CHAPTER ONE

Overview of Financial Reporting for Governmental and NFP Entities 1.1. Distinguishing characteristics of
Governmental and Not- for- Profit entities

Unique features of NFP organizations. 1. The profit motive is not inherent in their inception or
operations i.e. the objective of forming or running a

NFP organization is not to get profit but to render service to the society. 2. They are usually owned
collectively by their constituents i.e. owner ship is not normally evidenced by individually owned equity
shares which may be sold or exchanged.

Those contributing financial resources to the organization don't necessarily receive a direct or
proportionate 3. share ofits goods or services 1.1.2. Difference and Similarities between NFP and for
profit Organization 1. Differences • Business enterprises are operated for profit, which places much
emphasis on the determination of net income and reporting to stockholders.

Legal provisions in constitutions, charters, and regulations have the force and effect of law to control
state • and local government operations.

The government first determines the cost of services to be provided to citizens and then finds the
revenue • source to cover these costs.

The accrual basis of accounting is to be used in accounting for proprietary funds (internal service funds
and enterprise funds), and private-purpose trust funds and public employee retirement systems; the
modi fied accrual basis is to be used in accounting for all other fund-types. •

Inventories are often ignored in governmentd accounting because of an emphasis on budgeting

revenues • against outlays without looking behind the outlays to determine the extent to which they
represent actual

Usage or consumption.

The objective of most not-for-profit organization is to provide many goods or services each year as their
financial and other resources permit. Not-for-profit organizations seek to expend their financial
resources • for the benefit of the society. • Those contributing financial resources to the organization do
not necessarily eceive a direct or proportionate share of its goods or services.

As far as source of income is concerned, there are some differences as compared with profit maximizing
• enterprises. These differences may be: 2. Similarities

There are some similarities between accounting for profit-oriented companies and not-for-profit
entities. These are discussed as follows: • Double entry accounting, which is the foundation for financial
reporting, is uni versal. Companies of any kind and in most countries of the world, use double entry
accounting • Financial management processes are essentially similar in both entities and each must have
a viable information system • They are integral parts of the same economic system and use similar
resource in accomplishing their objectives

Both must acquire and convert scare resources into their respective goods or service

In some cases, both produce similar products • • 1.13. Regulations and Control of Not-for-Profit Entities.
In profit-seeking enterprise, the direct relationship between the provider of goods and services and the
consumer allows every consumer to make a dollar vote for that firnm providing the goods and services
that are most suitable to him/her. 1.14. Types of Not-for-Profit-Entities

Anot-for-profit entity exists because a community or society considers it necessary or desirable to

provide certain goods or services to its group as a whole. often without reference to whether costs
incurred will be recovered through charges for the goods or services or whether those paying for goods
or services are those benefiting from them.

Aassifications of Non-profit organizations

Non-profit organizations may be classified into the following five groups: 1.

Governmental units: include the federal or central government, state and regional government or, etc.

Educational: kindergarten, elementary and secondary schools, and colleges and uni versities. 2. 3. 4.

Health care providers: This group includes hospitals, clinics, nursing homes

Voluntary health and welfare organizations: 5.

Certain non-profit organizations: This group includes miscellaneous non-profit organizations that are no
grouped under the four categories. For example, labor unions, political parties, civic organizations 1.15.
Characteristics of NFP accounting

Similarity 1. Both NFP and for profit organization are recommended to use the double entry accounting
system 2. NFP organizations accounting and reporting focuses on the use of resources for achieving
social/political objective without regard to the profitability objective.

Accounting in the NFP sector is affected by two types of legal and administrative provisions. These are:-
1.

The use of funds 2. The role of budgets

Funds and Fund Accounting *A fund is 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 there in, which is se gre gated for the purpase of carrying out specific
activity or attaining certain objective in accordance with special regulation, restriction or limitation."

Important points in the definition

Fiscal and Accounting entity

A fund exists on a year basİs or project by project basis. It is not to be assumed a going concem like a
busines entity.

A fund is an accounting entity in that it has its own journals, ledgers, financial reports, accounts etc. 2.

A fund is established for the purpose of carrying out specific activities or attaining certain objective i.e. 3.
A fund is used to control resources restricted by special regulations restrictions and limitations.

The fund concept involves an accounting segregation not necessarily the physical segre gation of
resources. applicable to

Thus fund accounting is defined as an accounting and reporting concepts, standards and procedures
state and local government, federal government, and not for profit institutions such as uni versities,
hospital voluntary health and welfare organizations, and other not for profit organizations.

