FASB GAAP vs. GASB GAAP (in the news, even!)

Rarely does accounting treatment make headlines, but Emil Henry’s “America’s Debt Ceiling Opportunity” provides some interesting commentary on a topic that hasn’t received much public attention during the current debt ceiling maelstrom.  The article advocates FASB GAAP be applied to financial statement presentation for our federal government and highlights how this presentation would more accurately reflect the fiscal problems we collectively face.

Henry highlights the nature of government accounting as being closer to a cash basis of accounting, rather than the accrual basis required of publicly traded corporations. Accrual basis accounting recognizes revenues when realized (rather than when cash is received), and recognizes expenses when incurred (rather than when they are paid). The report notes that the government records “long term liabilities such as entitlements when they are paid,” while corporations under GAAP must reflect the net present value of total liabilities as they are incurred.

This treatment is especially important for entitlement programs financed by taxpayers. Social Security is a liability to retirees, for example, whose financial components are determined largely by actuarial assumptions. These assumptions include death rates, worker productivity, and the working lives of individuals.

The conclusion of USA Inc is that the United States, if required to file a financial statement under generally accepted account principles, our nation would have a negative net worth of $44 trillion with $1.3 trillion in negative cash flow for the fiscal year ended 2010. The negative net worth is largely the result of unfunded liabilities present in our national pension and medical care promises. The net present value of the total promises for payments to Social Security recipients exceeds payments into the system by a wide margin. The ‘wideness’ depends, again, on actuarial assumptions — lengthening life expectancies, for example, changes these calculations drastically because more people can be statistically expected to receive these monthly payments for longer.

Can we grow our way out of this problem? Yes, but growth would have to occur at unrealistic rates. Budgets could be balanced, according to the article, if our nation achieved average GDP growth of 5% per year indefinitely. Average GDP growth, however, has been 2.8% since 1960.

Financial statement presentation seems to obfuscate, rather than elucidate, our fiscal burdens. Hiding our unfunded liabilities behind a cloak of tailored accounting principles prevents the financial woes we face from capturing public attention.

This entry was posted in Accounting Standards, Government Failure, Unfunded liabiltiies and tagged . Bookmark the permalink.

One Response to FASB GAAP vs. GASB GAAP (in the news, even!)

  1. t marino says:

    Mr. Primaid your ability to extrapolate truth from the miry bog that is our government’s financial position is both refreshing and formidable. Based on your findings I will immediately raise my “potential government default threat level” from orange to red. Please continue to enlighten the public on the crushing weight of the future tax burden that young people will undoubtedly shoulder. Onward and upward.

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