Chapter One

Overview of Financial Reporting for Government al and NFP Entities

After studying this chapter, you should be able to:

 Identify and explain the characteristics that distinguish governmental and not- for-
profit entities from for- profit entities.
 Identify characteristics and types of government and Not- For profit organizations
(NFP)
 Identify the authoritative bodies responsible for setting IPSAS and financial reporting
standards for all governmental and not- for- profit entities.

 Contrast and compare the objectives of financial reporting for government, and not- for-
profit organizations.

 Explain how management’s discussion and analysis (MD& A), basic financial
statements, and required supplementary information (RSI) of SLG relate to their
comprehensive annual financial reports.

 Explain the different objectives, measurement focus, and basis of accounting of the
government wide financial statements and fund financial statements of SLG.
1.1. Government and Non- for- Profit Entities

Entities or organizations that are established with operating purpose other than profit
making include:
A. Governmental Entities (Government)
B. Nonprofit (NP) Entities

What is a Government?
A government is a body that has the power to make and the authority to enforce rules and
laws within a civil, corporate, religious, academic, or other organization or group.
For the purpose the course Government and NFP Accounting,
Government can also be defined as an entity that provides such major services as
administrative, social, economic, and others either free from charge or with a “token”
charge.
A government is an organized entity which, in addition to having governmental character,
has sufficient discretion in the management of its own affairs to distinguish it as separate
from the administrative structure of any other governmental unit. To be regarded as a
government, an entity must possess all three of these critical attributes: existence as an
organized entity, governmental character, and substantial autonomy. Each is explained
below.

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1 Existence as an Organized Entity - Evidence of this attribute is provided by the presence of
some form of organization and the possession of some corporate powers, such as perpetual
succession, the right to sue and be sued, have a name, make contracts, acquire and dispose of
property, and the like. Designation of a class of governments in law as “municipal
corporations,” “public corporations,” “bodies corporate and public,” and the like indicates
that such units are organized entities.
2 Governmental Character - this characteristic is indicated where officers of the entity are
popularly elected or are appointed by public officials. A high degree of responsibility to the
public demonstrated by requirements for public reporting or for accessibility of records to
public inspection, is also taken as critical evidence of governmental character.
Governmental character is attributed to any entities having power to levy property taxes,
power to issue debt paying interest exempt from Federal taxation, or responsibility for
performing a f unction commonly regarded as governmental in nature. An entity can also
be recognized as having governmental character if it meets the indicated requirements as
to officers or public accountability. Thus, some districts or zonal governments with no
taxing powers are recognized as local governments because of provisions as to their
administration and public accountability.
3 Substantial Autonomy - this requirement is met where, subject to statutory limitations and
any supervision of local governments by the state, an entity has considerable fiscal and
administrative independence. Fiscal independence generally derives from power of the entity
to determine its budget without review and detailed modification by other local officials or
governments, to determine taxes to be levied for its support, to f ix and collect charges for
its services, or to issue debt without review by another local government.

Some government agencies having considerable fiscal autonomy are classified as dependent
agencies of another government rather than as governments because of one or more of the:
following characteristics
 Control of the agency by a board composed wholly or mainly of parent government
officials.
 Control by the agency over facilities that supplement, serve, or take the place of
facilities ordinarily provided by the creating government.
 Provision that agency properties and responsibilities revert to the creating
government after agency debt has been repaid.
 Requirements for approval of agency plans by the creating government.
 Legislative or executive specification by the parent government as to the location and
type of facilities the agency is to construct and maintain.
 Dependence of an agency for all or a substantial part of its revenues on
appropriations or allocations made at the discretion of another state or local
government.
 Provision for the review and the detailed modification of agency budgets by another
local government.
Example of Governments in Ethiopia:

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 Federal government of Ethiopia and its agencies
 The eleven Regional State Governments and Two Administrative City councils
 Zonal Level Local Governments, District Level Local Governments, Municipality and
Town Governments, Keble level local governments i.e. Keble is the lower level
government in Ethiopia.
Government is classified as Special Purpose Government and General Purpose Governments.
The Special Purpose Government is a government that provides a single service or few
services to the citizenry.
For Example: Transportation authorities can be taken as Special Purpose Government
Entity.
The General Purpose government provides a wide collection of services to the citizenry.
Examples: Federal government, State governments, zone government, cities, towns, villages,
etc.
What is Not- for- profit (NFP) Entity?
NFP Entities are entities other than the government and that provides community services
either free from charge or with a “token” charge. The following are the essentials to
classify an entity as a not for- profit:
Legally separate organizations its operating purpose is other than to provide goods or
services at a profit.
It may not distribute surpluses Generating profit is not an objective outlined in its
legislation, regulations or constitution.
It does not pay income tax or income tax equivalents – usually exempt from federal, state,
and local taxation
It is not able to transfer ownership nonprofit entities are classified into two: governmental
and non- governmental
Examples: Religious entities, community service providers, private educational and
health care entities, museums, and fraternal and social organizations, etc.
In Ethiopia, there are various Nongovernmental NFP entities registered by Ministry of
Justice.
Examples: Save the Children UK and Canada Family Guidance Association of Ethiopia
Dawn of Hope Ethiopia Menschen for Menschen Rift Valley Children and Women
Development Fund National Museum
Major Types of Governmental and Nonprofit Entities
General Government – includes federal, state, county, city, town, village, special districts
Educational – includes kindergartens, primary and secondary schools, vocational &
technical schools, colleges, and universities
Health and Welfare –Hospitals, Orphanages, the Red Cross and Red Crescent, etc. .
Religious –churches, mosques, and missions Charitable –includes many NGOs

