Current financial resources measurement focus

What Is Current Financial Resources Measurement Focus?

The current financial resources measurement focus is an accounting principle primarily used in governmental accounting for preparing certain financial statements. It concentrates on the inflow and outflow of current financial resources available for spending in the near term, typically within one fiscal year, rather than focusing on all economic resources, both current and non-current. This approach helps demonstrate how governments have met their spending objectives and complied with their annual budget and legal requirements.

Within the broader category of financial reporting, this measurement focus aligns with the modified accrual basis of accounting. It emphasizes the accountability for short-term financial stewardship over the comprehensive financial position. The current financial resources measurement focus captures resources such as cash, receivables that are both measurable and available, and expenditures that will deplete current resources.

History and Origin

The evolution of financial reporting for state and local governments in the United States has largely been shaped by the need to balance accountability for current operations with a comprehensive view of long-term financial health. Historically, governmental entities predominantly relied on a measurement focus centered entirely on current financial resources. This approach was deeply tied to the concept of fund accounting, where separate funds were established to account for specific purposes and legal restrictions on spending.

A significant shift occurred with the establishment of the Governmental Accounting Standards Board (GASB) in 1984, which aimed to improve and standardize governmental accounting and financial reporting². Prior to GASB, governmental accounting standards were less cohesive. The board's mission is to establish and improve financial accounting and reporting standards for U.S. state and local governments. A major milestone in this evolution was the issuance of GASB Statement 34, "Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments," in June 1999. GASB Statement 34 was characterized as the "most significant change to occur in the history of government financial reporting." It introduced a dual-perspective financial reporting model requiring both government-wide financial statements (using the accrual basis accounting and an economic resources measurement focus) and traditional fund financial statements (retaining the current financial resources measurement focus and the modified accrual basis). This allowed financial reports to provide both a short-term operational accountability perspective and a long-term financial position view.

Key Takeaways

• The current financial resources measurement focus prioritizes the reporting of inflows and outflows of spendable resources.
• It is primarily used in governmental accounting for governmental funds.
• This measurement focus helps demonstrate a government's compliance with its annual budget and legal mandates.
• It is paired with the modified accrual basis of accounting, recognizing revenues when measurable and available, and expenditures when incurred.
• This approach contrasts with the economic resources measurement focus that captures all assets and liabilities, both current and non-current.

Formula and Calculation

The current financial resources measurement focus does not involve a single overarching formula like some financial metrics. Instead, it dictates which types of transactions are recognized and when, for the purpose of reporting changes in spendable resources, typically in a governmental fund's statement of revenues, expenditures, and changes in fund balances.

The "formula" for the change in fund balance under this focus can be conceptualized as:

Where:

• Revenues: Increases in current financial resources expected to be available to finance operations (e.g., taxes, fees).
• Expenditures: Decreases in current financial resources primarily for current operations, capital outlay, or debt service (e.g., salaries, supplies, equipment purchases, principal payments on long-term debt).
• Other Financing Sources: Inflows from non-revenue transactions, such as proceeds from long-term debt issuance or transfers from other funds.
• Other Financing Uses: Outflows from non-expenditure transactions, such as transfers to other funds.

This approach ensures that the focus remains on the availability of spendable resources and their use during the fiscal period.

Interpreting the Current Financial Resources Measurement Focus

Interpreting financial statements prepared under the current financial resources measurement focus requires understanding its inherent limitations and strengths. This focus provides crucial information about a government's fiscal accountability and its ability to finance current services. When reviewing governmental fund financial statements, the reported fund balance represents the net spendable assets available to the government at a specific point in time.

Users primarily interpret these statements to assess:

• Fiscal compliance: Whether the government operated within its legally adopted budget.
• Short-term solvency: The availability of cash and other liquid resources to meet immediate obligations.
• Interperiod equity: Whether current year citizens paid for current year services, or if resources were drawn from or passed on to future periods.

For example, a significant decrease in fund balance from one year to the next may indicate that the government spent more than it collected in current revenues, potentially drawing down reserves. Conversely, a consistent increase could suggest sound fiscal management or a build-up of unspent resources. This interpretation must always be done in conjunction with the government-wide financial statements, which provide a broader view using the economic resources measurement focus and the full accrual basis accounting.

Hypothetical Example

Consider the hypothetical town of Lakeside, which operates on a calendar fiscal year. Its general fund uses the current financial resources measurement focus and the modified accrual basis.

At the beginning of 2024, Lakeside had a general fund balance of $500,000. During the year, the town experienced the following:

• Property Tax Revenue: $3,000,000 was assessed, and $2,950,000 was collected and available for current spending. The remaining $50,000 is expected to be collected in the next fiscal year and thus not considered "available" under this focus for the current period.
• Expenditures:
  • Salaries and benefits: $1,800,000
  • Supplies: $200,000
  • Purchase of new police vehicles (a capital asset): $300,000 (The entire cost is recognized as an expenditure when the resources are spent, not depreciated over time).
  • Principal payment on long-term debt: $100,000
• Other Financing Sources: Proceeds from the sale of a small, unused municipal lot: $50,000.

