Public Government ch 1

1. Accounting for public sector and civil society

2. What are Governmental Organizations?
General Purpose Governments
Provide a wide variety of services
Examples: Federal government, state governments, Zone, Woreda, cities,
towns, townships, villages, counties.
Special Purpose Governments
Usually provide only a single or just a few services
Examples: Independent school systems, public colleges and universities,
public hospitals, fire protection districts, sewer districts, transportation
authorities, and many others

3. 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.
 They are owned collectively by their constituents
 Those who contributing financial resources to the organizations do
not necessarily receive a direct or proportionate share of their
services
 Their major policy decisions, and perhaps some operating
decisions, typically are made by majority vote of an elected or
appointed governing body.
 Decisions usually must be “in the sunshine” open to the public

4. Major Types Of Government & Nonprofit
Organizations
The major types of government and nonprofit organizations may be
classified as:
 Governmental: federal, state, county, municipal, township, village, and
other local governmental authorities and special districts.
 Educational: kindergarten, elementary and secondary schools,
vocational and technical schools, and colleges and universities.
 Health and welfare: hospitals, nursing homes, child protection agencies,
the American red Cross, and United Service Organizations (USO)
 Religious: Young Men’s Christian Association (YMCA), Young Women’s
Christian Association (YWCA), Salvation Army, and other church-related
organizations.
 Charitable: United Way, Community Chest, and similar fund-raising
agencies; related charitable agencies; and other charitable
organizations.
 Foundations: private trusts and corporations organized for educational,
religious, or charitable purposes.

5. Similarity Between G&NP and Business
organizations
• G&NP Organizations share commonality with Profit Seeking
Enterprises.
They are integral parts of the same economic system and use
financial, capital, and human resources to accomplish their purposes
Both must acquire & convert scarce resources into their respective goods
& services
Both must have viable information systems
Because their resources are scarce, cost analysis and other control and
evaluation techniques are used.
In some cases, both produce similar products

6. Distinguishing Characteristics of G&NP
Entities
G & NP organizations differ in important ways from business organizations
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
 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

7. Distinguishing Characteristics of G&NP Entities
cont’d….
Sources of Financial Resources:
 The typical non-debt 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.

8. Distinguishing Characteristics of G&NP Entities
cont’d….
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.
 Therefore, the profit motive and profit measurement constitute an
automatic allocation and regulating device in the free enterprise segment
of our economy.
 The 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

9. Distinguishing Characteristics of G&NP Entities
cont’d….
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.
 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.

10. Distinguishing Characteristics of G&NP Entities
cont’d….
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.
 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

11. Distinguishing Characteristics of G&NP Entities
cont’d….
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

12. Sources of Financial Reporting Standards
The following Table 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 Pictorial representations of
Standard Setting Organizations
Table 1.1
Summary of
Standard
Setting
Organizatio
ns

13. 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”
 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.

14. Objectives of Financial Reporting
 Closely related to the concept of accountability as the cornerstone
of governmental financial reporting is the concept the GASB refers
to as Interperiod equity.
 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.
 Comparison of Financial Reporting Objectives State and Local
Governments Federal Government and Not-for-Profit
Organizations.docx

15. Financial Reporting of State and Local
Governments
 GASB Concepts Statements stress that accounting and reporting
standards for state and local governments should meet the financial
information needs of many diverse groups: citizen groups,
legislative and oversight officials, and investors, and creditors
 The Concepts Statements also make clear that reporting standards
for governments recognize that decisions made by these groups
involve political and social decisions as well as economic ones.

16. Comprehensive Annual Financial Report
(CAFR)
 A Comprehensive Annual Financial Report(CAFR) is the
government’s official annual report prepared and published as a
matter of public record.
 In addition to the basic financial statements and other financial
statements, the CAFR contains introductory material, an auditor’s
report, certain Required Supplementary Information's (RSI),
schedules necessary to demonstrate legal compliance, and
statistical tables.
 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

17. Levels of Financial Statement Reporting
Governments have two levels of financial statement reporting:
Government-wide and Fund
Government-Wide Financial Statements
 Government-wide financial statements are intended to provide
an aggregated 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 objectives

18. Levels of Financial Statement Reporting
 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.
 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).

19. Levels of Financial Statement Reporting
Fund financial statements
 Fund-basis statements are presented for three categories of
activities: governmental, proprietary, and fiduciary
 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

20. Sections of CAFR
 A CAFR prepared in conformity with these standards should
contain the following sections.
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.)

