CHAPTER 1 public sector

Accounting for Public
sector and civil society

Objectives of the chapter
1. Identify and explain the characteristics that distinguish governmental and not-for-
profit entities from for-profit entities
2. Contrast and compare the objectives of financial reporting for government and
not-for-profit organizations.
3. Sources of financial reporting standards for Governmental and NFP
4. Qualitative Characteristics of information are the followings
5. Fundamental concepts Recognition, measurement, and disclosure concepts
6. Identify and describe the required financial statements for the federal
government, and not-for profit organizations
complined by : Abreham K 2

Introduction
❖There are organizations whose object is not to make profit. these N-F-P
organizations account their resources & financial activities under different
accounting system. Every organization wants to be successful.
❖“Success” must be defined in terms of goals. Then it needs some means to
measure its results against its goals.
❖Measuring success is often thought of in terms of effectiveness (achieving
the goal at the highest level) and efficiency (achieving the goal through
using the least amount of resources).

Cont.….
❖For profit seeking organizations(F.P.) whose objective is to make profit, both
efficiency and effectiveness can easily be measured with f/s.
❖There are certainly non financial criteria to judge success like qualitative or
quantitative measures. But regardless of what other measures are employed,
ultimately effectiveness will be measured by the income statement.
❖Efficiency is evaluated by the expense section of the income statement. If
expenses are less than revenue and the organization has earned an
“acceptable” profit, then we can say it is successful in efficiency.

Cont.….
❑We can therefore say that the objective of the income statement is to
demonstrate both the effectiveness and efficiency of the organization. For
not-for-profit organizations (N-F-P) however, these objectives are not as
useful.
❑Without a good measure of effectiveness, measurement of efficiency become
almost meaningless.
❑The public can then hold the person accountable for the proper use of the
resources. This means that the income statement is only limited to use in
judging effectiveness. complined by : Abreham K 5

Cont.….
❖Both the nature of N-F-P Orgn. & the objectives of their financial reporting
have given rise to a particular accounting method, i.e. the use of “fund
accounting”. It is very important to understand the meaning of fund in this
context. in normal conversation “fund” means simply, a resource of money.
❖That is not the meaning “fund” has in Fund Accounting. In fund accounting,
“fund” means a distinct entity within a larger entity. A separate journal entry
ledger will be kept and separate F/s will be kept for each fund

What are Governmental Organizations?
• Government and NFP entities operate in an environment different from
business enterprise.
• The users of financial reporting in government and NFP organizations are
different from business entities.
• The financial activities in government are based on legally adopted budget.
• Budget contains legal restriction and resource provider restrictions on the use
of recourse.

Con’t….
❖Government entities: Entities created by governmental laws, if they have the
following characteristics.
✓Their officer are properly elected and controlled by government body
✓They possess the power to enact and enforce a tax levy.
✓Have a power to issue debt with interest exempted from tax.
✓Force a potential dissolve by government and assume all assets and
liabilities.
✓Power ultimately rests in the hands of the people
✓Empowered by and accountable to a higher level government

For Example: National Bank of Ethiopia is not a government
➢Example of Governments in Ethiopia:
➢Federal government of Ethiopia and its agencies
➢The Ten Regional State Governments and Two Administrative City councils
➢76 Zonal Level Local Government
➢587 District Level Local Governments
➢Municipality and Town Governments
➢Kebele level local governments i.e. Kebele is the lower level government in
Ethiopia

❑ Government is classified as Special Purpose Government and General Purpose
Governments.
❖General purpose governments
➢Provide a wide variety of services
Examples: Federal government, state governments,
➢cities, towns, townships, villages, counties, boroughs, and parishes
❖Special purpose governments
➢Usually provide only a single or just a few services
Examples: Transportation authorities can be taken as Special Purpose
Government Entity, Independent school systems, public colleges and universities,
public hospitals, fire protection districts sewer districts, and many others

