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8/10/2019 oiytreadfghjk,mnbvc

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ACCOUNTING FOR GOVERNMENT AND OTHER NOT FOR PROFIT ENTITIES

1.1: Definition of Governmental and Not For Profit Accounting.

An accounting and reporting concepts, standards, procedures applicable to state

and local government, federal government, and not for profit organizations such

as all governmental organizations, universities, hospitals, voluntary health and

welfare organizations, and other not for profit organizations is said to be

governmental or Not for profit or fund accounting.

Government accounting is a method of segregating resources into categories,

(i.e. funds) to identify both the source of funds and the use of funds.

Governmental and other Non-Profit Organizations-Accounting emphasis is on

controlling funds and showing the sources and uses of funds. Have a multitude of

accounting/business entities; i.e. various funds.This can be a challenge for many

organizations or departments who may have to manage hundreds of different

funds. Organizations or departments with many contracts and grants need to

review the different terms, conditions and regulations each one may have.

1.2 Classifications of NFP Organizations

In a given economic system, however, there are two types of entities or

organizations. These may incorporate Business organization and Not-for-profit

organizations. The major types of not- for- profit organizations may be classified

as follows:

Government units: these Federal or central government which includes

all the ministry organizations such as Ministry of Defense, Ministry of

Education, etc, State and Regional Government or Killil. Lower divisions

of state such as Zonal and Woredas, municipal, township, village and

other local governmental authorities, including special districts.


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Educational: kindergartens, elementary and secondary schools, and

colleges and universities.

Religious: churches and other church related organization

Charitable: community chest, united appeals, united funds, and other

charitable organizations.

Foundations: private trusts and corporations organized for educational,

religious, or charitable purposes. Health care providers which

incorporates Hospitals, Clinics, Health centers, nursing home, Health

maintenance organizations that have health care plans, outpatient

surgery centers, etc which have been established by government as well

as community efforts.

Voluntary health and welfare organizations: which may include,

voluntarily established organizations that serve the public in the areas of

health, social welfare, and community services such as heath association,cancer association, red cross, AIDS centers, relief societies, development

agencies, etc. Traditionally, it is this type of organization that is

collectively called non-governmental organizations ( NGOs)

Other non-profit organization which may include miscellaneous non-

profit organization that are not grouped under the four categories. For

example, labour unions, political parties, civic organizations, professional

organizations, religious organizations, private and community

foundations, cultural institutions, fraternal organizations, public

Broadcasting stations, research and scientific organizations, social andcountry clubs, zoological and botanical societies, etc.

1.3 Distinguishing Characteristics of Governmental and Not- for- Profit Organizations

Governmental and not-for-profit organizations differ in important ways from

business organizations. Moreover, as you will soon learn, accounting and financial

reporting for governmental and not- for -profit organizations are markedly

different from accounting and financial reporting for businesses. An

understanding of how governmental and not for profit organization differs from

business organizations is essential to understanding the unique accounting and

financial reporting principles that have evolved for governmental and not- for-

profit organizations.


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In its statement of financial accounting concepts No. 4, the financial accounting

standards (FASB) noted the following characteristics that it felt distinguished

governmental and not- for- profit entities from business organizations:

Receipts of significant amounts of resources from resource providers

who do not expect to receive either repayment or economic benefits

proportionate to the resources provided.

Absence of defined ownership interest that can be sold, transferred, or

redeemed, or that covey entitlement to a share of a residual distributionof resources in the event of liquidation of the organization. Ownership

interest in NFP entities is not clearly defined. Rather, they are usually

owned collectively by general public. Because of this feature, there is no

equity interest to be sold or exchanged. For instance, there are many

public properties in Ethiopia specifically in the ministry of Defense that is

in your organization which belong to the whole citizen at large on

collective basis. But, ownership interest in profit seeking entities is

clearly defined. They are usually owned by sole proprietor, partners, or

stockholders. Since ownership is clearly defined, it can be sold ortransferred to others easily.

