources (823), less the sum of Operating Expenditures (545), Endowment Fund Investments (of Gifts) (135), and Plant Additions (126), or 806 for Total Uses, to yield a Cash Increase of 17. The Investment of En- dowment Gifts (135) and the Plant Addi- tions of (126) are new items; they were not in Statement C. The Cash Increase (17) is explained as the sum of Endow- ment Cash Increase (15) and Plant Cash (9), less the Decrease in Operating Cash (7).

Financial Flow Statement E is an aggregated statement (which shows the consolidation of all funds; it is set up to be accompanied by an Operating State- ment). Because of this, it begins by adding "Operating Excess" (30), and Depreci- ation (20) to show the Total from Operations (50). The other inflows are Endowment Income (10)-the net after eliminating the Transfer to Operations (80)-Endowment Gifts (140), Addi- tional Borrowing (63) and Grants for Plant (70), to show Total Sources (333). The uses are: Additions to Inventory (55), Additional Investments (135), and Additional Plant (126), a total of 316, which leaves the Net Increase in Cash (17). These totals, 333 (Sources) and 316 (Uses), are considerably smaller than those shown in Statement D, because the Sources in the Operating Statement were left out by showing only the Net Oper- ating Excess added to depreciation, as in Statement A, to show 50 of Sources from



Vatter 581

Operations. Allowing for this, the difference in Total Sources is explained 823 less 333 is 490, the amount of Total In- flows in the Operating Statement; but although the Endowment Earnings (80) was eliminated in the aggregation, the Grants for Operations (60) should not have been eliminated, for it was not an interfund transfer. The Total Sources must be 393, not 333.

Applying the same approach to the Total Uses, reducing it by 430 to correct for the 60 error in excluding grants, we get 806 -430 = 376, the indicated amount of Uses as corrected. This result would show the Increase in Cash as 393-316 or 77, not 17, as stated; something else is amiss. The answer is that Statement E started with the Total from Operations as 50, taken from Statement A (based on the original Operating Statement), when it should have used the expenditure- based figures from Statement B, which shows the difference between Operating Inflows (540) and Expenditures (545) as an outflow of 5, instead of the inflow of 50 in Statement E. This difference would bring the Cash Increase to 17, the correct amount, but the 55 of Additions to Inventory (shown explicitly in Statement E) would then not have been shown there; in an expenditure-based report, that item is included in Operating Expenditures as in Statement D, not as a separate "Use" as in Statement E. While all this may seem trivial, this reviewer sees it as a reasonable argument against the use of different concepts and financial reports (especially the latter) for non-business and business organizations.

Financial Flow Statement F. This method of presenting the result of activities for a period in a non-business organization reflects a basic difference from any of the preceding examples. It starts by adding Revenues (400) and Endowment Income and Gains (90)-leaving out the

transfer this time to get a "subtotal" (490). Expenses (510) are subtracted from this amount to leave an unlabeled deficit of 20. This, in turn, is covered by adding Gifts for Operations (60) to produce "Operating Excess" of 40. Capital Gifts

for Endowment (140 and for Plant (70) total 210, are added to produce Increase in Capital (250). Borrowings of both kinds (63), the Additional Endow- ments (135), and the New Plant (126) do not appear. An explanation of the "In- crease in Capital" (250) not furnished in the text is:

"Operating Excess" per expense-based computation, $ 50

Less Cash Income retained in Endowment Fund 10

Operating Excess per Statement E $ 40

Add: Gift to Increase Endowment $140 Gift to Finance part of New Plant 70 210

"Increase in Capital" $250

The Total Increase in Capital (even by the definition implied) is 260, not 250. The 10 Cash left in the Endowment Fund is Income, and it is as much an Increase in Capital as Revenue less Expense. Whether Borrowings of 63, Plant Addi- tions of 126 and Cash Income of 10 ought to be ignored in a Financial Flow State- ment is not, in this reviewer's opinion, a moot question!

The remainder of the report is devoted to the discussion of 14 remaining issues, which are listed here as they appear in the report:

Issue Three Do users need a report of operating flows that is separate from a report of capital flows?

Issue Four Do users need an operating statement?

Issue Five Do users need a report of cost of services performed?

Issue Six Should financial flow statements report encumbrances as well as, or instead of, expenditures?




