Course: Public Sector

Accounting & Civil Society

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 Chapter-1

Overview of Financial Reporting for

Governmental and NFP entities
Meaning of NFP
In accounting literatures there is no
consensus as to the exact definition
of what a Not for profit Entity (NFP)
mean.

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Not-for-profit entity is any entity were there is
• an absence of defined ownership interests that
can be sold, transferred, or redeemed, or that
convey entitlement to a share of a distribution of
resources, including a residual distribution on
liquidation of the entity.
• an entity that possesses the following
characteristics that distinguish it from a business
enterprise:
1. contributions of significant amounts of resources
from resource providers who do not expect
commensurate or proportionate pecuniary return
2. operating purposes other than to provide goods or
services at a profit and
3. absence of ownership interests like those of
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business enterprises.
Government accounting includes the process of;
recording,
analyzing,
classifying,
summarizing,
communicating and interpreting financial
information about Government in aggregate and in
details,
recording all transactions involving the;
 receipt,
 transfer and
 disposition of public funds and property.

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(a) Recording
Recording involves the process of documenting the
financial transactions and activities in the
necessary books of accounts are cash book, ledger
and Journals.
(b) Analyzing
Analyzing involves the process of separating
transactions according to their distinct nature and
posting them under appropriate heads and sub-
heads.

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(c) Classifying
Classifying has to do with the grouping of the
transactions into revenue and expenditure
descriptions and bringing them under major
classes as;
“Revenue Head‟ and „Sub-heads‟, with their relevant
code numbers of accounts.

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(d) Summarizing
Summarizing concerns the bringing together of all
the classes of accounts and preparing them into
reports periodically as are statutorily or
organizationally required.

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(e) Communicating
Communicating is about making available financial
reports on all the government financial activities
from the necessary accounting summaries to
various interested parties.
The style of communication adopted should be un-
ambiguous, lucid and devoid of jargons as much as
possible.

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(f) Interpreting

Interpreting ends the process by giving explanations

on what has been reported in the various financial
statements and reports, as regards the overall
operations and performance of the relevant
government organization(s). This is to enable the
necessary parties and users to take relevant
decisions based on their assessments of the reports.

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THE ACCOUNTING PROCESS

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Importance/ reasons of studying
governmental and non-for profit accounting
are:-
1)To better understand Reports of government and
non-for profit organizations:
•To understand the reports of non-for-profit sectors
and thereby observe how taxes and charitable
donations are used effectively and efficiently.
2)To increase the employability of yourself:
• The study of this course for sure will increase your
employability by increasing employment
opportunities in the not-for- profit sector
3)To be aware of the impact of the sector:
•on political, social and economic factors in an
economy to the extent of contribution in a national 11

economy.
4) Due to a need for sound financial management.

• Since the sector holds giant amount of scared

resources, the need for sound financial management
for best use is as important as the private sector.

5) To succeed in accounting related professional

exams

• In response to an increased demand to

professionals in the sector, questions related to the
government and NFPs sector are now representing
substantial portion of accounting related
professional exams like CPA Exam
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 Significance Differences and Similarities with
Business Organizations
major difference of the sector in relation to the
for profit sector are:-
1.Difference in Operating purposes or Organizational
objectives

• NFP entities are not in business to make profit. They are

rather operating for purposes other than providing goods
and services at a profit or profit equivalent.
• NFP organizations provides goods and services to a
community or society as a whole,
• There is no profit motive,
• the success or failure of NFP entities usually cannot be
evaluated in terms of net income or earnings per share.
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2.Difference in source of financial resources
NFP entities’
• Receive significant amount of resources from individuals or
organizations who or which do not expect to receive either
direct repayment or economic benefits

• Receive of significant amounts of resources from resource

providers, who do not expect to receive either repayment or
economic benefits proportionate to resources provided

• For governmental organizations, taxation is the major

source of financial resources in addition to grants,
intergovernmental transfers and charges for goods and
services.

