Accounting standards address the need for consistency in accounting metrics and financial data processing. This consistency allows for effective comparative analysis and evaluation employed in determining the performance of organizations.
Investors, corporate managers, accountants, bookkeepers, and governments are concerned with accounting compliance with rules and regulations on financial reporting that provide an accurate picture of current and expectable organizational performance.
There are different sets of standards used for accounting, based on the mandates of respective accounting standard bodies or agencies in various countries and regions around the world. GASB and FASB are accounting standard-setting bodies of note.
This article presents a comparison between the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB). Also included is a comparison between the modified accrual and full accrual accounting methods.
GASB and FASB: Similarities and Differences
The Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) are similar mainly in terms of their general purpose: to develop and establish standards for the accounting and financial reporting processes of organizations.
This means that both the GASB and the FASB are focused on ensuring that accounting and financial reporting activities are accurate and reliable, and the resulting financial reports are beneficial to end users.
However, the GASB and the FASB are different in terms of the scope and applicability of their principles and objectives. The scope of the GASB is the government, while the scope of the FASB includes public companies in the United States.
Thus, GASB standards apply to state and local governments, while FASB standards apply to publicly traded companies, like Apple, Amazon, Walmart, Tesla, and PepsiCo, as well as GE, McDonald’s, Nike, and Disney.
GASB standards are for governmental organizations’ accounting and financial reporting for the public and government decision making. FASB standards are for companies’ accounting and financial reporting for shareholders or investors.
Full Accrual Accounting vs. Modified Accrual Accounting
Full Accrual Accounting
Full accrual accounting serves as a means for assessing the performance and position of a company based on transactions in the fiscal or financial reporting period. At the time of transactions, expenses and revenues are recognized regardless of the time of the actual cash transfer or payment.
With full accrual accounting pairing revenues with expenses at the time of the transactions, the resulting financial report accurately represents the company’s financial position within the period under consideration.
Full accrual accounting provides reliable information about the long-term economic resources and financial positioning of the company. With the GAAP and FASB, the U.S. Securities and Exchange Commission requires the full accrual method for public companies.
Modified Accrual Accounting
Modified accrual accounting is similar to the full accrual accounting method in terms of recognizing expenses upon incurring liabilities, without consideration for the time of the cash payment involved.
However, modified accrual accounting also involves the cash basis method. For example, revenue is recognized only when the cash payment is made (or will be made) within or shortly after the current period.
The inclusion of the cash basis method in modified accrual accounting ensures that revenues are measurable and that the resulting financial report provides an accurate picture for evaluating costs and their corresponding revenues within the current financial reporting period.
Modified accrual accounting provides information about the current financial resources of the organization, in contrast to the emphasis on long-term economic resources under full accrual accounting.
Modified accrual accounting is applied in financial reports for governmental funds. Under the GASB standards, the modified accrual basis of accounting is mandatory for governmental entities.