Hawassa University CBE AcFn Department Government and Not for Profit Accounting

Chapter One
Governmental & Not-for-Profit Accounting Environment & Characteristics

Accounting and financial reporting for governments and nonprofit organizations are based on
distinctive concepts, standards, and procedures designed to accommodate their environments and
the needs of their financial report users. This chapter describes about the major environmental
characteristics of governmental and nonprofit organizations. It also describes about users,
standard-setters, the characteristics of accounting and financial reporting for governmental and
nonprofit organizations and objectives of financial reporting. The chapter ends with a brief
discussion of the financial reporting of state and local governments.

Characteristics and Types of G&NP Organizations

Governments and other nonprofit organizations are unique in that:
 They do not attempt to earn a profit − and most are exempt from income taxes − so
typical business accounting, income tax accounting, usually is not appropriate.
 They are owned collectively by their constituents; and because ownership is not
evidenced by equity shares that can be sold or traded, residents who are dissatisfied with
their government must await a change in its elected governing body or move elsewhere.
 Those contributing financial resources to the organizations do not necessarily
receive a direct or proportionate share of their services. For example, homeowners
pay property taxes to finance public schools even if they do not have children in school or
the welfare recipient (probably) did not pay the taxes from which welfare benefits
are paid.
 Their major policy decisions, and perhaps some operating decisions, typically are
made by majority vote of an elected or appointed governing body − for example, a
state legislature, a city council, or a hospital board of directors − whose members serve
part time, receive modest or no compensation, and have diverse backgrounds,
philosophies, capabilities, and interests.

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

 Decisions usually must be “in the sunshine” − is meetings open to the public, including
the news media − and most have “open records” laws that make their accounting and
other records open to the public.
A G&NP organization exists because a community or society decides to provide certain goods or
services to its group as a whole. Often these goods or services are provided regardless of whether
costs incurred will be recovered through charges for the goods or services or whether those
paying for the goods or services are those benefiting from them. Indeed, many G&NP services
could not be provided profitably through private enterprise. In addition, the community or
society may consider these services so vital to the public well-being that they should be
supervised by its elected or appointed representatives.

The major types of government and nonprofit organizations may be classified as:
1. Governmental: federal, state, county, municipal, township, village, and other local
governmental authorities and special districts.
2. Educational: kindergarten, elementary and secondary schools, vocational and technical
schools, and colleges and universities.
3. Health and welfare: hospitals, nursing homes, child protection agencies, the American
red Cross, and United Service Organizations (USO)
4. Religious: Young Men’s Christian Association (YMCA), Young Women’s Christian
Association (YWCA), Salvation Army, and other church-related organizations.
5. Charitable: United Way, Community Chest, and similar fund-raising agencies; related
charitable agencies; and other charitable organizations.
6. Foundations: private trusts and corporations organized for educational, religious, or
charitable purposes.
This general classification scheme has much overlap among the classifications. Many charitable
organizations are operated by churches, for example, and governments are deeply involved in
education, health, and welfare activities.
The G&NP Environment
G&NP organizations are similar in many ways to profit-seeking enterprises. For example:
1. They are integral parts of the same economic system and use financial, capital, and
human resources to accomplish their purposes.

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

2. Both must acquire and convert scarce resources into their respective goods and services.
3. Both must have viable information systems, including excellent accounting systems to
assure that managers, governing bodies, and others receive relevant and timely
information for planning, directing, controlling, and evaluating the sources, uses, and
balances of their scarce resources.
4. Because their resources are scarce, cost analysis and other control and evaluation
techniques are essential to ensure that resources are utilized economically, effectively,
and efficiently.
5. In some cases, both produce similar products. For example, both governments and
private enterprises may own and operate transportations systems, sanitation services, and
electric or gas utilities.

Distinguishing Characteristics of Governmental and Not-for-Profit Entities

Governmental and not-for-profit organizations differ in important ways from business
organizations. Not surprisingly then, accounting and financial reporting for governmental and
not-for-profit organizations are markedly different from accounting and financial reporting for
businesses. An understanding of how these organizations differ from business organizations is
essential to understanding the unique accounting and financial reporting principles that have
evolved for governmental and not-for-profit organizations.
Broad generalizations about such a diversified group as G&NP organizations are difficult.
Nonetheless, the major differences arise from differing:

1) Organizational Objectives
Expectation of income or gain is the principal factor that motivates investors to provide
resources to profit-seeking enterprises. But the objective of most governmental and nonprofit
organizations is to provide as much service each year as their financial and other resources
permit. G&NP organizations typically operate on a year-to-year basis—that is, each year they
raise as many financial resources as necessary and expend them in serving their constituencies.
They may seek to increase the amount of resources made available to them each year—and most
do—but the purpose is to enable the organization to provide more or better services, not to
increase its wealth.