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 Foundations - private organizations that promote research and development for
improvement of human life.
1.2. Similarities & Differences: Governmental and NFP Entities
 Similarities
 Lack of competitive market place. Governmental and NFP entities operate in an
environment which is difficult to set the quality and quantity of service or product.
 Use of fund accounting as a control device both classes of organization are organized and
operated on fund basis.
 Significant investment in non- revenue producing activities
 Differences
 Government differs from NFP entities in the following manners:
 Public corporations and bodies which are politic.
 Power ultimately rests in the hands of the people – public officials are accountable to the
general public and the legislative, judicial, and executive bodies will have an impact on
their operation
 People can vote and delegate that power to public officials
 Government is created by and accountable to a higher level government.
 Government has the power to tax citizens for revenue – taxpayers are the providers of
resources but the contribution may not be voluntary and the tax payers have little say in
deciding how to use the resources.

 The budget is an expression of public policy and method of providing control.

 The nature of the political process has a significant influence on their operation
 They may have monopoly power on some its services
 Criteria for Determining NFP Entity as Government
 An entity is said to be a government if one of the following conditions are met:
 Public corporations and bodies politic.
 Popular election of officers, or appointment of a controlling majority of the governing
body by officials of another government.
 Potential dissolution by a government with net assets reverting to a government
 Power to enact and enforce a tax levy.
 Other NFP Organization differs from government with respect to the following points:
i. They are accountable to the resource providers (donors)
ii. The budget is an expression of the interest of the benefactors.
iii. The nature of the political system may not influence their operation.
iv. The resource providers are donors, or volunteers and the contribution is mostly voluntary.
IPSAS further distinguishes governmental entities from not- for- profit entities and from
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 NFP entity by stressing that governments exist in an environment in which the power
ultimately rests in the hands of the people. Voters delegate that power to public officials
through the election process; the power is divided among the executive, legislative, and
judicial branches of the government so that the actions, financial and otherwise, of
governmental executives are constrained by legislative actions; and executive and
legislative actions are subject to judicial review. Further constraints are imposed on state
and local governments by the existence of the federal system in which higher levels of
government encourage or dictate activities of the lower levels and finance the activities.
1.3. Similarities and Differences: Business Entities and G & NFP Entities Similarities G
and NFP Entities to Business Entities
• Both are integral part of an economic system
• Both acquire resources to provide goods or services
• Both use financial management processes
• Both need financial information systems
• Both undergoes cost analyses, control and evaluation techniques
• Both may provide similar services – e.g. transportation systems; sanitation services;
utilities, stadiums, arenas, etc.
Differences between Businesses and G& NFP Entities
• Organizational objectives
• Operational focus
• Sources of Financial Resources
• Accounting and Financial Reporting
• Evaluation of Performance and Operating Results
• Regulation and Control
• Other Distinguishing Characteristics

1. Organizational  Want to maximize income from  Absence of profit motive;

Objectives revenues and other sources.  Most are tax exempt;
 Want to maximize community services;
 They provide services as resources Permit
2. Operational Focus  They focus on short-term and also  They focus on short-term, annual
look to long-term budget, and the current year is of primary
importance
3. Sources of  They raise resources from sales, debt  They raise resources from grants, shared
Financial transactions, and capital stock. revenues, and members’ contribution.
Resources  The resources form different sources  Taxation is unique source of revenue to
are accounted for differently. government.
 Benefits are proportional to resources  No distinction made in sources of
provided financial resources. Owner investment
and sales are insignificant or non-
Existent
4. Accounting and  Accounting and reporting  Accounting & reporting focus on budgets
Financial focuses on net income and appropriations and funds and fund
Reporting accounting, etc
 Dual basis of accounting & reporting
5. Evaluation of  Evaluation Focuses on measurement Profit not a motive and frequently cannot
be measured
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 Performance & net income. Not able to modify or withdraw some
Operating Results  Businesses are able to modify or unprofitable goods and services from the
withdraw unprofitable Goods marketplace. Services not found
and elsewhere so there is no competition
 services from market places
6. Regulation and  They are Regulated and controlled They face rules and regulations not found
Control by the presence of demand & supply in private sector. Statutory, fund and
mechanisms and profit devices budgetary controls are used.
 Regulated by federal, state, & local laws;
grant regulations; judicial decisions;
charter, by-laws, & ordinances;
contractual obligations; trust /donors
agreements; organization structure - elected
governance, line of authority, personnel
policies and procedures

