Introduction and Background (3)
Another feature of GAAP that needs to be understood is that in a number of instances there is more than one acceptable way to account for a specific type of transaction. For example, later chapters will describe the accounting for capital assets that are depreciated by governments. Depreciation expense can be calculated using any of several accepted methods. One method charges depreciation expense in equal amounts each year over the life of the asset—this is called straight-line depreciation. Another method charges more depreciation expense each year in the early years of a capital asset’s life and less depreciation expense each year in the later years of a capital asset’s life—this is called accelerated depreciation. Both of these methods are acceptable under GAAP. As accounting rule makers address more and more accounting issues, the existence of more than one acceptable method of accounting for the same transaction is gradually, but steadily, declining. Often accounting rule makers select accounting areas to address because there is a diversity of accounting treatments for the same type of transaction. In other words, their purpose in these cases would be to eliminate the diversity of accounting treatments for similar transactions. Accordingly, once an accounting area is addressed by an accounting rule maker, usually only one acceptable method of accounting for this area results. However, the reader should not be surprised by the remaining flexibility in some accounting treatments when trying to understand and compare the accounting for the same transaction by two different governments. It is also interesting to try to understand why a government selected a particular accounting method to use when there are several alternative acceptable methods.
One final note on GAAP is that these accounting principles apply only to material items. If an accounting transaction is not material to the financial statements, the financial statements need not follow GAAP in recording and presenting that transaction in the financial statements. Before jumping to conclusions that this concept will permit a tremendous amount of flexibility in recording relatively small transactions, an understanding of what is meant by being material to the financial statements is necessary.
Materiality is a concept that accountants have long struggled to define. The broad concept is that an item is material to the financial statements if its improper recording would have an impact on an informed reader of the financial statements. Applying this concept to individual circumstances in practice clearly results in the need for a good deal of judgment. It is not easy to try to anticipate what an “informed reader” of the financial statements will be affected by in reading the financial statements.
Taken From : Governmental Accounting Made Easy