21. Sections of CAFR Cont’d…
Financial Section
 The financial section of comprehensive annual financial report
should include
 An auditor’s report,
 Management’s Discussion and Analysis (MD&A),
 Basic Financial Statements,
 Required Supplementary Information (other than MD&A), and
 Other supplementary information, such as combining statements
and individual fund statements and schedules.
 Points (2), (3), and (4) represent minimum requirements for general
purpose external financial reporting

22. Financial Section
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
Government-Wide
Financial/S
Fund Financial Statements
Statement of net
assets
Statement of
activities
 Balance sheet—governmental funds
 Statement of revenues, expenditures, and
changes in fund balances—governmental
funds
 Statement of net assets— proprietary funds
 Statement of revenues, expenses, and
changes in fund net assets— proprietary
funds
 Statement of cash flows— proprietary funds
 Statement of fiduciary net assets
 Statement of changes in fiduciary net assets

23. 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

24. Fund Structure for S&L Gov’t Accounting and
Reporting
 Fund accounting and reporting permit governmental managers to
demonstrate compliance with legal and contractual requirements.
 Governmental accounting systems should be organized and
operated on a fund basis.
 A fund is defined as a fiscal and accounting entity with a self-balancing set of
accounts recording cash and other financial resources, together with all
related liabilities and residual equities or balances, and changes therein,
which are segregated for the purpose of carrying on specific activities or
attaining certain objectives in accordance with special regulations,
restrictions, or limitation

25. Fund Structure for S&L Gov’t Accounting and
Reporting
Note that the definition of the word fund requires that
two conditions must be met for a fund, in a technical
sense, to exist:
There must be a fiscal entity —assets set aside for
specific purposes, and
 There must be a double-entry accounting entity
created to account for the fiscal entity
State and local governments use 11 fund types.
These fund types are organized into three categories:
Governmental funds,
Proprietary funds, and
Fiduciary funds.

26. Number of Funds Required
The GASB principle states that:
governmental units should establish and maintain
those funds required by law and sound financial
administration.
If state law and/or agreements with creditors do not require
the receipt of revenues that are raised solely for a defined
purpose and if administrators do not feel that use of a
separate fund is needed to be able to demonstrate that
revenues were raised solely for that particular purpose, the
General Fund should be used.

27. Budgetary Accounting
GASB standards recognize that state laws generally require
administrators of state agencies and of local governmental units to
obtain the appropriate legislative body’s formal approval of all plans to
raise revenues and make expenditures.
Additionally, it is common for state agencies to be given the
responsibility for monitoring the financial plans and financial operations
of local governmental units within the state.
Therefore, GASB standards contain the following three-part budgetary
principle:
1. An annual budget(s) should be adopted by every governmental
unit.
2. The accounting system should provide the basis for appropriate
budgetary control.
3. Budgetary comparisons should be included in the appropriate
financial statements and schedules for governmental funds for
which an annual budget has been adopted.

28. The International Public Sector Accounting Standards Board
(IPSASB) :-
 recognizes the diversity of forms of government, social and cultural
traditions, and service delivery mechanisms that exist in the many
authorities that may adopt IPSASs. In developing this Conceptual
Framework, the IPSASB has attempted to respond to and embrace
that diversity.
This Standard shall be applied to all general purpose financial
statements prepared and presented under the accrual basis of
accounting in accordance with IPSASs. The following terms are used
in this Standard with the meanings specified

29. The Accrual Basis of Accounting
The Conceptual Framework deals with concepts that apply to general
purpose financial reporting (financial reporting) under the accrual
basis of accounting. Under the accrual basis of accounting,
transactions and other events are recognized in financial statements
when they occur (and not only when cash or its equivalent is received
or paid). Therefore, the transactions and events are recorded in the
accounting records and recognized in the financial statements of the
periods to which they relate.

30. Financial statements prepared under the accrual basis of
accounting inform users of those statements of past transactions
involving the payment and receipt of cash during the reporting
period, obligations to pay cash or sacrifice other resources of
the entity in the future, the resources of the entity at the
reporting date and changes in those obligations and resources
during the reporting period. Therefore, they provide
information about past transactions and other events that is
more useful to users for accountability purposes than and as
input for decision making as is information provided by the
cash basis or other bases of accounting or financial reporting

31. Accrual basis means a basis of accounting under which transactions and other events
are recognized when they occur (and not only when cash or its equivalent is received or
paid). Therefore, the transactions and events are recorded in the accounting records and
recognized in the financial statements of the periods to which they relate. The elements
recognized under accrual accounting are assets, liabilities, net assets/equity, revenue, and
expenses.
Assets are resources controlled by an entity as a result of past events and from which
future economic benefits or service potential are expected to flow to the entity.
Contributions from owners means future economic benefits or service potential that
has been contributed to the entity by parties external to the entity, other than those that
result in liabilities of the entity, that establish a financial interest in the net assets/equity
of the entity.

