CHAPTER ONE

1.1 Overview Of Financial Reporting For Governmental And NFP Entities

You must have come across organizations which are not engaged in business activities. Their
objective is not to make profits but to serve. Examples of such organizations are: schools,
hospitals, charitable institutions, welfare societies, clubs, public libraries, resident welfare
association, sports club etc. These are called Not-for-Profit Organizations (NPOs). These
organizations provide services to their members and to the public in general.

Their main source of income is membership fees, subscription, donation, grant-in-aid, etc. As the
money is involved in the activities of these organizations, they also maintain accounts. These
organizations prepare certain statements to ascertain the results in financial terms of their
activities for a particular period say, one year.

A not-for-profit entity receives contributions of resources from providers who do not expect
pecuniary returns, operates for purpose other than profits, and does not possess ownership
interests like those of business enterprises.

Fund accounting is an accounting system for recording resources whose use has been limited by
the donor, grant authority, governing agency, or other individuals or organizations or by law. It
emphasizes accountability rather than profitability, and is used by Non -profit organizations and
by governments.

Organizations that receive revenue through public and private sources of funding use the system
of fund accountancy rather than traditional business methods of accounting.

Fund accounting also refers to the management and allocation of revenue an organization
acquires/gets through donations, tax payments, grants and other public and private sources. The
basic idea behind fund accounting is to monitor and document the use of assets that are donated
by outside parties

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The goal of most nonprofit organizations and government agencies is to avoid budget deficits
while providing the greatest benefit to the public by strategically allocating the resources that are
available. In this respect, accountants working with nonprofit organizations are diligent/hard
working in seeing to it that available funds are being used in the most efficient way possible so
as to maximize the potential benefit of each dollar.

1.2 Characteristics of Not-for-profit organizations (NPOs)

Following are the main characteristics or the salient features of Not for Profit organizations
(NPOs):

1. The objective of such organizations is not to make profit but to provide service to its members
and to the society in general.

2. The main source of income of these organizations is not the profit earned from purchase and
sale of goods and services but is admissions fees, subscriptions, donations, grant-in-aid, etc.

3. These organizations are managed by a group of persons elected by the members from among
themselves. This group is called managing committee.

4. They also prepare their accounts following the same accounting principles and systems that
are followed by business for profit organizations that are run with an objective to earn profits:

1.3 Similarities and differences between NFP organizations and business enterprises.

A/ The similarities

1/both are integral part of the same economic system

2/Financial management process including appropriate accounting, meaningful reporting and

timely auditing are essential in both so as to provide relevant and timely information to users
for making rational decision.

3/both organization should use double entry accounting system.

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 B/The differences

1/ Organizational Purposes: Governments exist for the well being of citizens by providing
public services, not for the purpose of generating returns to owners.

2/ Sources of Revenues: Governments derive many of their resources from taxes and other non-
exchange transactions.

3/ Potential for Longevity: Governments very rarely go out-of-business. This long term view of
operations changes the focus of accounting to a longer-term focus on the sustainability of
services and the ability to meet future demand.

4/ Relationship with Stakeholders: Governments have an obligation to demonstrate

accountability for public funds.

5/ Role of the Budget: Government budgets often carry the authority of law, preventing public
officials from spending outside their budgetary authority.

6/ Governmental fund accounting focus on financial resources, whereas business enterprises

focus on economic resources.

7/Budgetary accounts: budgetary accounts are integrated into the accounting system of the
governmental units. However; there is no record of debt and credits for budget in business
enterprises.

1.4 SOURCES OF FINANCIAL REPORTING STANDARDS

Accounting and financial reporting standards for state and local governmental units are
established by the governmental accounting standard boards. Accounting and financial
reporting standards for profit seeking enterprise are established by the financial accounting
standard board. The financial accounting foundation appoints the member of the two boards and
supports the operating expenses of the board by obtaining contributions from business
corporations, professional organization of accountants, financial analysts, and other groups

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concerned with financial reporting; CPA firms, debt rating agencies and state and local
governments.

The authority to establish accounting principles (financial reporting standards) of not –for –profit
organizations are split between the GASB and FASB. Because a sizable number of NFP
organizations (particular key colleges and universities and hospitals) are governmentally related,
but many others are independent of governmental units.