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

In sum, private businesses seek to increase their wealth for the benefit of their owners;
G&NP organizations seek to expend their available financial resources for the benefit of
their constituency. Financial management in the G&NP environment thus typically focuses on
acquiring and using financial resources—up on sources and uses of expendable financial
resources (working capital), budget status, and cash flow—rather than on net income or earnings
per share. Even G&NP entities whose external financial reports do not require primary emphasis
on acquisition and use of financial resources emphasize this information for internal reporting
and management decision-making purposes.

2) Sources of Financial Resources

The sources of financial resources differ between business and G&NP organizations, as well as
among G&NP organizations. In the absence of a net income objective, no distinction generally is
made between invested capital and revenue of G&NP organizations. A dollar is a financial
resource whether acquired through donations, user charges, sales of assets, loans, or some other
manner.
The typical nondebt sources of financial resources for business enterprises are investments by
owners and sales of goods or services to customers. These sources of financing usually are not
the primary sources of G&NP organization financial resources.
Governments have the unique power to force involuntary financial resource contributions
through taxation−of property, sales, and income−and all levels rely heavily on this power. Grants
and shared revenues from other governments also are important state and local government
revenue sources, as are charges levied for goods or services provided, such as utilities.
Religious groups and charitable organizations usually rely heavily on donations, although they
may have other revenue sources. Some colleges and universities rely heavily on donations and
income from trust funds; others depend primarily on state appropriations and/or tuition charges
for support. Hospitals generally charge their clientele, although few admit their patients solely on
the basis of ability to pay. Indeed, many G&NP hospitals serve numerous charity patients and/or
have large amounts of uncollectible accounts; and some hospitals rely heavily on gifts and
bequests.
There are other, more subtle, differences in sources of G&NP organization financial resources as
compared with profit-seeking businesses. For example,

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

 Many services or goods provided by these organizations are monopolistic in nature, and
there is no open market in which their value may be objectively appraised or evaluated.
 User charges, where levied, usually are based on the cost of the goods or services
provided rather than on supply-and demand-related pricing policies common to private
enterprise.
 Charges levied for goods or services often cover only part of the cots incurred to provide
them; for example, tuition generally covers only a fraction of the cost of operating state
colleges or universities, and token charges (or no charges) may be made to a hospital’s
patients.

3) Regulation and Control

The operation of most business enterprise is usually regulated by the market; i.e., the interaction
of demand and supply. In the business environment, there exist a direct relationship between the
financial resources each consumer provides and the goods or services that consumer receives
from enterprise essentially dictates the type and quality of goods or services each profit-seeking
enterprise will provide. Firms with responsive management will be profitable and will continue
in the market. Firms with unresponsive management will be unprofitable and ultimately will be
forced out of business. Therefore, the profit motive and profit measurement constitute an
automatic allocation and regulating device in the free enterprise segment of our economy.
This profit test/regulator device is not present in the usual G&NP situation, and most G&NP
organizations must strive to attain their objectives without its benefits. In addition, as noted
earlier, many G&NP organizations provide goods or services having no open market value
measurement by which to test consumer satisfaction. This problem exists because the goods or
services are unique or are provided to some or all consumers without charge, or at a token
charge. Thus, these consumers have no “dollar vote” to cast.
Evaluating the performance and operating results of most G&NP organizations is
extremely difficult for the several reasons.
1. There is no open market supply and demand test of the value of the goods or services
they provide.
2. The relationship, if any, between the resource contributors and the recipients of the goods
and services is remote and indirect.