What are Not-for-Profit Organizations?
❖Unlike for-profit organizations, resource providers do not expect to receive repayment or
proportional benefits.
❖The organization lacks a profit motive.
❖There is an absence of transferable ownership rights.
❖Absence of transferable ownership rights.
❖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 complined by : Abreham K 11

Classification of not-for-profit organizations
❑Generally, organizations could be classified either based on their
1. Objectives 2. Ownership
• Objectives:
a. Commercial / for profit organizations- emphasize on the making of profit
b. Non commercial/ not –for – profit organizations- which do not give emphasis on the
making of profit.
2. Ownership :
a) Non-governmental (Private organizations) –operating for the benefit of an
individual proprietor or a group of partners
b) Governmental organization. –operated for the benefit of society as a Whole.

• A non profit (not- for profit) organization is a legal accounting entity that is
operated for the benefit of society as a whole rather than for the benefit of an
individual proprietor or a group of partners or shareholders.
• Thus, the concept of net income is not meaningful for non-profit organization.
• A non-profit organization strives only to obtain revenue & support sufficient to
coves its expenses. Non-profit organizations comprise a significant segment of the
country’s economy.

• NFP entities are classified into two: governmental and non-governmental
Ex : Religious entities, community service providers, private educational and health care
entities, museums, and fraternal and social organizations, etc
❖In Ethiopia, there are about 660 Nongovernmental NFP entities registered by Ministry
of Justice as 2006. 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 Non profit 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, missions
❖Charitable – includes many NGOs
❖Foundations - private organizations that promote research and development for
improvement of human life (Bk. Bilgate ………)

Similarities & Differences: Governmental and NFP Entities
❖Both should imply accounting forms and other types of controls to restrict on use of
assets & capture information, double entry accounting to record and classify that
information, employing journals and ledgers, and then use those journals and ledgers as a
basis to produce financial reports.
❖Luck 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

• Organization to serve the society (citizens): The basic principle of
governmental philosophy is that governmental units exist to serve the citizens
subject to their jurisdictions.
• General absence of profit motive: With few exceptions, governmental units
render services to the citizenry with out the objective of profiting from those
services. Business enterprises are motivated to earn profit.
• Society as a principal source of revenue: As with governmental units, most
non- profit organization depend on the general population for a substantial
portion of their support.

❑Citizenry contributions are mostly involuntary Taxes. Citizen’s contribution to
non-profit organizations is voluntary donations.
❑based upon their assessment, taxes could be classified into:
I) Self assessed taxes: - taxes, which are assessed and declared by the tax payer
e.g. Income tax, value added tax
II) Government assessed taxes:-The is Taxes determined and levied by the
governmental authorities. e.g. property tax , customs duty, Excise Tax.

• Stewardship for resources: A primary responsibility of
governmental units in financial reporting is to demonstrate adequate
stewardship for resources provided by its citizenry. Non-profit
organizations have a comparable responsibility to their donors but
not to the same extent as governmental units.
❖stewardship is the responsibility you have to wisely manage the total amount, most of which you
keep.

Differences
❖Government differs from NFP entities in the following manners.
❖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.

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

✓NFP Organization differs from government with respect to the
following points:
❖They are accountable to the resource providers (donors)
❖The budget is an expression of the interest of the benefactors.
❖The nature of the political system may not influence their operation
❖The resource providers are donors, or volunteers and the
contribution is mostly voluntary

Similarities and Differences: Business Entities and G & NFP Entities
Similarities G and NFP 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

1.2 Sources of financial reporting standards for Governmental and NFP
• The FASB establishes accounting and financial reporting standards for
business (For-Profit) organizations.
• Authority to establish accounting principles for not-for-profit organizations is
split between the GASB and the FASB.

❑Accounting and financial reporting standards for state and local
governmental units are established by the governmental accounting
standards board (GASB). Accounting and financial reporting standards for
profit seeking business are established by the financial accounting
standards board (FASB).
❑The GASB and the FASB are parallel bodies under the oversight of the
Financial Accounting Foundation. they are referred to as “ independent
standard setting boards” in the private sector.

