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1-5 Year-end financial accounting and reporting can reveal the economic substance of government actions that have been taken mainly to balance the...

1-5Year-end financial accounting and reporting can reveal the economic substance of government actions that have been taken mainly to balance the budget.Public officials, it is often charged, promote measures intended to make the government ‘‘look good’’ in the short-term, but that may be deleteriousin the long term. Assume that a city’s budget is on a cash or near-cash basis. Further assume that the following actions, designed to increase areported surplus, were approved by the city council and did indeed reduce budgetary expenditures or increase budgetary revenues:a. The city reduced its contributions to the employee defined benefit pension plan from the $10 million recommended by the city’s actuary to $5 million. Under a defined benefit plan, the employer promises employees specified benefits upon their retirement, and the level of benefits is independent of when and how much the employer contributes to the plan over the employees’ years of service.b. It reduced by $1 million the city’s cash transfer to a rainy-day reserve that is maintained to cover possible future reductions in tax collections attributable to a downturn in the region’s economy.c. It sold securities that had been held as an investment. The securities had been purchased five years earlier at a cost of $2 million. Market value at the time of sale was $5 million.d. It delayed until the following year $10 million of maintenance on city highways.1. Suppose that you were asked to propose accounting principles for external reporting that would capture the true economic nature of these measures—actions that, in substance, did not improve the city’s financial performanceor position. For each measure, indicate how you would require that it be accounted for and reported.2. Can you see any disadvantages to the principlesthat you propose?1-6Choice of accounting principles may have significant economic consequences.In preparing its budget proposals, a city’s budget committee initially estimated that total revenues would be $120 million and total expenditureswould be $123 million. In light of the balanced budget requirements that the city has to meet, the committee proposed several measures to either increase revenues or decrease expenditures. They included the following:a. Delay the payment of $0.4 million of city bills from the last week of the fiscal year covered by the budget to the first week of the next fiscal year.b. Change the way property taxes are accounted for in the budget. Currently, property taxes are counted as revenues only if they are expected to be collected during the budget year. New budgetary principles would permit the city toinclude as revenues all taxes expected to be collected within 60 days of the following fiscal year, in addition to those collected during theyear. The committee estimates that the change would have a net impact of $1.2 million.c. Change the way that supplies are accounted for in the budget. Currently, supplies are recognized as expenditures at the time they are ordered. The proposal would delay recognition of the expenditure until the supplies are actually received. The committee estimatesa net effect of $0.8 million.d. Defer indefinitely $1.5 million of maintenanceon city roads. Except as just noted with respect to supplies, the city currently prepares its budget on a cash basis, even though other bases are also legallypermissible. It prepares its year-end financial statements, however, on an accrual basis.1. Indicate the impact of each of the proposals on the city’s (1) budget, (2) annual year-end financial statements, (3) ‘‘substantive’’ economic well-being. Be sure to distinguish between direct and indirect consequences.2. It is sometimes said that choice of accounting principles doesn’t matter in that the principles affect only the way in which the entity’s fiscal ‘‘story’’ is told; they have no impact on the entity’s actual financial history or current status. Do you agree? Explain.

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