Organizational objectives: Operating purposes that are other than to

provide goods or services at a profit or profit equivalent. Expectation of

income or gain, the principal factor is motivating investors to provide

resources to profit- seeking enterprises. On the other hand, a notfor-

profit organization exists to provide certain goods or services to a

community or society as a whole, often without reference to whether

costs incurred are recouped through charges levied on those receiving

them and without regard to whether those receiving the goods or

services are those paying for them. There are no individual shareholders

to whom dividends are paid. The objective of most not-for-profit

organizations is to provide as many goods or as much service each year

as their financial and other resources permit .NFP organizations typically


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operate on a yearto- year basis, raising such resources as they can and

expending them in serving their customers. They may seek to increase

the amount of resources made available to them each year and most do

but this is to enable the organization to provide more or better goods

and services, not to increase its wealth. In sum, whereas privatebusinessesseek to increase their wealth for the benefit of their owners,

NFP organizations seek to expend their available financial resources for

the benefit of their owners, NFP organization seek to expend their

available financial resources for the benefit of their clientele.

Financial management in the NFP environment thus typically focuses on

acquiring and using financial resources- upon sources and uses of

working capital, budget status, and cash flow rather than on net incomeor earnings per share.

Accounting system: In order to account for legally imposed, externally

imposed, and self-imposed restrictions or limitations on the utilization of

their resources, NFPs have generally adopted the concepts and systems

of fund accounting. Comparatively, Profit seeking organizations adopt

concepts and systems of financial accounting.

Sources of Financial Resources: The sources of financial resources differ

between business and not for profit organizations as well as among not

for- profit organization. And, in the absence of a net income

determination emphasis, no distinction is generally made between

invested capital and revenue. A dollar is a resource whether acquired

through donation, user charge, sale of assets, loan, or in some other

manner.

Governments have the unique power to force involuntary financial resource

contributions through taxation- of property, sales, income, etc. and all levels rely

heavily upon this power. Other not -for profit organizations also derive financial

resources from a variety of sources. Religious groups and charitable organizations

usually rely heavily on donations, though they may have other revenue sources.


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Some colleges and universities rely heavily upon donations and income from trust

funds; others depend primarily upon state appropriations and/or tuition charges

for support. Finally, hospitals generally charge their clientele, though few select

their patients on the basis of ability to pay and many rely heavily upon gifts and

bequests.

User charges, where levied, usually are based on the cost of the goods or services

rendered rather than upon supply and demand related pricing policies common

to private enterprise.

Many services or goods provided by governmental and other NFP

entities are monopolistic in nature and there is no open market in which

their value may be objectively appraised or evaluated.

Charges levied for goods or services often cover only part of the costs

incurred to provide them; e.g., tuition generally covers only a fraction of

the cost of operating state colleges or universities, and token charges (or

no charges) may be made to a hospitals indigent patient.

Cost-Benefit Relationship: In NFP organizations, resource contributors

may not receive a proportionate share of goods and services. Someone

may contribute more but may receive less or nothing. On the contrary,

others may contribute less or nothing but may earn more. Moreover,

resource contributors do not receive equity interest in the net assets of

the organization. But, there is a direct relationship between costs and

revenues in profit seeking organizations. This implies that a person who

covers more cost is entitled to get more benefit. Moreover, resource

contributors (creditors and owners) receive equity interest in the net

assets of the organization.


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Scope of operation: The operation of NFP entities is mostly diversified.

That is, its scope is wide. For example, consider Addis Ababa

Municipality. Its common operations cover health, security,

administration, investments, construction, and others. We can observe

that it touches many areas. Relatively speaking, the operation or area ofactivity of business organizations is more specific. Because of this

feature, business organizations are classified as service giving,

merchandising, or manufacturing based on the nature of their activity or

area of operation. Such difference has its implication in accounting. Since

the scope of operation in NFP entities is relatively diversified, it requires

complex accounting treatments comparing to those specific business

activities.

Accounting system: In order to account for legally imposed, externally

imposed, and self-imposed restrictions or limitations on the utilization of

their resources, NFPs have generally adopted the concepts and systems

of fund accounting. Comparatively, Profit seeking organizations adopt

concepts and systems of financial accounting.