General Types of fun ds in NFP organizations 1. Expend able (governmental) funds

These funds are used to account for the current assets, related liabilities, changes in net assets and
balances that may be expended in its "not for profit type of activities"

Example Funds established to account for activities in fire or police protections. 2. Non expendable
(proprietary) funds

These funds are used to account for the revenue, expense, assets, liabilities and equities of its "business
type of ætivities". Example Funds established to account for activities in Utilities, cafeterias,
transportation systems and some trust funds.

The second major legal and administrative control provision affecting accounting in the NFP organization
is the

Budgets and Appropriations role of budgets and appropriation process. After the budget is enacted, the
one who establish the fund will have full right to use the resources. The right to use resources of the
fund is called appropriations. In other words appropriations are authorizations to make expenditure for
specified purpose.Appropriations must indicate the fund from which the expenditure may be made and
specify the purpose, the maximum amount, and the period of time for which the expenditure authority
is granted.

Proprietary funds are usually controlled by flexible budgets, such as those used in business organizations
and budgetary accounts are rarely used.

Some other distinguishing characteristics in NFP Accounting 1. The focal point of most NFP Accounting is
expendable resources, accounted for in expendable fund entities, and allocated by budgets and
appropriation process. 2. In NFP organizations the term expenditure rather than expense is use.
Expenditures are de fined as the cost of goods delivered/services rendered whether paid/unpaid
including current expense, provision for debt retirement not reported as a liability of the fund from
which retired and capital putl ays. 3. Even though a fund has self-balancing accounts; fixed assets and
long term debt are not part of governmental fund. The basic accounting equation of a fund is Current
assets = Current liabilities + Fund balance

Net income determination is not a consideration in NFP Accounting. As a result of this,

Inventory valuation may receive only passing attention. a.

Depreciation of fixed assets is not usually accounted, because as we said in no.3, above fixed assets are
b. not part of governmental fun ds. 5. The entity concept relates to the separate fund or fund type
entities not to the organi zation as a whole.

Generally there is no unified accounting or reporting entity for the organization in its entirety. 6. The
periodicity concept relates to the flow of funds during budgetary period rather than to income
determination.

The matching concept emphasize on the infl ow, outflow and balances of expendable resources rather
than the determination of revenue, expense and net income.

The going concern assume that funds exist on a year by year or project by project basis and may be
intentionally exhausted and go "out ofbusiness 1.2. Source of Financial Reporting for not-for-profit
entities

The Governmental Accounting Standard Board (GASB) establishes accounting and financial reporting
standards for state and local government units. The Financial Accounting Standard Board (FASB)
establishes accounting and financial reporting standard for profit seeking businesses. The GASB and the
4

FASB are referred to as independent standard setting boards in the public and private sectors,
respectively.

All information, including general purpose financial reporting, comprehensive annual financial reports
and popular reports, supplementary infomation, other types of financial reporting and other
information are used by financial report users. A comprehen sive annual financial report (CAFR) should
be prepared and published covering all funds and account groups of primary government including its
component units. It provides an overview of all discretely presente d component units of the reporting
entity including:

Introductory section, •

Appropriate combined, combining and individual fund statement, • •

Notes to the financial stat ements,

Required supplementary information and •

Narrative explanations. •

General purpose financial statement (GPFS) of the reporting entity may be issued separately from
comprehensive annual financial reports. Such statement should include the basic financial statements
the and notes to the financial statements that are essential to fair pre sentation of financial position and
results of operations.General purpose financial statement (GPFS) of the reporting entity may be issued
separately from the comprehensive annual financial reports. Such statement should include the basic
financial statements and notes to the financial statements that are essential to fair presentation of
financial position and results of operations.

Appropriate interim financial statements and reports of financial position, operating results and other
pertinent information should be prepared to facilitate management decision making

Financial Section of General Purpose Finandal Reporting

The financial section of comprehensive annual financial report should include: • An auditor's report, •
General-purpose financial statements and • Combining and individual fund and account group
statenents and schedules.

The five combined statements that comprise the GPES and that must be included in the financial section
of CAFR are

Combined Balance Sheet - All fund types and account groups:

Combined statements of revenue; expenditures and charges in fund balance for all Governmental

Tund types

Combined statement of revenue; expenditure, and changes in fund balance

Combined statement of revenue; expenses, and changes in equity-All proprietary funds; and fund types
and Non-expendable trust funds. •

Combined statement of cash flows for all proprietary

Interim Reporting

Very few governments publish interim financial statements for external users. Rather, interim
statements of governments are prepared on the budgetary basis and are designed primarily to meet the
needs of administrative personnel such as the chief executive, departmental supervisors, and budget
examiners.