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

3. Such organizations are not profit oriented in the usual sense and are not expected to
operate profitably; thus, the profit test is neither a valid performance indicator nor an
automatic regulating device.
4. Governments can force resource contributions through taxation.
Accordingly/due to the above reasons, other operating results measures and controls must be
employed to ensure that G&NP organization resources are used appropriately and to prevent
uneconomical or ineffective G&NP organizations from continuing to operate in that manner
indefinitely. Governmental and nonprofit organizations, particularly governments, are therefore
subject to more stringent legal, regulatory, and other controls than are private businesses.
All facets of a G&NP organization`s operations may be affected by legal or quasi-legal
requirements (1) imposed externally, such as by federal or state statue, grant regulations, or
judicial decrees, or (2) imposed internally by charter, bylaw, ordinance, trust agreement, donor
stipulation, or contract. Furthermore, the need to ensure compliance with such extensive legal
and contractual requirements often results in more stringent operational and administrative
controls that in private enterprise.
4) Ownership Interest
G and NP organizations are usually owned collectively by their constituents. Ownership is not
evidenced by equity shares that can be sold or traded. Because of this feature, there is no equity
interest to be sold or traded. This implies that ownership interest is not clearly defined. In
general, absence of defined ownership interests that can be sold, transferred, or redeemed,
or that convey entitlement to a share of a residual distribution of resources in the event of
liquidation of the organization characterizes most G&NFP organization.
But for profit seeking enterprises, ownership interest is clearly defined which can be sold or
traded or transferred to other parties. A business enterprise might either be owned by a sole
proprietor or partners or stockholders who they do have the right to sell or transfer their
ownership interest to other parties.
5) Cost-Benefit Relationship
Those contributing resources (donors or taxpayers) do not necessarily receive an equivalent or
proportionate share of the government`s or not-for-profit organization`s goods or services.
Someone may contribute more but may receive less or nothing. On the contrary, others may
contribute less or nothing but may earn more. For example, welfare recipient (probably) did not

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pay the taxes from which welfare benefit are paid. However, there exist a direct relationship
between costs and benefits in profit-seeking organizations. This implies that those who are
capable of afford (incur) more costs are entitled to get a proportionate more benefits. Moreover,
resource contributors (creditors and owners) can receive equity interest in the net assets of the
organization.
6) Scope of Operations
The scope of operation of G&NFP organizations, especially for governmental organizations, is
mostly diversifies. i.e., they are engaged in a wide area of activity. For example, consider the city
municipality of Hawassa. Its common operations cover health, security, administration,
investments, construction, and others.
Relatively speaking, the operation or area of activity of profit-seeking organizations is more
specific. Based on their activity, we may categorize a given business entity in a service, a
merchandising or a manufacturing classification. Due to the above characteristics and
characteristics, which would be discussed in the subsequent sections, there is a need of complex
accounting treatment for G&NFP organizations as compared to profit-seeking organizations.
Sources of Financial Reporting Standards
Figure 1.1 shows the primary sources of accounting and financial reporting standards for
business and not-for-profit organizations, state and local governments, and the federal
government. Specifically, the FASB sets standards for for-profit business organizations and
nongovernmental not-for-profit organizations; the GASB sets standards for state and local
governments, including governmental not-for-profit organizations; and the Federal
Accounting Standards Advisory Board (FASAB) sets standards for the federal government
and its agencies and departments.
Authority to establish accounting and reporting standards for not-for-profit organizations split
between the FASB and the GASB because a sizeable number of not-for-profit organizations are
governmentally owned, particularly public colleges and universities and government hospitals.
The FASB is responsible for setting accounting and reporting standards for the great majority of
not-for-profit organizations, those that are independent of governments. Governmental not-for-
profit organizations follow standards established by the GASB.

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The GASB and the FASB are parallel bodies under the oversight of the Financial Accounting
Foundation. The foundation appoints the members of the two boards and supports the boards`
operations by obtaining contributions from business corporations; professional organizations of
accountants, financial analysts, and other groups concerned with financial reporting; CPA firms;
debt-rating agencies; and state and local governments (in the case of the GASB). The federal
Sarbanes-Oxley Act greatly enhanced financial support for the FASB by mandating an assessed
fee on corporate security offerings. Because of the breadth of support and the lack of ties to any
single organization or governmental unit, the GASB and the FASB are referred to as
“independent standards-setting boards in the private sector.”

Figure 1.1: Primary Sources of Accounting and Financial Reporting Standards for Businesses, Governments,
and Not-for-Profit Organizations. (Source: Statement on Auditing Standards (SAS) 69, amended by SAS 91,
April 2000, AICPA Professional Standards, v.1, Au Sec. 411.)