Control: Non-profit organizations use funds and budget as a control

device. Because market is not used as a controlling means. They are

highly affected by legal requirements or restrictions. In profit seeking

organizations, market is used as a control devise. If there is a business

organization that is not efficient and competitive, it will become out of

market and closed within reasonable short period of time. Thus, the rule

of market itself controls business organizations and determine their

continuity. The basic problem of non-profit organizations is that they

may continue to exist forever even though they are inefficient and

ineffective. Because their revenue is not necessarily correlated to their

service. In other words, the rule of market cannot control them. Instead,

funds and budget are used in NFP organizations as a control device.

Moreover, they are highly affected by legal requirements or restrictions.


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Accounting Differences between NFP Organizations and Profit entities

Remember the points in relation to accounting principles that you have taken in

the previous accounting modules. That was the principles which are strictlyapplied to the profit entities. The same concepts and terms are used in NFP

entities but with different connotation. This may incorporate;

Business Entity concept: in profit seeking organizations, the entity

concept refers to the organization as a whole. In other words, one business

organization means one accounting entity and only one ledger with one set

or group of accounts. Thus, for example, it will have only one cash accountand one receivable controlling account. But, the entity concept in

government and NFP entities relates to the separate fund or fund type

entities; not the organization as a whole; in NFP organizations the multiple

entity concepts is used, whereas in profit seeking concerns the single entity

conceptis applied.

The periodicity concept: This concept typically in NFP entities relates to

the measurement and comparison of the flow of funds during the

budgetary period and to budgetary comparisons. In NFP entities, how

much resource inflows and resource outflows occur during the budgetary

period is the major concern. Similarly, a comparison between the budgeted

revenues with actual revenues and estimated expenditures with actual

expenditures attracts the interest of many accounting information users.

But in business organizations, the periodicity concept refers to the

determination or measurement of income or profit within one accounting

period. To measure income or profit, the concept of revenue and expense

is followed. In other words, the concern of business organization is how

much income or profit is earned as a difference between revenue and

expense during a given period.

The matching concept:In profit seeking organizations and commercial

type NFP entities, the matching concept refers to the matching of revenues

and expenses for net income or net loss measurement. That is, incurred


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expenses should be recognized and recorded in the accounting period in

which the corresponding revenue is recorded. Otherwise, if revenue is

recorded in one accounting period but the related expenses are recorded in

another accounting period, income of one year is overstated/understated

and income of another year is understated /overstated. But, in NFP entitieswhich use expendable funds, this concept refers to matching financial

inflows with financial outflows, and estimated data with actual results.

Thus, all financial inflows as well as financial outflows should be recorded in

the budgetary period in which they occur. From this discussion we learn

that the matching concept is more of related to the periodicity concept.

The going concern concept:Little thought has been given to applying

the going concern concept to the NFP organizations as a whole. This

concept usually is considered relevant only when commercial type or self-

supporting activities are involved in NFP organizations. Because

expendable resource funds exist on a year-by-year or project-by-project

basis and may be intentionally exhausted and go out of operation. But, the

going concern or continuity concept is more important in profit seeking

organizations. According to this concept, it is assumed that the business

organization will continue to exist indefinitely at least to materialize its plan

and to meet its obligations or commitments.

1.4 Similarities between Commercial and Governmental

AccountingGovernmental and NFP entities are in many ways similar to profit- seeking

enterprises in the following ways.

They are integral parts of the same economic system and utilize similar

resources in accomplishing their purposes.

Both must acquire and convert scarce resources into their respective

goods or services.


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Financial management processes are essentially similar in both and each

must have a viable information system of which the accounting system is

an integral component if its manager and other interested persons or

groups are to receive relevant and timely data for planning, directing,

controlling, and evaluating the use of its scare resources.

In as much as their resources are relatively scarce whether donated,

received from consumers, acquired from investors or creditors, or

secured through taxation least cost analysis and other control and

evaluation techniques are essential to assuring that resources are

utilized economically, effectively, and efficiently.

In some case, both produce similar products, for example DefenseResource Management College through its effort is striving to produce

intellectuals in various field of study who will administer the public

resources efficiently and effectively. Likewise, Unity University College

which is private college in our country is engaged in production of

intellectuals who will apply the same principle as Defense Resource

Management College does. Moreover, both governments and private

enterprise may own and operate transportation systems, sanitation

services, and electric or gas utilities.