7. Other  Perfect competition  Monopolistic services

Distinguishing  Open market for goods and services  No open market for goods and services
Characteristics  All the services are provided at arm’s  User charges based on cost or
length prices without profit
 Use of matching concept  Matching is a concept used only in
 Use of going concept business-type activities
 Use of periodicity concept  Going Concern is only for business-
 Ownership Rights are transferrable type activities
From one owner to the other  Periodicity refers to flow of annual
 Policy setting that maximizes wealth financial resources
and profit of the owners.  Absence of transferable ownership
rights
 Consensus policy-setting by elected or
appointed oversight body

1.4. Objectives of Financial Reporting for Government and NFP Entities

1. Objectives of Financial Reporting For Government
- 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 (here after ref erred 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.
Governmental financial reporting objectives are influenced by the characteristics of the
state and local governmental operating environment and by the needs of those who use
governmental financial reports. IPSAS Concept Statement No. 1 set forth the following
three financial reporting (FR) objectives:
A) Financial Reporting should assist users is assessing accountability by:

 Providing information to determine whether current- year revenues are sufficient to pay
for current- year services ( Inter- period Equity)
 Demonstrating whether resources are obtained and used in accordance with the entity' s
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 legally adopted budget, and demonstrating compliance with other finance- related legal or
contractual requirements
 Providing information to assist users in assessing the service ef forts, costs, and
accomplishments of the governmental entity
ACCOUNTABILITY: is the cornerstone of all financial reporting in government
Accountability arises from the citizens’ “right to know.” It imposes a duty on public
officials to be accountable to citizens for raising public monies and how they are spent.
Inter- period equity relates to accountability. Government officials are accountable and
have an obligation to disclose whether current- year revenues were sufficient to pay for
current- year benefits or not. If inter- period equity is not achieved, the current citizens are
deferring payments to future taxpayers.

B) Financial Reporting should assist users in evaluating the operating results of the
governmental entity for the year by:
 Providing information about sources and uses of financial resources
 Providing information about how it financed its activities and met its cash requirements
 Providing information necessary to determine whether its financial position improved or
deteriorated as a result of the year' s operations
C) Financial Reporting should assist users in assessing the level of services that can be
provided by the governmental entity and its ability to meet its obligations as they become
due by: Providing information about its financial position and condition Providing
information about its physical and other non- financial resources having useful lives that
extend beyond the current year, including information that can be used to assess the
service potential of those resources. Disclosing legal or contractual restrictions on
resources and the risk of potential loss of resources.
In general, financial reports are used in governmental entities primarily to: Compare actual
financial results with legally adopted budget Assess financial condition and results of
operations Assist in determining compliance with finance- related laws, rules, and regulations
Assist in evaluating efficiency and effectiveness
2. Objectives of Financial Reporting for NFP Entities
NFP financial reporting should provide information useful in:
Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and performance
 Assessing economic resources, obligations, net resources, and changes in them

1.5. The Conceptual Framework for Public Sector Accounting Role of the

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 Conceptual Framework

The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) establishes 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

The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) establishes the concepts that underpin general
purpose financial reporting (financial reporting) by public sector entities that adopt the
accrual basis of accounting.

The International Public Sector Accounting Standards Board (IPSASB) will apply these
concepts 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.

The primary objective of most public sector entities is to deliver services to the public,
rather than to make profits and generate a return on equity to investors. Consequently the
performance of such entities can be only partially evaluated by examination of financial
position, financial performance and cash f lows. GPFRs provide information to users for
accountability and decision- making purposes. Therefore, users of the GPFRs of public
sector entities need information to support assessments of such matters as:

 Whether the entity provided its services to constituents in an efficient and effective
manner;

 The resources currently available for future expenditures and to what extent there are
restrictions or conditions attached to their use;

 To what extent the burden on future- year taxpayers of paying for current services has
changed; and

 Whether the entity’s ability to provide services has improved or deteriorated compared
with the previous year.

Types of financial reporting

A. Special Purpose Financial Reports: - responds to the requirements of users that have
the authority to require the reporting entity to provide the information that they need for
their purposes directly to them.