Issue Seven Do users need a single, aggregated set of financial statements for the organization rather than separate financial statements for each fund group? If the latter, what criteria should determine the composition of fund groups?

Issue Eight Are there conceptual issues related to the balance sheet?

Issue Nine How should the nonrevenue operating inflows of an accounting period be measured?

Issue Ten How should endowment earnings be measured?

Issue Eleven Under what circumstances, if any, should a charge for the use of capital assets be recorded as an item of spending?

Issue Twelve Should pension costs be accounted for as spending in the period in which the related services were rendered?

Issue Thirteen Under what circumstances, if any, should donated or contributed services be reported as an item of expense at their fair value?

Issue Fourteen How, if at all, should business organizations be distinguished from other organizations for the purpose of develop- ing accounting concepts?

Issue Fifteen Should the federal government and/or state governments be excluded from the applicability of financial accounting concepts for non-business organizations?

Issue Sixteen Should a single set of concepts apply to all types of non-business organizations, or should there be one set for governmental organizations and one or more additional sets for non-governmental, non-business organizations?

Issues Three through Eight are discussed in the remainder of Chapter 3, Issues Nine through Thirteen are dealt with in Chapter 4, and the last three are the focus of attention in Chapter 5. In the 125 pages or so used for these expositions, each of these 14 issues is thoroughly discussed in a general pattern, as follows: (a) introductory background, (b) statement of the issue, (c) arguments for each approach to that issue, (d) arguments against, and (e) comments of various kinds. This mode is in keeping with the intention expressed on page 29, where the

author wrote the following about these issues:

Background material . .. is intended to be entirely descriptive; if any value judgments are inferred, their inclusion is unintentional. .. . Relevant considerations relating to the issue are listed. Essentially, these are pros and cons for each of the alternative ways of re- solving the issue.

It should be emphasized again that the study stops at this point. There is no attempt to weigh the relative merits to the various pros and cons, and hence to arrive at a conclusion or recommendation on the issue. This is the task for the next stage, if and when the FASB decides to develop objectives and basic concepts....

This approach has the result of bringing to the fore (so far as can be seen) every position that could be taken by anyone connected with the study. The fact that the 53 advisors listed immediately after the preface were drawn from various organizations would tend to sharpen the issues and bring up whatever pros and cons appeared to be relevant. The group contained eight CPA firm partners, five accounting educators, 12 from various governmental organizations, six from hospitals and other health and welfare institutions, four from investment firms, three finance officers of universities, three from foundations, two from church organizations, and each from ten other kinds of organizations, such as the Com- munity Fund, a professional society, a pension fund, a museum, and a bank. With such a group of participants, one would expect that no large stone or even a small pebble would remain unturned. Some examples are given below, to elucidate:

[T]hose who favor the "expenditure" approach may refer to either of two expenditure definitions. One group favors the budgetary expenditure approach in which expenditures are recorded only for those items for which appropriations or similar resources have been provided in the current period; they would



Vatter 583

omit, for example, pensions and other liabilities that do not come due until the future and that will be discharged by appropriations or other resources expected to be provided at that time. Those who favor this definition maintain that there is no reason to record a liability if no provision is made in a current appropriation for discharging this liability....

Those who favor the conventional definition of expenditures, in which all liabilities are recorded as soon as they exist, maintain that to do otherwise is to present misleading financial information (p. 84).

In discussing the problem of timing (largely solved in business accounting by the concept of realization), the report takes the position that (pp. 123 fl):

In general, an asset is recorded when the organization receives either cash or the un- conditional right to cash or to equivalent resources.... [that have a] high probability of being received....

The revenue recognition concept stated above is a generalization that is amplified, applied to specific situations, and even changed on an exception basis by accounting standards. For example, the recognition of revenue on certain types of long-term con- struction contracts, and for certain precious metals are exceptions to the basic concept....

Although there are differences of opinion on the treatment of specific types of operating inflows . . ., it is roughly accurate to say that there are two general approaches to the measurement of the amount of such [non- business] inflows in an accounting period. These are here labeled the "matching" alternative and the "availability" alternative. ...

A useful way of sharpening the distinction between these two alternative approaches ... is to examine the differences that would result in the recording of certain types of transactions.