Comptroller General
Financial Director of the Office of
Accounting Management and
Foundation Budget
Secretary of the Treasury

Financial Governmental Federal Accounting

Accounting Accounting
Standards Standards Standards Advisory
Board (FASB) Board (GASB) Board (FASAB)

Nongovern- Federal government

Business State and local Governmental
mental
(for-profit)
not-for-profit
governmental not-for-profit and its agencies and
organizations organizations organizations departments
organizations

Before the creation of the GASB and the FASB, financial reporting standards were set by groups
sponsored by professional organizations: The forerunners of the
GASB (formed in 1984) were the National Council on Governmental Accounting (1973—84),
the National Committee on Governmental Accounting (1948—73), and the National Committee
on Municipal Accounting (1934—41). The forerunners of the FASB (formed in 1973) were the

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Accounting Principles Board (1959—73) and the Committee on Accounting Procedure (1938—
59) of the American Institute of Certified Public Accountants.
Federal statutes assign responsibility for establishing and maintaining a sound financial structure
for the federal government to three officials: the Comptroller General, the Director of the
Office of Management and Budget, and the Secretary of the Treasury. In 1990, these three
officials created the Federal Accounting Standards Advisory Board (FASAB) to recommend
accounting principles and standards for the federal government and its agencies. It is understood
that, to the maximum extent possible, federal accounting and financial reporting standards should
be consistent with those established by the GASB and, where applicable, by the FASB.
In Rule 203 of its Code of Professional Conduct, the American Institute of Certified Public
Accountants (AICPA) has formally designated the GASB, the FASAB, and the FASB as the
authoritative bodies to establish generally accepted accounting principles (GAAP) for state
and local governments, the federal government, and business organizations and
nongovernmental not-for-profit organizations, respectively. “Authority to establish
accounting principles” is interpreted in practice to mean “authority to establish accounting and
financial reporting standards.”
Users of Financial Reports

Users of G&NP entity accounting information as both internal and external. Major external users
are:
 Resource provides (tax payers, donors and potential donors, investors and potential
investors, bond-rating agencies and grant providing organizations).
 Legislative and oversight bodies (higher-level governments and regulating agencies)
 Service recipients (citizen advocate groups)

Objectives of Financial Reporting

In its Concepts Statement No. 1, “Objectives of Financial Reporting,” the Governmental
Accounting Standards Board stated that “Accountability is the cornerstone of all financial
reporting in government….Accountability requires governments to answer to the citizenry  to
justify the raising of public resources and the purposes for which they are used.” The board
elaborated:

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

… Governmental accountability is based on the belief that the citizenry has a ’“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 duty to be publicly accountable in a democratic society.

Table 1.1 shows several ways that state and local governmental financial reporting is used in
making economic, social, and political decisions and assessing accountability. Closely related to
the concept of accountability as the cornerstone of governmental financial reporting is the
concept the GASB refers to as interperiod equity. The concept and its importance are explained
as follows:
The Board believes that interperiod equity is a significant part of accountability
and is fundamental to public administration. It therefore needs to be considered
when establishing financial reporting objectives. In short, financial reporting
should help users assess whether current-year revenues are sufficient to pay for
services provided that year and whether future taxpayers will be required to
assume burdens for services previously provided.

Accountability is also the foundation for the financial reporting objectives the Federal
Accounting Standards Advisory Board (FASAB) has developed for the federal government. The
FASAB’s Statement of Accounting and Reporting Concepts Statement No. 1 identifies four
objectives of federal financial reporting (see Table 1.1) focused on evaluating budgetary
integrity, operating performance, stewardship, and adequacy of systems and controls.

Table 1.1: Comparison of Financial Reporting Objectives- State and Local Governments,
Federal Government, and Not-for-Profit Organizations
State and Local Federal Government Not-for-Profit Organizations
Governments

Financial reporting is used in Financial reporting should help Financial reporting should
making economic, social, and to achieve accountability and is provide information useful in:
political decisions and in intended to assist report users  Making resource
assessing accountability in evaluating: allocation decisions
primarily to:  Budgetary integrity  Assessing services and
 Comparing actual  Operating performance ability to provide services

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

financial results with  Stewardship  Assessing management

legally adopted budget  Adequacy of systems stewardship and
 Assessing financial and controls performance
condition and results of  Assessing economic
operations resources, obligations, net
 Assisting in resources, and changes in
determining them
compliance with
finance-related laws,
rules, and regulations
 Assisting in evaluating
efficiency and
effectiveness