Under the current financial resources measurement focus, Lakeside's General Fund activity would be reported as follows:

Revenues:
Property Taxes: $2,950,000

Expenditures:
Salaries & Benefits: $1,800,000
Supplies: $200,000
Police Vehicles: $300,000
Debt Principal Payment: $100,000
Total Expenditures: $2,400,000

Excess (Deficiency) of Revenues over Expenditures:
$2,950,000 - $2,400,000 = $550,000

Other Financing Sources:
Proceeds from Sale of Lot: $50,000

Net Change in Fund Balance:
$550,000 + $50,000 = $600,000 increase

Ending Fund Balance:
Beginning Fund Balance ($500,000) + Net Change ($600,000) = $1,100,000

This example illustrates how the current financial resources measurement focus highlights the inflow and outflow of spendable resources and their impact on the government's ability to finance its current operations. The purchase of the police vehicles is shown as a full expenditure, rather than being capitalized and depreciated, because it represents a use of current financial resources. Similarly, the principal payment on long-term debt is an expenditure from current resources, while interest payments would also be.

Practical Applications

The current financial resources measurement focus is central to how state and local governments present their governmental fund financial statements. These statements, particularly the Statement of Revenues, Expenditures, and Changes in Fund Balances, are designed to show how governmental activities affect current financial resources. This is crucial for demonstrating compliance with legally mandated budgets and helping citizens and oversight bodies understand how short-term financial resources were raised and expended for public services.

Key applications include:

• Budgetary Compliance: Governments use this measurement focus to report against their annual operating budget. The reported expenditures directly reflect the actual spending of current appropriations, making it easy to compare to budgeted amounts.
• Fiscal Condition Assessment: Analysts and citizens can quickly gauge a government's short-term fiscal health and ability to meet its current obligations by examining the governmental fund's balance sheet and its fund balance.
• Capital Outlay Reporting: When a government purchases a capital asset (like a building or equipment) using governmental fund resources, the entire cost is reported as an expenditure in the period of acquisition. This highlights the immediate impact on spendable resources, unlike the long-term capitalization and depreciation seen under accrual basis accounting.
• Debt Service: Principal payments on long-term debt are reported as expenditures in the period they are made, reflecting the use of current resources to reduce long-term obligations. This approach is distinct from the accrual method, where the total liability is tracked over its life.
• Legislative and Oversight Use: Legislative bodies and oversight committees rely on this focus to evaluate whether agencies are operating within their authorized spending limits and to make future allocation decisions.

The Governmental Accounting Standards Board (GASB) continues to refine the financial reporting model, as evidenced by recent pronouncements like GASB Statement No. 103, which aims to further enhance transparency and consistency in financial reporting while preserving the distinct purposes of different measurement focuses.

##¹ Limitations and Criticisms

While the current financial resources measurement focus is valuable for assessing fiscal accountability and budgetary compliance in governmental accounting, it has certain limitations:

• Incomplete Picture of Financial Position: By focusing only on current financial resources, this measurement focus does not present a complete view of a government's overall financial health. For example, it typically does not report capital assets (like infrastructure or buildings) or long-term liabilities (like pensions or bonds payable) in the governmental fund balance sheet. This can lead to an underestimation of a government's total resources or obligations.
• Mismatch of Revenues and Expenses: Unlike the accrual basis accounting used in commercial enterprises, this focus does not match all revenues with the expenditures incurred to generate those revenues. For instance, the purchase of a capital asset is recorded as an immediate expenditure rather than being capitalized and depreciated over its useful life, which can obscure the true cost of services delivered.
• Focus on Flow, Not Stock: It primarily shows the flow of spendable resources over a period, rather than the stock of all assets and liabilities at a point in time. While useful for short-term operations, it may not provide sufficient information for evaluating long-term sustainability or capital investment decisions.
• Potential for Misinterpretation: Without the complementary information provided by government-wide financial statements (which use the economic resources measurement focus), users might misinterpret a government's financial position. For instance, a government might appear to have a healthy fund balance, but simultaneously be accumulating significant unfunded long-term liabilities that are not fully reflected in the governmental funds.

These limitations are why the Governmental Accounting Standards Board (GASB) mandates a dual reporting model, providing both fund-based financial statements using the current financial resources measurement focus and government-wide financial statements using the economic resources measurement focus.

Current Financial Resources Measurement Focus vs. Economic Resources Measurement Focus

The current financial resources measurement focus and the economic resources measurement focus represent two distinct approaches to financial reporting, primarily in the context of governmental accounting. The key differences lie in what they measure and the basis of accounting they typically employ.

The confusion between the two often arises because both are essential components of a complete government financial report. The current financial resources measurement focus provides insight into short-term financial management and compliance with the annual budget, while the economic resources measurement focus offers a long-term, comprehensive view akin to private sector financial reporting, accounting for all assets and liabilities.

FAQs

What is the primary purpose of the current financial resources measurement focus?

The primary purpose is to demonstrate fiscal accountability for a government's short-term financial stewardship and its compliance with the annual budget. It focuses on the inflow and outflow of spendable resources.

Which financial statements typically use the current financial resources measurement focus?

This measurement focus is used for the governmental fund financial statements, such as the Statement of Revenues, Expenditures, and Changes in Fund Balances, and the Governmental Funds Balance Sheet.

How does it differ from the economic resources measurement focus?

The current financial resources measurement focus tracks only spendable resources, aligning with the modified accrual basis of accounting. In contrast, the economic resources measurement focus includes all assets and liabilities (both current and non-current) and uses full accrual basis accounting, providing a broader, long-term financial picture.

Are capital assets reported under this measurement focus?

Under the current financial resources measurement focus, the acquisition of capital assets is reported as an expenditure when the resources are used. The assets themselves are generally not recognized on the governmental fund's balance sheet because they do not represent current financial resources available for spending.