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A debate in this journal, spanning several years, over the accounting treatment of public assets has concentrated attention on the appropriateness of the Public Sector Accounting Standards Board's decision to apply private sector accounting concepts to the development of public sector accounting standards. The case is examined here and it is shown why private sector accounting standards must be appropriately adapted to suit a very different and varied operating environment in the public sector. These differences have been largely ignored, with resulting problems for public sector accounting standards.
In the development of accrual accounting standards for the public sector, the Public Sector Accounting Standards Board (PSASB) has endeavoured to apply concepts and standards initially developed for commercial activities to the public sector. The major standards are AAS 27 Financial Reporting by Local Governments (1995), AAS 29 Financial Reporting by Government Departments (1996), AAS 31 Financial Reporting by Governments (1996), SAC 1 Definition of the Reporting Entity (1990), SAC 2 Objectives of General Purpose Financial Reports (1990), SAC 3 Qualitative Characteristics of Financial Information (1990), and SAC 4 Definition and Recognition of Elements of Financial Statements (1992).
The board holds the belief that the two sectors are fundamentally similar in the information needs of users of general purpose financial reports (GPFRs) and in their operating environments; and hence that private sector accounting standards can be readily applied to the public sector with only a few minor modifications. This viewpoint has been explained and justified by Warren McGregor, executive director of AARF, in his recent useful and thoughtful article (1999). He states (p. 3): "An important feature of the concepts statements developed by the board is that they are applicable to financial reporting by all types of reporting entity. That is, no distinction is made between entities on the basis of ... sector location (public or private)."
This universal approach is challenged in this response. Parts of the public sector environment are so different from a business environment that a differentiated approach is required. Moreover, the public sector environment is itself so highly heterogeneous that it cannot be treated as one for accounting purposes, and generalisations cannot be made which embrace the whole of the sector. The public and private sectors of the nation are not...