Both profit and NFP entities are applying the concept of double entry

accounting

The concept of accounting cycle that begins from business transaction,

recording in journals, posting to the ledger, summarizing in the form of

trial balance and working papers, recording adjusting entries, preparing

financial statements, recording closing entries, and preparing post

closing trial balances are similarly maintained.

1.5 Regulation and Control of NFP Entities

In profit accounting, if they are not achieving profit in the process offering goods

and services, enterprises will be modified or withdrawn or wound up. The direct

relationship between the producer and the consumer allows every consumer to


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cast his dollar vote for that firm providing the goods or services most suitable to

him. In this situation a firm whose management is incompetent or unresponsive

to the desires of the consuming public will be unprofitable and will ultimately be

forced out of business. Therefore, the profit motive and profit measurement

constitute an automatic regulating device in our free enterprise economy.

Such a concept which is applied to business entities are not applied in a manner

similar to governmental and other NFP entities. That means, the profit

test/regulator device is not present in the usual not for profit situation, and most

NFP organizations must strive to attain their objectives without its benefits. In

addition, many not for profit organizations provide goods or services having no

open market value measurement by which to test consumer satisfaction because,

as discussed earlier NFP entities are operated under the absence of the need to

operate profitably, there is lack of an open market test of the value of the

organizations output, there is the remote and indirect relationship, if any,

between the resource contributor and the goods or services recipient, and in the

case of governments, the ability to force resource contributions via taxation,

might make it possible for an inefficient, uneconomical, or even ineffective not-

for-profit organization to continue operating indefinitely. Not-for-profitorganizations, particularly governments, are therefore subject to more stringent

legal, regulatory, and other controls than are private businesses.

Governmental and NFP organizations operations may also be affected by legal or

quasi legal requirements such as Governmental operations are imposed externally

by federal or state statute, ruling, grant stipulation, regulations, laws or judicial

decree. They are also, imposed internally by charter, bylaw, ordinance, trustagreement, donor stipulation, or contract. Furthermore, operational and

administrative controls may be more stringent than in private enterprise because ofthe need to assure compliance with legal and other requirements. Among the

aspects of a NFP organizations operations that may be regulated or otherwisecontrolled are:


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a.

Organization structure: form; composition of its directing board or similar

body; the number and duties of its personnel; lines of authority and

responsibility; which officials or employees are to be elected, appointed, or

hired from among applicants.

b.

Personnel policies and procedures: who will appoint or hire personnel;tenure of personnel; policies and procedures upon termination; extent of

minority group representation on the staff; levels of compensation;

promotion policies; and types and amounts of compensation increments

permissible

c.

Sources of resources: the types and maximum amounts of taxes, licenses,

fines, or fees a government may levy; the manner in which user charges

are to be set; tuition rates; debt limits; the purposes for which debt may be

incurred.

d.

Use of resources: the purpose for which resources may be used includingearmarking of certain resources for use only for specific purposes;

purchasing procedures to be followed; budgeting methods, forms, or

procedures to be used.

e.

Accounting: any or all phases of the accounting system. E.g. chart of

accounts bases of accounting, forms, and procedures.

f.

Reporting: type and frequency of reports; report format and content; to

which reports are to be furnished.

g.

Auditing: frequency of audit; that is to perform the audit; the scope and

type of audit to be performed; the time and place for filling the auditreport; who is to receive or have access to the audit report; the wording of

the auditors report.

Generally, rulers of NFP organizations may have limited discretion compared with

managers of business enterprises. For example, it may be difficult to modify an

organizations structure, no matter how archaic, awkward, or ineffective; attract

qualified employees at prescribed pay rates ,discharge or demote incompetent

employees or reward outstanding employees; and improve the existing

budgeting, accounting, reporting, or auditing arrangement


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The role and emphasis of financial accounting and reporting may be

correspondingly altered, therefore, as compared with the profit seeking

enterprise environment.