Cont….
❑Before the creation of the GASB & FASB, financial reporting standards
were set by groups sponsored by professional organizations. Before 1934
in US, there was no governmental accounting standard.
❑But by 1934, to overcome this confusion & scandal specially in
municipality accounting, the Municipal Finance Officers Association
(MFOA) formed, the National Committee on Municipality Accounting
(NCMA) to assure accounting standard for municipalities.

Cont….
❑By expanding its scope, the NCMA in 1949 was reorganized as National
Committee on Governmental Accounting (NCGA) to establish accounting
standards for states and local governmental units. In 1974, the
committee was again reorganized as a council and formed the National
Council of Governmental Accounting (NCGA).
❑In 1984 the council was again reorganized as a board parallel to FASB and
was renamed as Governmental Accounting Standards Board (GASB).

Cont….
❑ Accordingly the GASB has the responsibility for establishing accounting &
financial reporting standards for not for profit organizations whose financial
statements may be combined with the financial statements of state and local
governmental reporting entities, or which are considered governmentally
owned. The FASB has the responsibility for establishing accounting and financial
reporting standards for non-governmental non-for profit organizations.
• But now, IPSAS is adopted for N-F.-P and governmental organization.

What are IPSAS & IFRS?
• IPSAS: stands for International Public Sector Accounting Standards are a set of
accounting standards issued by the IPSASB for use by public sector entities
around the world in the preparation of F/S.
• IPSAS are financial reporting standards for use by public sector entities & they
are for public sector equivalent of International Financial Reporting Standards
(IFRS), which apply to private sector companies and developed by the
International Accounting Standards Board (IASB). As of January 2016 the IPSASB
had issued 39 IPSAS.

Cont….
• IFRS: Stands for International Financial Reporting Standards are a
set of accounting rules for the financial statements of public
companies that are intended to make them consistent, transparent,
and easily comparable around the world.
• It was also created to bring consistency and integrity to accounting
standards and practices, regardless of the company or the country.
• IFRS are issued by the International Accounting Standards Board
(IASB).

IPSAS versus IFRS
1. Scope : IPSAS applies to :International organization, public sectors (National &
local government, other government and commission). IFRS applies to
government business entities and private sectors.
2. Basis of accounting : IPSAS follow accruals or cash basis of accounting while
IFRS follow accrual basis of accounting.
3. Revenue: Public sector entities derive revenues from exchange or non-
exchange transactions IPSAS 23 on revenue from non-exchange (taxes and
transfers (cash or non-cash) without directly giving approximately equal value in
exchange.

4. While IFRS on IAS 18 record on the title of revenue and it only include
revenue from ordinary activity.
5. IPSAS Allows entity to use equity method to account for controlled entities
in the separate financial statement of controlling entities while IFRS use the
cost method.
6. Lease: Both IPSAS & IFRS classified lease as operating lease or finance lease

The Conceptual Framework for Public Sector Accounting [IPSASB]
DEFINITON OF FRAMEWORK :
❖ 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 It describes the objective & the concepts for general purpose for something. It
is a theoretical structure of assumptions, principles, and rules that holds together the ideas
comprising a broad concept.
❖The objective of the IPSASB is to serve the public interest by setting high-quality
accounting standards and by facilitating the adoption it, thereby enhancing the quality and
consistency of practice throughout the world and strengthening the transparency and
accountability.