The common interim reports include:

Interim balance sheets, •

Interim operating statements, •

Interim budgetary comparison statement. and •

Detailed budgetary statements and statements and state ments of cash receipts, disbursements, and •
balances for each fund.

Interim reports typically are prepared primarily for internal use. Thus, they usually are prepared on
budgetary basis and often do not include statements reporting general fixed assets or general long-term
the debt

Annual Reporting

Annual reporting is the last phase of the annu al budget and accounting cycle for which the exe cutive
branch of the government is responsible.

The annual financial report is designed to inform:

The legislative body.

Students of public finan ce, •

Creditors, • Political scientists, and

The general public

Investors,

Analysts,

The GASB (Governmental Accounting Standard Board) requires that it is vital that every governmental
unit should prepare and publish, as a matter of public record, a comprehen sive annual financial report
(CAFR) that encompasses all funds and account groups. The CAFR should contain both the
generalpurpose financial statements (GPFS) by fund type and account group and required
supplementary information and combing statements by fund type and individual fund state ments.

Users of Not-profit entities financial ting

The users of financial information are:

Tax payers

Grant ors

Investors • Fee-paying service recipients

Employees

Vendors • Legislative bodies • Managements • Over sight bodies

Vaters

Users of financial reporting for not-for-profit-entities into four as discussed below. 1. The citizenry: -
(taxpayers, voters, and service recipients), the media advOcate groups, and public fiancé rese archers. 2.
Legislative and oversight bodies. 3. Investors and creditors. 4. Governmental administrators. 13.
Objectives of financial reporting for NFP organizations

The se objectives are: 1. To provide financial information useful for determining and predicting the
flows, balances. and requirements of short-term financial resources of the governmental unit. 2. To
provide financial information useful for determining and predicting the economic condition of the
governmental unit and changes therein.

To provide financial information useful for monitoring performance under the terms of legal, contractual
and fiduciary requirements. 4. To provide information useful for planning and budgeting and for
predicting the impact of the acquisition and allocation of resources on the achievement of operational
objectives. 5. To provide information useful for evaluating managerial and organizational performance.

Users of financial informnation by not-for-profit sectors, use the information for the following
summarized reasons. These are:-

To compare actual financial results with the legally adopted budget, •

To assess financial condition and results of operations.

To assist in determining compliance with finance related laws, rules and regulations, and • •

To assist in evaluating efficiency and effectiveness. • 14. IPSAS VS IFRS

Measurement in IFRS and IPSAS is not suitable for natural assets

The IPSASB natural resources project confirmed that natural assets are unlikely to be recognised on the
balance sheet since these will rarely meet the definition of an asset as currently defined.

There are not many differences between the measurement bases and techniques applied under

IPSAS and IFRS. The key difference is the applicability of fair value in the public sector vs the private
sector. Whist fair value does also permit a cost approach in the absence of a market, it is really designed
for arm's length transactions occurring in an orderly market: see below for further detail.

Fair value can be difficult to apply in the public sector for the following reasons: many asse ts are held
for their continuous operational use and there is little purpose in obtaining the sales price; ► if an asset
cannot be sold then the costs of revaluing an asset may outweigh the benefits of having up to date
valuation; and many assets are either specialized or restricted meaning there is no market in which to
obtain input data, making fair value difficult to apply.

IPSASB agree that fair value has a role in valuing assets held for their financial capacity and has
developed a new measurement basis for assets held for their operational capacity, called current
operational value, which is covered in more detail below.The IPSASB measurem ent standard defines the
current value bases as follows:

BASES

DEFINITION |The amount the entity would pay for the remaining service potential lof an asset at the
measurement date.

Current

Operational

Value 8

DEFINITION

BASES

Cost of

The cost that the entity will incur in fulfilling the obligations

Eulfiln ment represented by the liability, asuming that it does so in the least |costly manner |The price
that would be received to sell an asset or paid to transfer a ir Value liability in an orderly transaction
between market participants at the measurement date.

The IPSASB measurement standard defines current value measurement techniques as follows:

TECHNIQUES|

DEFINITION

Market |Prices and other relevant information generated by market transactions involving identical or
comparable (i.e.similar) assets, 1abilities or a grOup of assets and liabilities.