Unlike the FASB and the GASB, which base their standards on external financial reporting,
the FASAB and its sponsors in the federal government are concerned with both internal and
external financial reporting. Accordingly, the FASAB has identified four major groups of users
of federal financial reports: citizens, Congress, executives, and program managers. Given the
board role the FASAB has been assigned, its standards focus on cost accounting and service
efforts and accomplishment measures, as well as on financial accounting and reporting.
Financial reports of not-for-profit organizationsvoluntary health and welfare organizations,
private colleges and universities, private health care institutions, religious organizations, and
othershave similar uses. However, as Table 1.1 shows, the reporting objectives for not-for-
profit organizations emphasize decision usefulness over financial accountability needs,
presumably reflecting the fact that the financial operations of not-for-profit organizations are
generally not subject to as detailed legal restrictions as those of governments.

Note that the objectives of financial reporting for governments and not-for-profit entities stress
the need for the public to understand and evaluate the financial activities and management of
these organizations. Readers will recognize the impact on their
lives, and on their bank accounts, of the activities of the layers of government they are obligated
to support and of the not-for-profit organizations they voluntarily support. Since each of us is
vitally affected, it is important that we be able to read intelligently the financial reports of
governmental and not-for-profit entities. In order to make informed decisions as citizens,

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taxpayers, creditors, and donors, readers should make the effort to learn the accounting and
financial reporting standards developed by authoritative bodies.

Financial Reporting of State and Local Governments

Like the FASB, the GASB continues to develop concepts statements that communicate the
framework within which the Board strives to establish consistent financial reporting standards
for entities within its jurisdiction. The GASB, as well as the FASB, is concerned with
establishing standards for financial reporting to external users those who lack the authority to
prescribe the information they want and who must rely on the information management
communicates to them. The board does not intend to set standards for reporting to managers and
administrators or others deemed to have the ability to enforce their demands for information.

Figure 1.2 displays the minimum requirements for general purpose external financial reporting
under the governmental financial reporting model specified by GASB Statement No. 34
(GASBS 34). Central to the model is the management’s discussion and analysis (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 of the prior year. The
MD&A should provide an overview of the governments financial activities and financial
highlights for the year. The MD&A should provide a narrative explanation of the contents of the
CAFR, including the nature of the government-wide and fund financial statements, and the
distinctions between those statements. The remainder of the MD&A should describe the
governments financial condition, financial trends of the government as a whole and of its major
funds, budgetary highlights, and activities affecting capital assets and related debt. Finally, the
MD&A should discuss economic factors and budget and tax rates for the next year.

GASBS 34 prescribes two categories of basic financial statements, government-wide and

fund. Government-wide financial statements are intended to provide an aggregate overview of
a government’s net assets and changes in net assets. 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

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objectives. The GASB concluded that reporting on operational accountability is best

achieved by using essentially the same basis of accounting and measurement focus used by
business organizations: the accrual basis of accounting and flow of economic resources
measurement focus.
(Note: Measurement focusrefers the nature of the resources, claims against resources, and
flow of resources that are measured and reported by a fund or other entity. For example,
governmental funds currently measure and report available financial resources, whereas
proprietary and fiduciary funds measure and report economic resources. Basis of accounting
refers the standards used to determine the point in time when assets, liabilities, revenues, and
expenses (expenditures) should be measured and recorded as such in the accounts of an entity).

Fund financial statements, the other category of basic financial statements, assist in assessing
fiscal accountabilitywhether the government has raised and spent financial resources in
accordance with budget plans and in compliance with pertinent laws and regulations. Certain
funds, referred to as governmental funds, focus on the short-term flow of current financial
resources rather than on the flow of economic resources. Other funds, referred to as proprietary
and fiduciary funds, account for the business-type and certain fiduciary activities of the
government. These funds follow accounting and reporting principles similar to those of
business organizations, although a number of GASB standards applicable to these funds differ
substantially from FASB standards applicable to business organizations.

The notes to the financial statements are considered integral to the financial statements. In
addition, governments are required to disclose certain RSI other than MD&A.