• The financial sources are basically of voluntary or

involuntary contributions based on governmental or non- 14

governmental non-for profit entity

3. Difference in ownership interest and stewardship for
resources
Ownership Interest
• Ownership interest is not clearly defined and they are usually
owned collectively by general public.
•There is no equity interest to be sold or exchanged
• the two most important legal provisions affecting accounting
are those relating to
(1) budgeting and
(2) funds
4. Difference Measurement of objectives or output
• In business organizations the major goal of wealth is found to
be creating wealth to owners.
• In NFP sector, however, measuring the objectives or outputs in
either monetary terms or any other quantitative terms is very
much difficult.
5. Difference in whom they serve
•The main purpose of the sector is to render goods and 15
services to society as a whole.
6. Difference in internal accounting
• In business, the revenue-expense matching
relationship plays such an important role but this does
not exist in non-for profit entities.
• The internal accounting for the NFP focuses on
compliance with legal, donor and other similar
restrictions and ensuring spending does not exceed
budget and is made on and for predetermined goods
and services only.

• In business organization, internal accounting mainly

focuses on ensuring that spending is generating
required income.
• The internal accounting is mainly driven by the
question of having sufficient resources to 16

discharge its objective

7. Difference in use of budget

• Budget is the most widely used method for control

resources of non-for profit entities. It helps the entities
to identify sources and uses of financial resources. The
driving force behind most of the activities of non-for
profit sectors is the budget.

8. Difference in regulation and control

• Business organizations choose on the type and

quantity of goods and services they provide to the
public, based on the invisible hand principle.

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• The not for profit entities, on the other hand, may be
required by law and/or contractual agreements to provide
certain goods and services irrespective of the fact that they
choose it or not.

• The profit motive and profit measurement constitute an

automatic allocation and regulation device in the profit-
seeking sector of an economy. But this is not present in the
NFP sector and most NFP entities must strive to attain
their objectives without its benefits.
9.Difficulty in evaluating operating performance and
the need for stringency in control b/c
•There is no open market supply and demand test of the
value of the goods and services they provide.

•The relationship, if any, between the resource providers and

the receipts of the goods and services is remote and indirect
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NFPs Similarity with Business Organizations
• Both NFPs and business do acquire resources to
provide goods or services

• Both are integral part of the same economic

system. As a result, they operate and compete for
same resources in financial, capital, and human
markets.

• Both NFPs and business do use of accounting &

other information systems for informed decision
making.
• Both NFPs and business do use financial
management processes
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• NFPs and business do use Cost analyses, control

How Do Governmental Entities Differ From Not-For-
Profit Organizations?
• Non-for-Profit is usually is used to connote only
private not-for-profits.

• Governments, however, do have also unique

characteristic that makes them to be different
from private not-for-profits entitles.
These characteristics are:
• Power ultimately rests in the hands of the people:
the controlling majority of members of governing
board of state or local governments are either voted
or appointed

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• Government NFPs are created by and accountable
to a higher-level government

• Government NFPs do have power to enact and

enforce a tax levy to raise revenue for covering
their expenditures.

• Governmental NFPs do have the ability to issue

tax-exempt debt

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 1.2 Sources of financial reporting standards for
Governmental and NFP entities in Ethiopia

• Financial Reporting Proclamation 847/2014

• Council of Ministers Regulation 332/2014

• Directives to be issued by AABE (The

Accounting and Auditing Board of Ethiopia
1.3 Objectives of financial reporting in NFP
entities

(1)compare actual financial results with the legally

adopted budget;

(2) assess financial condition and results of

operations;

(3) assist in determining compliance with finance-

related laws, rules, and regulations; and

(4) assist in evaluating efficiency and effectiveness.

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 NATURE AND OBJECTIVES OF GOVERNMENT
ACCOUNTING
The following are the main objectives of government
accounting:
To record financial transactions of revenues and
expenditures related to the government
organizations.
To avoid the excess expenditures beyond the limit
of the budget approved by the government.

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To make expenditures according to the appropriate
act, rules and legal provisions of the government.
To provide reliable financial data and information
about the operation of public fund.
To prevent misappropriation of government
properties by maintaining the systematic records of
cash and store items.