Cost

Amounts that would be required to replace the service capacity of an asset (often referred to as curent
replacement cost)

Future cash flows converted to a single current discounted

Inc Come amount (often referred to as net present value or NPV)

Models: historic cost versus current value

Key IFRS vs IPSAS differences

There are three differences that require greater scrutiny: 1. Fair value and how that is applied in the
public sector 2. Unique measurement basis in public sector - current operational value; and 3. Assets
held for their service potential and other specialist assets. 1) Fair value in the public sector

The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell
the asset or to transfer the liability would take place between market participants at the measurement
date under current market conditions. 2) Current Operational ValuePSASB has created an alternative to
FV known as current operational value (COV). This measurement basis is designed to help an entity
estimate the value of a non-financial asset in achieving its service delivery objectives.

The following key aspects will affect the measurement of an asset's current operational value: ►
Existing asset - COV assumes that the entity will continue to deliver goods or services by using the
identical or a similar asset; ► Existing use of the asset ► Existing location – value of the asset based on
the current location, not an alternative site. 3) Service potential and other specialist assets

The primary objective of most public sector entities is to deliver services to the public, rather than to
make profits and generate a return on equity to investors. The type of assets that public sector entities
hold is likely to reflect this objective - a ssets are held much more frequently for their service potential
rather than their ability to generate cash flows. 15. The Conceptual Framework for Public Sector
Accounting [The IPSASB]

The Conceptual Framework for General Purpose Financial Reporting by Public Sector

Entities (the Con ceptual Framework) establishes the concepts that are to be applied in developing

International Public Sector Accounting Standards (IPSASS) and Recommended Practice

Guidelines (RPGS) applicable to the preparation and presentation of general purpose financial reports
(GPFRS) of public sector entities

Role of the Conceptual Frame work

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

The International Public Sector Accounting Standards Board (IPSASB) will apply these concepts in
developing International Public Sector Accounting Standards (IPSASS) and Recommended

Practice Guidelines (RPGS) applicable to the preparation and presentation of general purpose financial
reports (GPFRS) of public sector entities. 1.5.1. Objectives of financial reporting 0

Financial reporting is how public entities account for their stewardship of - that is, the care they take
with- public money and other assets.
Financial reporting helps in decision-making and in increasing accountability, openness, and
transparency. It also helps to improve the performance of, and trust in, the public sector.

General purpose financial reports

Financial reports provide basic information to people interested in the performance of an entity (the
users). They allow the entity to be held accountable for how it manages and uses the money it receives.

General purpose financial reports are designed to provide financial and, where required, performance
information to a range of users. To be relevant, the information must meet the accountability and/or
decision-making needs of the users. 1.5.2. Fundamental concepts Recognition, measurement, and
disclosure concepts

Recognition in IPSAS clarifies that fair presentation requires the faithful representation of the effects

The Standard of transactions, other events and conditions in accordance with the definitions and
recognitio riteria for assets, liabilities, revenue and expenses set out in the IPSASS.In virtually all
circumstances, a fair presentation is achieved by compliance with applic able

IPSASS. A fair presentation also requires an entity: (a) To select and apply accounting policies in
accordance with IPSAS 3, Accounting Policies

Changes in Accounting Estimates and Erors (b) To present information, including accounting policies, in a
manner that provides relevant, faithfully representative, understandable, timely, comparable, and
verifiable information. (c) To provide additional disclosures when compliance with the specific
requirements in IPSASS is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity's financial position and financial performan ce. 1

Measurement in IPSAS

The principal measurement bases for initial and for subsequent measurement in accordance with

IPSASS include cost, fair value and present value. Since these measurement bases are fundamental to
numerous IPSASS, they will be introduced in this chapter.

In addition to the principal measurement bases underlying the IPSASS, most of which correspond to
those of IFRSS, certain IPSASS introduce further specific bases for initial or subsequent measurement
such as net realizable value and current replacement cost in IPSAS 12, recoverable (service) amount in
IPSAS 17, 21 and 26 or value in use under IPSAS 21 and 26.

Initial Measurement

On the date an item qualifies for recognition, it shall be initially mneasured at its transaction price, plus
transaction costs for assets or minus transaction costs for liabilities, unless:
A) That transaction price, plus or minus transaction costs, does not faithfully present relevant
information of the entity in a manner that is useful in holding the entity to account or b) Otherwise
required or permitted by another IPSAS.

When applying accrual basis IPSAS for the first time, initial measurement in an opening statement of
financial position at the date of adoption of IPSAS should be carried out in accordance with IPSAS 33,
First-time Adoption of Acerual Basis Intermational Public Sector

Accounting Standards (IPSASS).

Transactions in an Orderly Market

When an asset is acquired, constructed, or developed, or a liability is as sumed in an orderly market, the
transaction price, plus or minus tran saction costs, reflects the initial value of the asset or liability
negotiate d between market participants at the measurement date under current market conditions.