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 Hawassa University CBE AcFn Department Government and Not for Profit Accounting

Figure 1.2 Minimum Requirement for General Purpose External Financial

ReportingGASB Statement No. 34 Reporting Model

Management’s discussion and analysis

Government-wide Fund financial

financial statements statements

Notes to the financial statements

Required supplementary information (other than MD&A)

Comprehensive Annual Financial Report (CAFR)

Serious users of governmental financial information need much more detail than is found in the
MD&A, basic financial statements, and RSI (other than MD&A). For state and local
governments, much of that detail is found in the governmental reporting entity’s comprehensive
annual financial report (CAFR). Although governments are not required to prepare a CAFR,
most do so as a matter of public record and to provide additional financial details beyond the
minimum requirements. As such the GASB provides standards for the content of a CAFR in its
annually updated publication Codification of Governmental Accounting and Financial Reporting
Standards. A CAFR prepared in conformity with these standards should contain the following
sections.

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 Hawassa University CBE AcFn Department Government and Not for Profit Accounting

Introductory section
The introductory section typically includes items such as a title page and contents page, a letter
of transmittal, a description of the government, and other items deemed appropriate by
management (e.g., list of principal officials, organization chart, location, etc). The letter of
transmittal may be literally that – a letter from the chief financial 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. In either event, the letter or narrative material should cite legal
and policy requirements for the report. The introductory section may also include a summary
discussion of factors relating to the government’s service programs and financial matters.
Matters discussed in the introductory section should not duplicate those discussed in the MD&A.
because the MD&A is part of the information reviewed (but not audited) by the auditor, it
presents information based only on facts known to exist as of the reporting date since the
introductory section is generally not covered by the auditor’s report, it may present information
of a more subjective nature, including prospective information such as forecasts or expenditures.

Financial section
The financial section of comprehensive annual financial report should include (1) an auditor’s
report, (2) management’s discussion and analysis (MD&A), (3) basic financial statements,
(4) required supplementary information (other than MD&A), and (5) other supplementary
information, such as combining statements and individual fund statements and schedules.
Items (2), (3), and (4) represent minimum requirements for general purpose external financial
reporting. So, it should be apparent that a CAFR provides additional supplementary financial
information beyond the minimum amount required by generally accepted accounting principles.

The financial section should contain sufficient information to disclose fully and present fairly the
financial position and results of financial operations during the fiscal year. Laws of higher
jurisdictions, actions of the legislative branch of the governmental unit itself, and agreements with
creditors and others impose constraints over governments` financial activities and create unique
financial accountability requirements.

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 Hawassa University CBE AcFn Department Government and Not for Profit Accounting

Governmental financial reporting has evolved to meet the unique needs of citizens and other
financial statement users. It should not be surprising that these financial statements are quite
different from those prepared by business organizations. The basic financial statements, which
are reported in the financial section of CAFR, consist of:
Government-wide Financial Statements
1. Statement of net assets
2. Statement of activities
Fund Financial Statements
1. Balance sheet—governmental funds
2. Statement of revenues, expenditures, and changes in fund balances—governmental funds
3. Statement of net assets—proprietary funds
4. Statement of revenues, expenses, and changes in fund net assets—proprietary funds
5. Statement of cash flows—proprietary funds
6. Statement of fiduciary net assets
7. Statement of changes in fiduciary net assets

Government-wide Financial Statements

The two government-wide financial statements are intended to report on the
government`s operational accountability.
accountability. As such, the government-wide financial
statements are prepared using essentially the same basis of accounting and measurement
focus that are used in business accounting−that is, the accrual basis of accounting and
measurement of total economic resources.
Fund Financial Statements
By contrast, governmental fund financial statements report on fiscal accountability.
Therefore, these statements report only information that is useful in assessing whether
financial resources were raised and expended in compliance with budgetary and other
legal provisions. Thus, governmental fund statements focus on the flow of current
financial resources−cash and near cash resources that are available for expenditure.
Since long-term obligations do not have to be paid in the current budgetary period, nor do
noncurrent assets such as land, buildings, and equipment provide resources to pay current