The governmental accounting standards board (GASB) further distinguishes

governmental entities from not- for- profit entities and from businesses by

stressing that governments exist in an environment in which the power ultimately

rests in the hands of the people. Voters delegate that power to public officials

through the election process; the power is divided among the executive,

legislative, and judicial branches of the governments so that the actions, financial

and otherwise, of governmental executives are constrained by legislative actions;

and executive and legislative actions are subject to judicial review.

Further constraints are imposed on state and local governments by the existence

of the federal system in which higher levels of government encourage or dictate

activities by lower levels and finance the activities (partially, at least) by an

extensive system of inter governmental grants and subsidies that require the

lower levels to be accountable to the entity providing the resources, as well as tothe citizenry. Revenues raised by each level of government come, ultimately, from

taxpayers.

Since governments may have a monopoly on the services they provide to the

public, the lack of a competitive market place makes it difficult to measure

efficiency in the provision of the services. It is also extremely difficult to measureoptimal quantity or quality for many of the services rendered by government for

example, how many policies are needed and enough? The governmentalaccounting standards board notes the determination of optimal quantity or quality

of government services is complicated by the involuntary nature of the resourcesprovided. A consumer purchasing a commercial product can determine how much

to purchase and may choose among good, better, or best quality and payaccordingly. A group of individuals paying for governmental services (and paying


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in different proportions for services that some of them may not use or desire)

presents a far more complex situations.

1.6 Accounting and Financial Reporting in Government Operation.Financial reporting for governmental and other NFP organizations involvesconcepts, standards, and procedures designed to accommodate the uniqueness of

the environment in which they operate and the unique needs of the financial reportusers.

The Governmental Accounting Standard Board (GASB) stated that accountability

is the cornerstone of all financial reporting in government. Accountability

requires governments to answer to the citizenry that is, to justify the raising of

public resources and the purposes for which they are used. The GASB also

believes that interpreted equity is a significant part of accountability and is

fundamental to public administration.

Sources of Financial Reporting Standards

The primary sources of accounting and financial reporting standards for business,

governmental and not -for-profit organization are not the same. As shown below,

the Financial Accounting Standards Board (FASB) establishes accounting and

financial reporting standards for profit seeking businesses and for

nongovernmental not-for-profit organizations. The governmental accounting

standards Board (GASB), sets accounting and financial reporting standards for

governmentally related not-for-profit organizations, such as colleges and

universities, health care entities, museums, libraries and performing arts


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organizations that are owned or controlled by governments. Accounting and

financial reporting standards for the federal governmental are recommended by

the Federal Accounting Standard Advisory Board (FASAB).

The GASB and the FASB are parallel bodies under the oversight of the Financial

Accounting Foundation (FAF). The FAF appoints the members of the two boards

and provides financial support to the boards by obtaining contribution from

business corporation; professional organization of accountants, financial analysts,

and other groups concerned with financial reporting, CPA firms, debt rating

agencies; and state and local governments (for support of the GASB). Because of

the breadth of support and the lack of ties to any single organizations or

government, the GASB and the FASB are referred to as independent standards

setting bodies in the private sector. Standards set by the FASAB, GASB and FASB

are the primary sources of generally accepted accounting principles (GAAP) as the

term is used in accounting and auditing literature.


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Source: http://www.gasb.org

FASAB, GASB, and FASB standards are set forth primarily in documents called

statements. Independent auditors are engaged to express their opinion that the

financial statements of a client present fairly, in all material respects, the clients

financial position as of the end of a fiscal year and the results of its operations and

its cash flows for the year then ended, in conformity with generally acceptedaccounting principles (GAAP).

Objectives of Accounting by Not-for- Profit Entities

All three standard setting organizations the federal accounting standards advisory

board, the financial accounting standards board, and the government accountingstandards board take the position that the establishment of accounting and

financial reporting standards should be guided by conceptual considerations so

that the body of standards is internally consistent and the standards address

board issues expected to be of importance for a significant period of time. The

Financial

accounting

foundation

Financial accounting

standards board (FASB)

Governmental

accounting standards

board (GASB)

Federal accounting

standards advisory

board (FASAB)

Business (for

profit)

organizations

Non-

governmental

not-for-profit

State and local

governments

Federal

governments


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cornerstone of conceptual framework is said to be a statement of the objectives

of financial reporting.