32. An economic entity is a controlling entity and its controlled entities.
Expenses are decreases in economic benefits or service potential during the reporting
period in the form of outflows or consumption of assets or incurrences of liabilities that
result in decreases in net assets/equity, other than those relating to distributions to
owners.
Impracticable Applying a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so.
Liabilities are present obligations of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits or service potential.
Material Omissions or misstatements of items are material if they could, individually or
collectively, influence the decisions or assessments of users made on the basis of the
financial statements.

33. Materiality depends on the nature and size of the omission or misstatement judged
in the surrounding circumstances. The nature or size of the item, or a combination
of both, could be the determining factor. Net assets/equity is the residual interest in
the assets of the entity after deducting all its liabilities.
Conceptual Framework for Financial Reporting
Overview Describes the objective of, and the concepts, General purpose
financial reporting.
Purpose and status Assists the Board to develop Standards that are based on
consistent concepts; preparers to develop consistent accounting policies when no
Standard applies to a particular transaction or other event, or when a Standard
allows a choice of accounting policy; and all parties to understand and interpret the
Standards. It is not a Standard and sits outside of IFRS Standards. Nothing in the
Framework overrides any Standard or any requirement in a Standard

34. The objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions relating to providing
resources to the entity. Those decisions include buying, selling or holding equity
and debt instruments, providing or settling loans and other forms of credit,
exercising rights to vote on, or otherwise influence, management. General
purpose financial reports provide information about the resources of, and claims.
Qualitative Characteristics of Useful Financial Information For financial
information to be useful, it needs to meet the qualitative characteristics set out in
the Framework. The fundamental qualitative characteristics are relevance and
faithful representation. Financial reports represent economic phenomena in
words and numbers

35. Financial statements are prepared from the perspective of an entity
as a whole, rather than from the perspective of any particular group
of investors, lenders or other creditors (the entity perspective).
Financial statements are prepared on the assumption that the
reporting entity is a going concern and will continue in operation
for the foreseeable future.
International financial reporting standard (IFRS)
A set of accounting rules for the financial statement of public
companies that are intended to make the consistent, transparent,
and easily comparable around the world.

36. Under IFRS revenue is recognized based on the satisfaction of
performance obligations. In applying IFRS entities would
follow this five-step process:
1. Identify the contract with a customer.
2. Identify the separate performance obligations in the
contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance
obligations.
5. Recognized revenue when (or as) each performance
obligation is satisfied.

37. IFRS Business Combinations
Overview An acquirer of a business recognizes the assets acquired and liabilities
assumed at their acquisition date fair values and discloses information that enables
users to evaluate the nature and financial effects of the acquisition.
Business combination is a transaction or event in which an acquirer obtains control of
one or more businesses. A business is defined as an integrated set of activities and
assets that is capable of being conducted and managed for the purpose of providing
goods or services to customers, generating investment income (such as dividends or
interest) or generating other income from ordinary activities.
Recognition of assets and liabilities the acquisition method is used for all business
combinations. The acquirer recognizes the identifiable assets acquired, the liabilities
assumed and any non-controlling interest (NCI) in the acquire.

38. Measurement Assets and liabilities are measured at their fair values (with a
limited number of specified exceptions) at the date the entity obtains control of
the acquire. If the initial accounting for a business combination can be
determined only provisionally by the end of the first reporting period, the
combination is accounted for using provisional values. Adjustments to
provisional values relating to facts and circumstances that existed at the
acquisition date are permitted within
Disclosure A measure of profit or loss and a measure of total assets and
liabilities must be presented for each reportable segment. Additional measures
such as revenue from external customers, interest revenue and expense,
depreciation and amortization expense and tax is required to be presented if
they are included in the measure of profit or loss reviewed by the chief operating
decision maker or provided to them separately.

39. IPSAS VERSUS IFRS
There are approximately 180 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 influence 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 constitutional presumption that the financial information in long-term
plans will be prepared on the basis of the “best available information”, strength of these
plans may suffer in the short-term. Other potential issues include:

40.  A wider definition of Government Business Enterprise
 A narrower definition of control
 Optional recognition of inheritance assets
 A 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
Another difference cited is that IPSAs contains no standard for reporting service
performance. We do not see this as an issue at all as:
 Local authorities are already subject to legal requirements to report service
performance
 There are standards in preparation at the present time

41. End of Chapter One and