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period obligations, neither is reported in the governmental funds. Both are reported in
the Governmental Activities column of the government-wide statement of net assets.
Modified accrual is the basis of accounting that has evolved for governmental funds.
Under this basis, revenues are recorded only if they are measurable and available for
paying current period obligations. Expenditures are generally recognized when
incurred.
The governmental fund statement of revenues, expenditures, and changes in fund
balances reports expenditures, since outlays to acquire goods or services are more
relevant than expenses in measuring the outflow of current financial resources. Expenses,
however, are more relevant at the government-wide level, as they measure the cost of
services provided. Consequently, expenses, classified by program or function, are
reported for both governmental and business-type activities.
Proprietary fund financial statements present financial information for enterprise funds
and internal service funds. Both types of funds operate essentially as self-supporting
entities and, therefore, follow accounting and reporting practices similar to those of
business organizations. Enterprise funds and internal service funds are distinguished
primarily by the kinds of customers they serve. Enterprise funds provide goods or
services to the public, whereas internal service funds mainly serve departments of the
same government. For most governments, the information reported in the Business-type
Activities column of the government-wide statements is simply the total of all enterprise
funds information. Because internal services funds predominantly serve governmental
activities, financial information for internal service funds is typically reported in the
Governmental Activities column at the government-wide level.
The final two required financial statements are those for the fiduciary funds. By
definition, fiduciary funds account for resources that the government is holding or
managing for an external private party, that is, an individual, organization, or other
government. Because these resources may not be used to support the governments own
programs, GASB standards require that financial information about fiduciary activities be
omitted from the government-wide financial statements; however, the information must
be reported in two fund financial statements: a statement of fiduciary net assets-
fiduciary funds and a statement of changes in fiduciary net assets-fiduciary funds.

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

Both statements are prepared using accrual accounting with the economic resources
measurement focus.
Both governmental funds and proprietary funds financial statements must provide separate
columns for each major fund. A fund is classified as major if it is significantly large with
respect to the whole government. “A fund is “major” if
a) Total assets, liabilities, revenues, or expenditures/expenses of the individual
governmental or enterprise fund are at least 10 percent of the corresponding total of
assets, liabilities, revenues, expenditures/expenses for all funds of that category or type
(total governmental or total enterprise funds), and
b) Total assets, liabilities, revenues, or expenditures/expenses of the individual
governmental or enterprise fund are at least 5 percent of the corresponding total for all
governmental and enterprise funds combined.
The aggregate of non-major governmental and enterprise funds is reported in a single column of
the corresponding statements.
Reporting by major fund meets the information needs of citizens and other report users having a
specific interest in the financial condition and operations of a particular fund. To meet the needs
of individuals having an interest in particular non-major funds, governments should provide
separate combining financial statements for nonmajor governmental and proprietary funds, as
well as for discretely presented component units. Combining and individual fund statements are
not ordinarily audited unless the engagement letter with the auditor extends the scope of the audit
to include these statements. Other supplementary information that may be presented in the
financial section of the CAFR includes schedules necessary to demonstrate compliance with
finance-related legal and contractual provisions and schedules to present comparative data on
items such as tax collections and long-term debt.
Statistical Section
In addition to the introductory and financial sections of the CAFR, A CAFR should contain
a statistical section. The statistical section typically presents tables 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
governmental unit.

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

GASB Statement No. 44 indicates that generally the statistical section should present
information in five categories to assist the user in understanding and assessing a
government`s economic condition. The five categories are:
1) Financial trends information, which provides the user with information that is
helpful in understanding and assessing how a government`s financial position has
changed over time. Schedules in this category are prepared at both the fund level
and government-wide level. The focus is on showing the trend in fund balances and
net asset categories, including changes in net assets and fund balances.
2) Revenue capacity information, which assists the user with understanding and
assessing the government’s ability to generate its own revenues (own-source
revenues), such as property taxes and user charges. The schedules presented should
focus on the governments most significant own-source revenues. Suggested
schedules provide information on the revenue base (sources of revenue), revenue
rates (including overlapping tax rate information), and property tax levy and
collection information.
3) Debt capacity information, which is useful in understanding and assessing the
governments existing debt burden and its ability to issue additional debt. Four types
of debt schedules are recommended−ratios of outstanding debt to total personal
income of residents, information about direct and overlapping debt, legal debt
limitations and margins, and information about pledged revenues.
4) Demographic and economic information, which assists the user in understanding
the socioeconomic environment in which the government operates, and provides
information that can be compared over time and across governments. Governments
should present demographic and economic information that will be most relevant to
users, such as information on personal income, unemployment rates, and
employers.
5) Operating information, which is intended to provide a context in which the
governments operations and resources can be better understood. This information is
also intended to assist users of financial statements in understanding and assessing
the government’s financial condition. At a minimum, three schedules of operating

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Hawassa University CBE AcFn Department Government and Not for Profit Accounting

information should be presented-number of government employees, indicators of

demand or level of service (operating indicators), and capital asset information.

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