Financial reports of not- for-profit organizations- voluntary health and welfare

organizations, private colleges and universities, private hospitals, religious

organizations, and other have similar uses. In its statement of financial accounting

concepts No. 6, the FASB emphasized that its concern is with financial reporting

to users who lack the authority to prescribe the information they want and who

must rely on the information management communicates to them to make

economic decisions. However in recognition of the fact that the financial

operations of not-for-profit organizations are generally not subject to as detail

legal restrictions as are those of governments.

The FASB stresses that the objective of financial reporting by not-for-profit

organizations is to provide

Information useful in making resource allocation decisions;

Information useful in assessing service and ability to provide services;

Information useful in assessing management stewardship andperformance; and

Information about economic resources, obligations, net resources

and changes in

them.

Objectives of Financial Reporting for Governmental and Other NFP

Entities

As per the GASB issued its concepts statement No. 1, Objectives of financial

reporting, for state and local governments .In that statement the board note the

following;


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Accountability requires governments to answer to the citizenry 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 rightto receive openly declared facts that may lead to public debate by the citizens and

their elected representatives. Financial reporting plays a major role in fulfilling

governments duty to be publicly accountable in a democratic society.

Financial reports of state and local governments, according to the Governmental

Accounting Standards Board, are used primarily to:

Compare actual financial results with the legally adopted budget

Assess financial condition and results of operations

Assist in determining compliance with finance related laws, rules, and

regulations; and

Assist in evaluating efficiency and effectiveness.

GASB issued its concepts statementNo. 2, Service Efforts and Accomplishments

Reporting to encourage state and local governments to experiments withreporting more complete information about a governmental entitys performance

than can be displayed in traditional financial statements. Indicators of service

efforts include inputs of non-monetary resources as well as inputs of dollars.

Indicators of service accomplishments include both outputs and outcomes.

1.7 Users of Financial Reports: Governmental and Other NFP Entities

Financial Accounting Standards Boards Statement of Financial Accounting

Concepts No. 4 (SFAC 4), is about Objectives of Financial Reporting by

Organizations. It addresses the objectives of general purpose external financial

reporting by non business (nonprofit) organizations. SFAC 4 notes that:


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The objectives stem primarily from the needs of external users who

generally cannot

prescribe the information they want from an organization.

In addition to information provided by general purpose external financialreporting, managers and, to some extent, governing bodies need a great

deal of internal accounting information to carry out their responsibilities inplanning and controlling activities.

The Governmental Accounting Standard Board (GASB) originally identified fourgroups of primary users of external financial reports of governmental units

and

added a fourth group in its mission statement. They are discussed below:

1.

The citizenry: Those to whom the government is primarily accountablein-

cluding citizens (taxpayers, voters, service recipients), the media, advocate

groups, and public finance researchers.

2. Legislative and oversight bodies: Those who directly represent the

citizensincluding members of state legislatures, county commissions, city

councils, boards of trustees and school boards, and executive branchofficials with oversight responsibility over other levels of government.

3.

Investors and creditors: Those who lend or participate in the lending

processincluding individual and institutional investors and creditors,

municipal security underwriters, bond rating agencies, bond insurers, and

financial institutions. The needs of intergovernmental grantors and other

users are considered by the GASB to be encompassed within those of these

three primary user groups. Further, internal executive branch managers

usually have ready access to the financial information through internal

reports. Thus they are not considered as primary users of external financialreports.

4.

Government administrators: Include internal executive branch managers if

they do not have ready access to the governments internal information.


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1.8 Growth and Importance of NFP Entities

Many constituents need full knowledge about the activities of non-profit

organizations in the form for financial information showing how well they are

meeting their own goals. Among the values or importance of governmental and

other NFP entities, the followings are the few.

The importance of these organizations lies in their dramatic growthespecially in recent years emerging as major social, economic and political

forces in society.

Their role in society can be signified in terms of the following factors:

their contribution toward the growth domestic products(gdps) of

countries,

the validity of their goods and services,

the employment opportunities they crate, and

the diversity and wideness of their activities.