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To facilitate for making auditing of the books of
accounts.
To help for preparing different financial statements
and reports.
To facilitate for estimating the annual budget by
providing historical financial data of government
revenues and expenditures.

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To provide the means by which actual performance

may be compared with the target set.

To evaluate the economy, efficiency and

effectiveness with which governance is carried out.

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Objectives of Financial Reporting-Federal
SFFAC I, Objectives of Federal Financial Reporting,
outlined four objectives that should be followed in
federal financial reporting;
1)Budgetary integrity, indicates that financial reporting
should demonstrate accountability with regard to the
raising and expending of moneys in accord with the
budgetary process and laws and regulations.

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“ACCOUNTABILITY is the cornerstone of all financial
reporting in government,” (GASB Concepts Statement
No. 1, par. 56).

 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.

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2) Operating performance, suggests that financial
reporting should enable evaluation of the service
efforts, costs, and accomplishments of the
reporting entity.
3) Stewardship reflects the concept that financial
reporting should enable an assessment of the
impact on the nation of the government's
operations and investments.

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4) Systems and controls, indicates that financial

reporting should reveal whether financial systems and

controls are adequate.

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Objectives of Financial Reporting—State
and Local Governments (SLG)

Financial reports are used primarily to:

1) Compare actual financial results with
legally adopted budget
2) Assess financial condition and results of
operations
3) Assist in determining compliance with
finance-related laws, rules, and regulations
of the government
4) Assist in evaluating efficiency and
effectiveness of management, its
resources and programs

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 PURPOSE OF PUBLIC SECTOR ACCOUNTING

The purposes of Public Sector Accounting include:

1) Demonstrating the proprietary of transactions and
their conformity with the law, established rules and
regulations.
2) Measuring current performance.

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3) Providing useful information for the efficient control
and effective management of government
operations.
4) Facilitating audit exercise to be carried out.
5) Planning future operations.
6) Appraising those in the authority, in efficiency and
effectiveness

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USERS OF GOVERNMENT ACCOUNTING

In Concepts Statement #1, GASB identified 3

basic groups of users of governmental
accounting information:

 Citizenry
 Legislative and oversight bodies
 Investors and creditors

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1)The citizenry-Those to whom the government is
primarily accountable-including;
citizens (taxpayers, voters, service recipients),
the media,
advocate groups, and
public finance researchers.

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2) Legislative and oversight bodies: Those who directly
represent the citizens including;
 members of state legislatures,
 county commissions,
 city councils,
 boards of trustees and school boards, and
 executive branch officials with oversight
responsibility over other levels of government.

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3)Investors and creditors: Those who lend or
participate in the lending process including;
individual and institutional investors creditors,
municipal security underwriters,
bond rating agencies,
bond insurers, and
financial institutions

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4) Government administrators: Include internal

executive branch managers if they do not have ready

access to the government’s internal information.

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• IFRS Reporting frameworks/Standards
• standard-setter = International Accounting Standards
Board (IASB)
• More Principle based
• IFRS for SME
• standard-setter = International Accounting Standards
Board (IASB)
• More Principle based
• IPSAS
• standard-setter = International Public Sector
Accounting Standards Board (IPSASB)
• More Principle based
• US-GAAP
• Financial Accounting Standard Board (FASB)
• Rule- based 40
1.4 IPSAS Vs IFRS IFRS for
IFRS IPSAS
SMEs
Designed for which Profit-oriented Public sector Not
entities? publicly
accountab
le
Targeting whose Existing and Service recipients Broad
information needs that potential and resource range
cannot require investors, providers
information from the lenders,
entity? creditors
As a basis for assessing Prospects for Stewardship, Broad
what? future net cash compliance, range
inflows sustainability,
adaptability
For informing what Buy, hold, sell Service delivery Economic
actions? decisions and planning, including decision-
advance or advancing or making
withdraw loan withdrawing resources

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1.5 Users of Financial Reporting

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 Fundamental concepts
• Recognition,

• measurement and

• disclosure concepts

N/B read the given PPt for better understanding

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