Assume that property taxes are levied in November 1977, are payable in 1978, and are to finance municipal services in 1978. In the matching alternative, these property taxes would be operating inflows in 1978. In the availability alternative, there is some doubt as to whether the property taxes should be counted as operating inflows in 1977 (on the grounds that the tax levy can be used as the basis of tax anticipation notes in 1977) or

whether they should be counted as operating inflows in 1978 when they are actually payable. (This doubt would be resolved in an accounting standard.)

... if dues intended to finance 1978 services were received in 1977, they would be operating inflows in 1978 under the matching alternative, but they would be operating inflows in 1977 under the availability alternative. Dues intended for 1978 activities not paid by the end of 1978, but for which payment is expected, would be operating inflows for 1978 under either alternative.

The subject of depreciation of capital assets occupies 13 pages in which the methodology related to computations is not an issue (in keeping with earlier exclusions). The following alternatives are proposed as background for discussion (pp. 137-38):

1. Do not depreciate assets. Omit depreciation expense from the operating statement.

2. Record depreciation expense when the corresponding grant, contract, or user charge for a service or program includes depreciation as one of the applicable ele- ments of cost.

3. Record depreciation expense when the governing body intends to use the funds derived from operating activities to replace the assets being depreciated.

4. Record depreciation expense when the governing body intends to use funds derived from operating activities to replace the assets being depreciated if it sets aside in a special fund an amount equal to the depreciation expense.

5. Record debt service payments as an expense, in lieu of depreciation, for assets whose acquisition is financed by bond issues with a maturity substantially equivalent to the useful life of the asset.

6. Record depreciation expense for assets whose acquisition was financed by endowment funds when the depreciation amount is returned to the endowment fund.

7. Record depreciation on fixed assets to be acquired in the future, but do not depreciate fixed assets currently on hand.

8. Do not record depreciation for assets that constitute the organization's "infrastruc- ture" (e.g., roads, dams, bridges, sewer and water distribution systems, educational




buildings). Record depreciation for other depreciable assets.

9. Depreciate all depreciable assets, as in business organizations.

. .. In discussing the above alternatives, some people make a distinction between real property and personal property. They tend to favor a depreciation mechanism for furniture, equipment, automobiles, and other personal property on the grounds that these items have a relatively short life and there is a relatively steady need to provide for their replacement . .. (pp. 138-39).

Opponents of depreciation accounting rec- ognize that under some circumstances the costs that are reimbursed through fees, grants, or contracts specifically include an allowance for depreciation or a charge for the use of facilities that amounts to the same thing. They deny, however, that this practice is a valid reason for reporting depreciation expense on the financial statements; the calcu- lation of the reimbursement should be separate from financial reporting. They maintain that if the fixed assets were donated or ap- propriated in a capital budget, the effect of such a practice would be to collect double payment for them, once at the time of dona- tion or appropriation for the asset acquisition, and the second time via user charges paid by current clients (p. 142).

With regard to Issue Fifteen, whether federal and/or state governments should be "excluded from the applicability of financial accounting concepts for non- business organizations," some of the arguments are:

Creditors ... know that the unique power of the federal government to create money pro- vides better assurance of repayment than can be inferred from any financial statement analysis....

... The national debt differs in its essential nature from the liabilities of other organizations; in particular, there is no expectation that the national debt is a meaningful claim on assets listed on an accounting balance sheet.

The federal government is sovereign. The Comptroller General has statutory authority to set accounting standards for federal agencies.... It is therefore questionable whether any useful purpose is served by suggesting that concepts developed by another organization, such as the FASB, should be applicable to the federal government (p. 176).

CONCLUSION

This long and tedious discourse has taken liberties in correcting a few mis- takes, offering some critical comments, and quoting extensively to present a sample-certainly not conclusive, perhaps inadequate, and possibly colored by the reviewer's own predilections, but nevertheless a sample-of what the report presents. The report is the culmina- tion of much time and effort in producing it, and the problems dealt with are complex and difficult to evaluate. The author and those who helped him are to be com- mended for attempting to uncover the gaps that seem to exist between business- oriented accounting, and applications of it that are made to fit "non-business" situations. Those who will work through the report as the reviewer has done will gain at least a partial appreciation of what those gaps are, even if no ways can be found to bridge them.



review article: state of the art -- non-business accounting

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