Transactions not Undertaken in an Orderly Market

When an asset is acquired, constructed, or developed, or a liability is assumed, as a result of an event

that is not a tran saction in an orderly market: (a)

It may not be possible to observe a transaction price:The transaction price may not faithfully present
relevant information about the asset or (b) liability:;or (c) The transaction price may be zero.

Transaction Costs at Initial Measurement

Transaction costs related to acquiring, constructing, or developing, an asset or incurring a liability are a
feature of the transaction in which the asset was acquired, constructed, or developed, or the liabilitywas
incurred.

Transaction Occurring in Stages

The acquisition of an asset may occur in stages or may be followed by further expenditures adaptthe
asset for the entity's own use to

Deferred Payments

Where the time value of money is materialfor example, where the length of time before settlementfalls
due is significant- the amount of the future cash flows is discounted so that, at the time an assetor
liability is first recognized, it represents the value of the amount received or paid.

Subseguent Measurement

After initial measurement, unless otherwise required by the relevant IPSAS, an accounting policy choice
is made to measure an asset or liability on an historical cost basis or a current value basis.

This accounting policy choice is reflected through the selection of the measurement mno del.
Measurement Models

Assets and liabilities recognized in financial statements are quantified in historical terms or current
terms.

Measurement BaSes

A measurement basis provides information that achieves the qualitative characteristics, as describe d in
the Conceptual Framework for General Purpose Financial Reporting by Public

Sector Entities (the Conceptual Framework) and ensures the constraints on information in GPFRS are
considered under the measurement model selected.

Historical Cost Basis

The historical cost basis is an entry, entity-specific value. The historical cost basis provides monetary
information about assets, 1liabilities and related revenue and expenses, using information derived, at
least in part, from the price of the transaction or event that gave rise to them. 12

Current Operational Value Basis

Current operational value provides monetary information about asse ts, and related amortization,
depreciation, etc., using information updated to reflect conditions at the measuremnent date.

Current operational value differs from fair value because it: a) Is explicitly an entry price; b) Reflects the
value of an asset in its existing use, and c) Is entity-specific and therefore reflects the economic position
of the entity

Cost of Fulfillment Basis

Cost of fulfillment is an exit, entity-specific cost that the entity will incur in fulfilling the obligations
represented by the liability, assuming that it does so in the least costly manner. Cost of fulfillment is the
present value of the cash, or other economic resources, that the entity expects to be obliged to transfer
as it fulfills a liability.

Fair Value Basis

Fair value meas urement is an exit, market-based meas urement that provides monetary information
about assets, liabilities and related revenues and expenses, using information updated to reflect
conditions at the measurement date.

Characteristics of the Asset or Liability

A measurement basis is applied to a particular asset or liability. Therefore, when applying the
measurement basis, an entity shall take into account the characteristics of the asset or liability at theme
asurement date.The asset or liability measured might be either of the following: a) Astand-alone asset or
liability (e.g., a financial instrument or a non-financial asset): or b) A group of as sets, a group of liabilities
or a group of assets and liabilities

Measurement Techniques

An entity shall use measurement techniques that are appropriate in the circumstances and for which
sufficient data are available to estimate the measurement basis or determine deemed cost.

Market Approach

The market approach uses prices and other relevant information generated by market transactions
involving identic al or comparable (i.e., similar) assets, liabilities or a group of assets and liabilities

Cost Approach 14

The cost approach reflects the amount that would be required currently to replace the service provided
by an asset through the acquisition, construction, or development of a substitute asset of comparable
utility, adjusted for obsolescence.

Income Approach

The income approach converts future amounts (e.g., cash flows or revenue and expenses) to a
singlecurrent (i.e., discounted) amount.

Depreciation, Impairment and Other Adjustm ents

Depreciation and impairment are applicable to measurement bases in the historical cost model and the
current value model. Neither depreciation nor impairment are measurement bases or measurement
techniques in their own right.

Transaction Costs in Subsequent Measurement

Transaction costs are incremnental costs that would not have been incurred if the entity had not
acquired, constructed, developed or disposed of the asset or incurred, transferred, or settled the
lhability

Disclosure

An entity shall disclose information that helps users of its financial statements assess the measurement
basis, the me asurement techniques and inputs used to develop those measurements,.

Segment Reporting

PSAS 18, Segment Reporting, requires the disclosure of certain information about the service delivery
activities of the entity and the resources allocated to support those activities for accountability and
decision-making purposes. Unlike the sectors reported under statistical bases of financial reporting,
segments reported in accordance with IPSAS 18 are not based on a distinction between market and
nonmarket activities,