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As government financial managers know well, the evaluation of bottomline effectiveness in governments frequently is hampered by the lack of a strong correlation between the revenues generated and the expenditures/expenses incurred. Interperiod equity is a new measure of financial performance that can help address this problem. In the future, measuring interperiod equity will become an essential benchmark for demonstrating performance and accountability in government financial reporting. The primary guidance in this area is found in the Governmental Accounting Standards Board's (GASB) Statement No. 11, Measurement Focus and Basis of Accounting-Governmental Fund Operating Statements,1 and Statement No. 34, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments.2
The Matching Principle
Determining bottom-line effectiveness or profitability in private-sector business enterprises relies upon the accrual basis of accounting and the application of the matching principle, which calls for expenses incurred during a period to be matched with revenues earned during the same period. The resulting difference between these two financial elements yields a measure of net income or net loss for the period, thereby providing management, investors and creditors with a signal as to the financial performance of the organization. In the nonprofit and government sector, interperiod equity (also known as intergenerational equity) is the financial reporting concept that parallels the matching principle and profitability orientation found in private-sector business enterprises.
Interperiod equity is the measure of whether current-year revenues are sufficient to pay for current-year services. A measure of interperiod equity, for example, would show whether citizens received services in the current year but shifted part of the payment burden to future years or used up previously accumulated resources. Such a measure would show whether current-year revenues not only were sufficient to pay for current-year services, but also if they increased accumulated net resources. For example, citizens benefit from the services (such as trash collection) provided by government employees. Current expenditures for these services would include employee wage payments. Related to these wage payments today are the future payments that will be expended for retiree health care and pension benefits. If revenues from current taxation are not sufficient to cover the future retiree disbursements, then future generations will bear the burden of paying for services that did not benefit them. Consequently, interperiod equity would...