Accordingly, the GASB has the responsibility for establishing accounting and financial
reporting standards for NFP organizations which are considered to be governmental related; the
FASB has the responsibility of establishing accounting and financial reporting standards for
non-governmental NFP organizations

Summary of standard setting boards

Reporting entity Standard setting board

Federal government FASAB - Federal Accounting Standards Advisory Board

State and Local Government GASB - Governmental Accounting Standards Board

(SLG)
Private(non-governmental) Not- FASB - Financial Accounting Standards Board
for-profits
Public not for profit GASB - Governmental Accounting Standards Board
Investor owned business FASB - Financial Accounting Standards Board

1.5. Objectives of financial reporting in NFP entities

1/Accountability

The GASB states that accountability of is the corner stone of all financial reporting in
government. Accountability requires governments to answer to the citizenry: to justify the rising
of public resources and the purpose for they are used. Governmental accountability is based on

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the belief that the citizenry has the “right to know”, a right to receive openly declared facts that
may lead to public debate by the citizens and their elected representatives. Financial reporting
plays a major role in fulfilling government’s duties to be publicly accountable in a democratic
society. Financial reports of state and local governmental units, according to FASB, are used
primarily to:

1) Compare actual financial results with the legally adopted budget.

2) Assess financial conditions and results of operations

3) Assists in determining compliance with financial related law, rules and regulations, and

4) Assists in evaluating efficiency and effectiveness.

 Decision making purposes

1.5.1 Objectives of financial reporting

The objectives of financial reporting by public sector entities are to provide information about
the entity that is useful to users of GPFRs for accountability purposes and for decision-making
purposes (hereafter referred to as “useful for accountability and decision-making purposes”).

Financial reporting is not an end in itself. Its purpose is to provide information useful to users of
GPFRs. The objectives of financial reporting are therefore determined by reference to the users
of GPFRs, and their information needs.

1.6 IPSAS conceptual framework

The adoption of IPSASs by governments will improve both the quality and comparability of
financial information reported by public sector entities around the world.

The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) establishes and makes explicit the concepts that are to
be applied in developing International Public Sector Accounting Standards (IPSASs) and
Recommended Practice Guidelines (RPGs) applicable to the preparation and presentation of
general purpose financial reports (GPFRs) of public sector entities.

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 IPSAS have its own conceptual outline:

 Relevance

 Faithfully representative

 Understandable

 Timely

 Comparable

 Verifiable

1.7 IFRS vs. IPSAS

There are differences between International Public Sector Accounting Standards

(IPSAS) and the present International Financial Reporting Standards (IFRS). Of these
fewer than a dozen appear to have real implications, and of these the two with most
significant and immediate impact are:

1. A new requirement to report revenue, expenses, assets and liabilities by segment –

this raises issues around the interface with the requirement to prepare group level
Funding Impact Statements under the Local Government Act, the manner in which
local authorities define their groups of activity for reporting purposes, and potentially
someone off costs classifying assets to segments

2. A lack of a standard to guide the preparation of prospective financial information –

with no legislative or statutory presumption that the financial information in long-
term plans will be prepared on the basis of the “best available information”,
robustness of these plans may suffer in the short-term.

Other potential issues include:

 wider definition of Government Business Enterprise

 narrower definition of control

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  Optional recognition of heritage assets

 requirement to recognize and measure revenue from non-exchange transactions

differences in the measurement of some items of inventory

 no requirement that values be independent or registered

 less guidance on the application of depreciated replacement cost

 Changes to disclosures about related parties.

1.6.1 Segment Reporting

This is perhaps the biggest practical difference between IFRS and IPSAS – and the one that the
sector needs to come to grips with most quickly. IPSAS 18 Segment Reporting requires the
reporting of revenues, expenses, assets and liabilities for each segment. A segment is (perhaps
somewhat loosely) defined as an activity or group of activities for which it is appropriate to
separately report financial information. IPSAS 18 notes that a segment could potentially be
either service based (e.g. Water or Recreational Facilities etc) or geographically based.

In general IFRS are internationally recognized widely adopted and are designed for large profit
oriented companies. While IPSAS are designed for public sector entities whose main objectives
are provide goods and service to benefit society and to redistribute wealth.

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