Basis of Accounting versus Budgetary Basis

Type: 
Best Practice
Background: 

The term "basis of accounting" is used to describe the timing of recognition, that is, when the effects of transactions or events should be recognized. The basis of accounting used for purposes of financial reporting in accordance with generally accepted accounting principles (GAAP) is not necessarily the same basis used in preparing the budget document. For example, governmental funds are required to use the modified accrual basis of accounting in GAAP financial statements whereas the cash basis of accounting or the "cash plus encumbrances" basis of accounting may be used in those same funds for budgetary purposes. Disparities between GAAP and the budgetary basis of accounting often occur because regulations governing budgeting (e.g., laws or ordinances of the state, county, city, or some other jurisdiction) differ from GAAP.

An understanding of the GAAP basis of accounting is critical to the proper budgeting of available financial resources. Explaining the major differences between the basis of accounting used in the budget document and the basis of accounting used in the GAAP financial statements helps stakeholders better understand and interpret the numbers presented in both documents. Likewise, providing a documented reconciliation of the two bases of accounting can help to prevent errors from occurring when the budget is prepared or interpreted.

For those governments that use a budgetary basis of accounting other than GAAP, some of the more common differences between GAAP and the budgetary basis of accounting are as follows:

  • The timing of revenue and expenditures may be different under the GAAP basis of accounting than under the budgetary basis of accounting. For example, in GAAP accounting revenues are recognized in governmental funds as soon as they are both "measurable" and "available", whereas revenue recognition under the budgetary basis of accounting may be deferred until amounts are actually received in cash. Likewise, under GAAP accounting for governmental funds, payments for pension, OPEB, and other long-term obligations are recorded in the period they are due and payable.  However, under the budgetary basis of accounting, these payments are often recorded when the disbursements are actually made.
  • Under the GAAP basis of accounting used in proprietary funds, the receipt of long-term debt proceeds, capital outlays, and debt service principal payments are not reported, but allocations for depreciation and amortization expense are recorded. Often, the opposite is true under the budgetary basis of accounting.
  • Encumbered amounts are never classified as expenditures under the GAAP basis of accounting, while encumbrances are commonly treated as expenditures under the budgetary basis of accounting.
  • Categories of reporting are often different in the GAAP financial statements than in budgetary reporting.  For example, items reported as “other financing sources” and “other financing uses” under the GAAP basis of accounting may be classified as  revenues and expenditures under the budgetary basis of accounting.
  • Under the GAAP basis of accounting, changes in the fair value of investments generally are treated as adjustments to revenue, which commonly is not the case under the budgetary basis of accounting.
  • Under the GAAP basis of accounting, an expenditure and other financing source are recognized for the present value of the expected lease payments at the time a government enters into a lease involving a governmental fund. Typically, no such expenditure or other financing source are recognized under the budgetary basis of accounting.
  • There may be differences between the fiscal year used for financial reporting and the budget period (e.g., the use of lapse periods in connection with encumbrances, project length budgets, and grant budgets tied to the grantor’s fiscal year).
  • The fund structure used in GAAP financial statements may differ from the fund structure used for budgetary purposes (e.g., debt service payments may be reported in a debt service fund in the GAAP financial statements, but accounted for in the general fund for budgetary purposes).
  • All of a government’s component units and funds that are reported in the GAAP financial statements may not be included in the government’s budget document (e.g., a school district included in the GAAP financial statements may not be incorporated into the budget).
Recommendation: 

GFOA recommends that the budget document clearly define the basis of accounting used for budgetary purposes. If the budgetary basis of accounting and the GAAP basis of accounting are the same, this fact should be clearly stated. If the budgetary basis of accounting and the GAAP basis of accounting are different, major differences and similarities between the two bases of accounting should be noted, and reconciliation between the two bases of accounting should be included in the budget document. Disparities may include basis differences, timing differences, fund structure differences, and entity differences. The description of the differences between the GAAP basis of accounting and the budgetary basis of accounting should be written in a manner that is clearly understandable to those without expertise in either accounting or budgeting. The use of technical accounting terms should be avoided whenever possible. In cases where the use of technical accounting terms cannot be avoided, those terms should be clearly defined and fully explained.

Notes: 

 

References: 
  • Building a Better Budget Document (Second Edition), John Fishbein, GFOA, 2013.
  • Governmental Accounting, Auditing and Financial Reporting (GAAFR) and GAAFR Update Supplement, Stephen J. Gauthier, GFOA 2012 and 2014.
Approved by GFOA's Executive Board: 
March 2019