Asset accounting and service activities Question 1: General-purpose governments perform three main types of service acti

Asset accounting and service activities

Question 1:

General-purpose governments perform three main types of service activities: They divide their list of activities into three broad categories: governmental activities, business-type activities, and fiduciary activities. Governmental activity includes functions that are directed to the common good and which do not target particular individuals. For example, police and fire protection, road construction, garbage collection, and public health services. Such services can be fully funded through state revenues or predefined subsidies rather than cost per user. (Accounting, 2014).

Business-type activities, on the other hand, work more like business operations in that they offer services. This ranges from facilities that provide water supply, electricity and the transport sector. Such services are mostly financed from charges recovered from the people or organizations receiving such services and were designed to be cost-recovery agencies.

Fiduciary activities refer to the management of assets belonging to other people. For instance, a government may manage the employees’ pension to cater for their post-service indemnities or hold cash in trust for other persons. As for fiduciary activities, although they involve governmental operations, these are excluded from consideration as operational budgets because the funds are not owned by the government but are entrusted to the government on behalf of certain users. (Chase, 2020).

Question 2:

Accounting for infrastructure assets can follow one of two approaches: the modified approach or the depreciation approach. This modified approach does not call for recognizing the depreciation of the infrastructure assets. Instead, the government is responsible for keeping the assets in a certain condition level. Accumulated repairs and maintenance costs are recognized as expenses, and any changes to the company’s entity or the establishment of a new facility are capitalized. Checks and audits have to be carried out from time to time in order to confirm that the items available conform to the set quality. (Ball & Pflugrath 2012).

However, the depreciation approach identifies how the cost of the infrastructure decreases over the useful economic life of the asset. Depreciation costs are presented in the annual accounting period as they represent consumption of the asset base. The cost of maintenance is still accrued individually, but it is not associated with the condition standard of that particular asset.

If a government using the modified approach fails to maintain its infrastructure at the required condition level, it will be required to move to the depreciation approach. This would mean that the government would have to begin charging depreciation for those assets, and this could easily have a tremendous impact on financial statements by reflecting an expense that was not there before – a depreciation of the value of the asset.

References

Accounting, G. (2014). Standards Board. Qualitative Characteristics of Accounting Information, Statement of Financial Accounting Concepts, (2).

Ball, I., & Pflugrath, G. (2012). Government accounting. World Economics, 13(1), 1-18.

Chase, B. W. (2020). Fundamentals of governmental accounting and reporting.