The Korea Local Administration Review

This study analyzes financial reports of the accounting information of grantswhich local governments receive from central government employing accrualaccounting framework. The grants occupy a great portion of operating incomeof local governments, therefore, it will have much effect on the performanceevaluation of local governments. The current local government accountingstandard prescribes that all grants should be recognized as current profitwithout classifying grants depending on their types, even though grants can becategorized depending on whether asset acquisitions are their purposes or not.This study analyzes empirically how grants influence asset acquisition of a localgovernment. It was found that the ranking of performance evalution of localgovernments can be changed depending on how grants for asset acquisition arerecorded. If grants for asset acquisition are recognized as current profit,government accounting information will give users a false signal andperformance evaluation will be distorted.