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.

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 nonprofit 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 and
country 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- forprofit organizations.

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 distribution
of 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 or
transferred 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 not forprofit 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

operate on a year to- 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 private
businesses seek 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 income
or 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.

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.

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 of
activity 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.

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 strictly
applied 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 account
and 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
concept is 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

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 entities
which 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 selfsupporting 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

Accounting
Governmental 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.

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 Defense

Resource 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

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 notfor-profit organization to continue operating indefinitely. Not-for-profit
organizations, 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, trust
agreement, donor stipulation, or contract. Furthermore, operational and
administrative controls may be more stringent than in private enterprise because of
the need to assure compliance with legal and other requirements. Among the
aspects of a NFP organizations operations that may be regulated or otherwise
controlled are:

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 including
earmarking 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 audit
report; 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

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 to
the 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 measure
optimal quantity or quality for many of the services rendered by government for
example, how many policies are needed and enough? The governmental
accounting standards board notes the determination of optimal quantity or quality
of government services is complicated by the involuntary nature of the resources
provided. A consumer purchasing a commercial product can determine how much
to purchase and may choose among good, better, or best quality and pay
accordingly. A group of individuals paying for governmental services (and paying

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 involves
concepts, standards, and procedures designed to accommodate the uniqueness of
the environment in which they operate and the unique needs of the financial report
users.
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

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.

Financial
accounting
foundation

Financial accounting
standards board (FASB)

Business (for
profit)
organizations

Governmental
accounting standards
board (GASB)

Nongovernmental
not-for-profit
organizations

Federal accounting
standards advisory
board (FASAB)

State and local

governments

Federal
governments

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 accepted
accounting 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 accounting
standards 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

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 and
performance; 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;

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 right
to 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 statement No. 2, Service Efforts and Accomplishments
Reporting to encourage state and local governments to experiments with
reporting 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:

 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 financial
reporting, managers and, to some extent, governing bodies need a great
deal of internal accounting information to carry out their responsibilities in
planning and controlling activities.
The Governmental Accounting Standard Board (GASB) originally identified four
groups 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 accountableincluding citizens (taxpayers, voters, service recipients), the media, advocate
groups, and public finance researchers.
2. Legislative and oversight bodies: Those who directly represent the
citizens including members of state legislatures, county commissions, city
councils, boards of trustees and school boards, and executive branch
officials with oversight responsibility over other levels of government.
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 financial
reports.
4. Government administrators: Include internal executive branch managers if
they do not have ready access to the governments internal information.

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 growth

especially 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.

Stewardship refers 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

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 to
include 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 principle 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.

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 an
overview 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 may
be 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 as
follows:

Interim Reporting:

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 estimates and limitations for the month or
quarter and/or for the year to date. Interim reports typically are prepared primarily for internal use. Thus, they usually are prepared on the budgetary basis and
often do not include statements reporting general fixed assets or general longterm debt. Further, they may properly contain budgetary or cash flow projections
and other information deemed pertinent to effective management control during
the year.

The key criteria by which internal interim reports are evaluated are their relevance and usefulness for purposes of management control. They include planning

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 environments 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.