Generally Accepted Accounting Principles (GAAP)

How It Works

Government GAAP (as set by the Governmental Accounting Standards Board, GASB) differs from private-sector GAAP (set by the Financial Accounting Standards Board, FASB) in several important ways. Government accounting uses fund-based reporting, partitioning financial activity into distinct funds (general, special revenue, capital projects, debt service, permanent, enterprise, internal service, pension trust, investment trust, private-purpose trust, custodial) each with its own set of self-balancing accounts. In governmental funds, revenues are recognized when measurable and available (the modified accrual basis, meaning cash will be received within the period or shortly thereafter, typically within 60 days), not when earned. Enterprise and proprietary funds use full accrual accounting similar to private-sector GAAP. Government-wide statements under GASB Statement 34 (1999, effective 2001-2003 depending on size) also use full accrual and consolidate governmental and business-type activities. Government GAAP has specific rules for infrastructure assets (GASB 34 capitalization and either depreciation or modified approach), pension obligations (GASB 67 for plans and GASB 68 for employers, effective 2014-2015), OPEB (GASB 75, effective 2018), leases (GASB 87, effective 2022), subscription-based IT arrangements (GASB 96, effective 2023), and income taxes are not accrued the same way as private corporations. Not all cities follow GAAP. Smaller cities and villages often use cash-basis or modified cash-basis accounting, which can obscure the true financial picture by ignoring accrued liabilities such as accumulated vacation payouts, pension underfunding, and deferred maintenance. State laws typically require GAAP-compliant ACFRs for cities above population thresholds (often 5,000 or 25,000) and for any city issuing publicly registered debt. GAAP compliance is a prerequisite for GFOA reporting awards and for meaningful inclusion in the CitySpend Fiscal Health Score peer comparisons.

Related Terms

• Governmental Accounting Standards Board (GASB), The independent organization that sets accounting and financial reporting standards for U.S. state and local governments.
• Comprehensive Annual Financial Report (CAFR/ACFR), A city's official annual financial report, audited by independent accountants, containing detailed financial statements, statistical data, and management discussion.
• Modified Accrual Accounting, The accounting method used for governmental funds (like the general fund), where revenues are recognized when measurable and available, and expenditures are recognized when the liability is incurred.