Examples include: prudential regulation reporting requirements tax reporting requirements

Standard setters of ten describe as “special purpose financial reports” those financial reports
prepared to respond to the requirements of users that have the authority to require the
preparation of financial reports that disclose the information they need for their particular

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 purposes. The IPSASB is aware that the requirements of IPSASs have been (and may
continue to be) applied effectively and usefully in the preparation of some special purpose
financial reports.

B. General Purpose Financial Reports; - General purpose financial reporting (GPFR)

aims to provide useful financial information about the reporting entity to primary users
who cannot require the reporting entity to provide information directly to them.

The Conceptual Framework acknowledges that, to respond to users’ information needs,

GPFRs may include information that enhances, complements, and supplements the
financial statements. Therefore, the Conceptual Framework reflects a scope for financial
reporting that is more comprehensive than that encompassed by financial statements.

Objectives and Users of General Purpose Financial Reporting, identifies the objectives of
financial reporting and the primary users of GPFRs.

It also outlines the consequences of the primary users’ likely information needs for what
may be encompassed within the scope of financial reporting.

1.5.1. IPSAS vs IFRS

 International Public Sector Accounting Standards (IPSAS) standard- setter

= International Public Sector Accounting Standards Board (IPSASB)

 International Financial Reporting Standards (IFRS) standard - setter = International

Accounting Standards Board (IASB)

 IFRS for Small and Medium- sized Entities (IFRS for SMEs) standard- setter =

IASB Local financial reporting frameworks (e.g. US GAAP) various national standard-
setters.

 IPSAS accrual: The Conceptual Framework for General Purpose Financial Reporting by
Public Sector Entities IPSAS cash basis (no conceptual framework) IFRS: The
Conceptual Framework for Financial Reporting by business entities.

 The IFRS for SMEs: Section 2 Concepts and Pervasive Principles IPSAS accrual;-
Designed for the general purpose financial reporting by public sector entities other than
those that are primarily profit oriented IPSAS GPFRs provide information about a public
sector entity’s: Financial Position, Financial Performance and Cash Flows Budget
Information and Compliance with Legislation or Other Authority Governing the Raising
and Use of Resources Service Delivery Achievements Prospective Financial and Non-
financial Information Explanatory Information

1.6. Financial Reporting for State and Local Government

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 A. Minimum External Financial Reporting

The minimum requirements for general purpose external financial statements include
Management’s Discussion and Analysis (MD& A);

Basic Financial Statements (Government Wide Financial Statements, Fund Financial

Statements, and Notes to Financial Statements), and Required Supplementary Information
(RSI) other than MD& A as shown in the illustration below. Central to the minimum
requirement of the new reporting model is the MD & A. The MD& A is required
supplementary information (RSI)designed to communicate in narrative, easily readable
form the purpose of the basic financial statements and the government’s current financial
position and results of financial activities compared with those prior year. There are two
categories of basic financial statements, government- wide financial statements and fund
financial statements:

Government- Wide Financial Statements are intended to provide a highly aggregated

overview of a government’s net assets and results of financial activities. The government-
wide financial statements report on the government as a whole and assist in assessing
operational accountability –whether the government has used its resources efficiently and
effectively in meeting operating objectives.

Fund Financial Statements –– the other category of basic financial statements

prescribed by the new reporting model, assist in assessing fiscal accountability – with
budget plans and in compliance with pertinent laws and regulations.

2. Comprehensive Annual Financial Report (CAFR)

General purpose financial reporting includes not financial statements but also all other
means of communicating information that relate directly or indirectly to the information
provided by the accounting system. In addition to the minimum financial information,
“Every governmental entity should publish, as a matter of public record, a comprehensive
annual financial report (CAFR).

A. CAFR: Introductory Section Introductory section includes such items as Title page

Contents page

Letter of transmittal – a letter from the chief finance officer addressed to the chief
executive and governing body of the governmental unit or it may be a narrative over the
signature of the chief executive. The letter or narrative material should cite legal and
policy requirements for the report other (as desired by management)

B. CAFR: Financial Section

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 The financial section of a CAFR should include:

 Auditor’s report MD & A

 Basic Financial Statements

 Government- Wide Financial Statements

1. Statement of Net Assets

2. Statement of Fund Financial Statements Governmental Funds Balance Sheet

Statement of Revenues, Expenditures, and Changes in Fund Balances Proprietary Funds

Statement of Net Assets

Statement of Revenues, Expenses, and Changes in Fund Net Assets

Statement of Cash Flows

Fiduciary Funds

1. Statement of Fiduciary Net Assets

2. Statement of Changes in Fiduciary Net Assets Notes to the Financial Statement Required
Supplementary Information (RSI) other than MD& A Combining and individual fund
statements and schedules

C. CAFR: Statistical Section a CAFR should contain a statistical section. The statistical
section typically presents tables and charts showing and charts showing social and
economic data, financial trends and the fiscal capacity of the government in detail needed
by readers who are more than casually interested in the activities of the government unit.

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