1.9 Stewardship and Accountability

There are two basic concepts of financial accounting, which it will be useful to

define before we discuss users and their needs, particularly because their use in

ordinary language is often not helpful in understanding their technical meaning.

These are a stewardship and accountability, and they represent the ends of a

spectrum of reporting possibilities.

Stewardshiprefers to the holding of someone else's assets by a steward. In its

narrowly defined sense the responsibility of stewardship is to demonstrate that

those assets have not been misappropriated


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Stewardship accounting is, therefore, typically limited to the balance sheet

showing the money collected by the stewards, the form in which that money is

held, and an audit certificate vouching for the truth and fairness of the

statement.

Accountability, in its widest sense, refers to the responsibility for your actions to

someone else. It is therefore much more than just accounting, however widely

accounting is defined. There are many ways through which public sector

organizations are held accountable (through elections, highest level

governments, the media, public requires, etc. ) and for many different aspects of

their performance. Though not easy to define accounting is concerned with

financial accountability plus some aspects of economic accountability. This kind

of accountability goes beyond the narrowly defined stewardship of assets toinclude responsibility for the performance of those assets.

Financial reports in all organizations have traditionally emphasized the

stewardship function. In profit-oriented organizations their emphasis has not

been to the exclusion of performance measures, the stewardship accounts can be

analyzed to yield pointers to performance.

1.10. Financial Reporting in Governmental Units

State and local government financial reporting is addressed by the twelfth princi-

ple set forth in the GASB Codification. That principle states, in part:

i. Appropriate interim financial statements and reports of financial position,operating results, and other pertinent information should be prepared to

facilitate management control of financial operations, legislative

oversight, and, where necessary or desired, for external reporting

purposes.


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ii. A comprehensive annual financial report (CAFR] should be prepared and

published covering all funds and account groups of the primary

government including its blended component units. It provides anoverview of all discretely presented component units of the reporting

entity including:

Introductory section;

Appropriate combined, combining and individual fund statements;

Notes to the financial statements;

Required supplementary information;

Schedules;

Narrative explanations; and Statistical tables.

The reporting entity is the primary government including its blended component

units and all discretely presented component units.

iii. General purpose financial statements [GPFS] of the reporting entity maybe issued separately from the comprehensive annual financial report.

Such statements 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 (and cash flows of those fund

types and discretely presented component units that use proprietary fund

accounting). Those statements may also be required to be accompanied

by required supplementary information essential to financial reporting of

certain entities. The characteristics of each report are described asfollows:

Interim Reporting:


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Very few governments publish interim financial statements for external use.

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. But

sometimes legislators may be interested in them. Interim statements help

administrative personnel to determine how well the executive branch is

complying with budgetary and other finance-related legal requirements. In

addition, interim statements are important to controlling current operations

because they disclose variations from plans that may require altering the plans or

improving operating performance and assist in planning future operations.

The common interim reports include:

interim balance sheets,

interim operating statements,

interim budgetary comparison statement, and

detailed budgetary statements and statements of cash receipts,

disbursements, and balances for each fund.

Interim financial reports are comprised principally of statements that reflect

current financial position at the end of a month or quarter. They also compare

actual financial results with budgetary estimatesand limitations for the month or

quarter and/or for the year to date. Interim reports typically are prepared primar-

ily for internal use. Thus, they usually are prepared on the budgetary basis and

often do not include statements reporting general fixed assets or general long-

term debt. Further, they may properly contain budgetary or cash flow projections

and other informationdeemed pertinent to effective management control during

the year.

The key criteria by which internal interim reports are evaluated are their rele-

vance andusefulness for purposes of management control. They include planning


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future operations as well as evaluating current financial status and results to date.

Because managerial styles and perceived information needs vary widely,

however, appropriate internal interim reporting is largely a matter of professional

judgment rather than one to be set forth in detail here.

Interim reporting typically is for internal use, and individual managers and envi-

ronments require different types of interim reports. Thus, neither the GASB nor

any other recognized body has set forth what might be considered generally

accepted principles of interim reporting.


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