The Framework of IPSAS is structured into with the following topic:
Conceptual framework for
IPSASB
1. Role and Authority of the Conceptual Framework
2. Objectives and Users of General Purpose Financial Reporting
3. Qualitative Characteristics
4. Reporting Entity
5. Elements in Financial Statements
6. Recognition in Financial Statements
7. Measurement of Assets & Liabilities in Financial Statements
8. Presentation of Information in General Purpose F/S

Why Must Governmental Financial Reporting
Differ from Business Financial Reporting?
❖Different financial report users with different needs
❖ Governmental financial reporting focuses on stewardship
and accountability for how public resources are raised and
used to provide services

Objectives of Financial Reporting—State and Local Governments (SLG)
❖Governmental financial reports are used primarily to:
❖Compare actual financial results with legally adopted budget
❖Financial reporting is not an end in itself. Its purpose is to provide information useful to users
of GPFRs.
❖Assess financial condition and results of operations
❖Assist in determining compliance with finance related, laws, rules, and regulations
❖Assist in evaluating efficiency and effectiveness
❖Users : i) Governments , ii) Other public sector entities, iii) Taxpayers, iv) Donors , v)
Lenders .

Cont.…..
➢ACCOUNTABILITY is the cornerstone of all financial reporting in
government.
• What do we mean by accountability?
A: Accountability arises from 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

How does “inter-period equity” relate
to accountability?
• Inter-period equity is a government’s obligation to disclose
whether current-year revenues were sufficient to pay for current-
year benefits—or will future taxpayers be required to pay for them
instead?

Qualitative Characteristics of information are the followings
1. Relevance: Financial and non-financial information is relevant if it is capable of
making a difference in achieving the objectives of financial reporting.
2. Faithful Representation: To be useful, information must be a faithful
representation of the economic & other phenomena that it purports to represent.
3. Comparability: Comparability is the quality of information that enables users to
identify similarities in, and differences between, two sets of phenomena.
4. Verifiability: Verifiability is the quality of information that helps assure users that
information in GPFRs faithfully represents the economic and other phenomena
that it purports to represent. others are: Materiality and cost-benefit

Elements in Financial Statements
a) Property, plant, and equipment;
(b) Investment property; (c) Intangible assets;
(d) Financial assets (excluding amounts shown under (e), (g), (h) & (i));
(e) Investments accounted for using the equity method;
(f) Inventories;
(g) Re coverables from non-exchange transactions (taxes and transfers);
(h) Receivables from exchange transactions;
(i) Cash and cash equivalents;

Con’t.………
(j) Taxes and transfers payable;
(k) Payables under exchange transactions;
(l) Provisions;
(m) Financial liabilities (excluding amounts shown under (j), (k), & (l));
(n) Minority interest, presented within net assets/equity; and
(o) Net assets/equity attributable to owners of the controlling entity.

Cont….
❑Presentation of Information in General Purpose Financial Statements
❑Presentation is defined in the Framework as “the selection, location and
organization of information that is reported in the GPFRs”. It focuses on the
comprehensive scope of financial reporting, and describes the concepts applicable
to financial statements in greater detail.
❑Reporting Entity: A public sector entity is an entity that raises economic resources
from, or on behalf of, constituents and/or uses economic resources to undertake activities for
the benefit of, or on behalf of, those constituents, and whose service recipients or
resource providers are dependent on the GPFRs of the entity for information for
accountability or decision-making purposes

Fundamental concepts Recognition, measurement, and disclosure concepts
❑Recognition: is described as the process of incorporating and including
amounts shown on the face of the appropriate financial statement.
❑An item that is recognized is one that meets the definition of an element and
can be measured in a way that achieves the qualitative characteristics
provided for in the Framework.
❑Measurement: is the process is of assigning a monetary value to the item
for the financial statements. Assigning a monetary value to a transaction
requires the selection of an appropriate measurement basis.

Con’t….
❑And it ensuring that the measurement is sufficiently relevant and faithfully
representative of the item. The objective is to select those measurement
bases that most fairly reflect the cost of services, operational capacity &
financial capacity of the entity in a manner that is useful in holding the entity to
account, & for decision-making purposes”.
❑Disclosure concept is an accounting principle that requires management to
report all relevant information about the company’s operations to creditors
and investors in the financial statements and footnotes.

CHAPTER 1 public sector

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