Government and Not-for-Profit Entities (1)
Government and not-for-profit entities serve different purposes in society than do business entities. Because such organizations are largely financed by taxpayers, donors and others who do not expect benefits proportional to the resources they provide, management has a special duty to be accountable for how those resources are used in providing services
Government and not-for-profit entities serve different purposes in society than do business entities. Because such organizations are largely financed by taxpayers, donors and others who do not expect benefits proportional to the resources they provide, management has a special duty to be accountable for how those resources are used in providing services. Thus the need for managers to be accountable to citizens, creditors, oversight bodies and others has played a central role in shaping the accounting and reporting practices of government and not-for-profit organisations.
Governmental and not-for-profit entities are vast in number and range of services provided.In Nigeria, government exist at the federal, state and local levels and serve a wide variety of functions. The Federal Accounts Allocation Committee (FAAC) reports that there are 774 local governments, 36 states and the federal capital territory. Some states have also created some local council development agencies (LCDA) that derive their power from state governments. States, local governments areas and the LCDA’s, are general purpose governments that provide a wide range of services to the citizens (such as police and fire protection, sanitation, construction and maintenance of streets, roads and bridges, culture and recreation).
Independent primary schools, public colleges, polytechnics and universities, are special purpose governments- governments that provide only a single function or a limited number of functions (such as education, drainage and flood control, irrigation, soil and water conservation, fire protection, water supply). Special purpose governments have the power to levy and collect taxes and to raise revenues from other sources as provided by state laws to finance the services they provide.
Not-for –profit organizations also exist in many forms and serve many different functions in society. These include private primary schools, colleges and universities, various kinds of community service and health care organizations, public libraries, museums, professional and trade associations, fraternal and social organizations, and religious organizations.
Need for Government Reporting Standard
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, so that the action, financial and otherwise of government executives are constrained by legislative action, and executive and legislative actions are subject to judicial review.
Further constraints are imposed on state and local governments by the federal government. Revenues raised by each level of government come, ultimately from tax payers. Tax payers are required by law to provide resources to governments even though they often have little choice about which government services they receive and the extent to which they receive them. This relative lack of tax payer choice is premised of the fact that most governments do not operate in a competitive market place, face virtually no threat of liquidation and do not have equity owners. Government accounting and financial reporting standards aim to address the need for public accountability information by helping stakeholders assess how public resources were acquired and either used during the period or are expected to be used. Such reporting also helps users to assess whether current resources were sufficient to meet current service cost ( or whether some costs were shifted to future tax payers) and whether the government’s ability to provide services improved or declined from previous year.
Characteristics of Government and Not-for-Profit Organizations
Governmental and not-for-profit organizations differ in important ways from business organization. An understanding of how these organizations differ from business organization is essential to understanding the unique accounting and financial reporting principles that have evolved for governmental and not-for-profit organizations.
The following characteristics distinguish the governmental and not-for-profit entities from business organisations:
a. Receipt of significant amounts of resources from resources providers who do not expect to receive either repayment or economic benefits proportionate to the resources provided
b. Operating purposes that are other than to provide goods or services at a profit or profit equivalent
c. Absence of defined ownership interests that can be sold, transferred, or redeemed or that convey entitlement to a share of residual distribution of resources in the event of liquidation of the organization.
Objectives of Financial Reporting In Government
Accountability is the cornerstone of all financial reporting in government. Accountability requires government to answer to the citizenry- to justify the raising of public resources and the purposes for which they are used.
Governmental accountability is based on the belief that 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 government’s duty to be publicly accountable in a democratic society.
Comparison of financial reporting objectives- state and local governments, federal government, and not-for-profit organizations.
State and local governments.
Financial reporting is used in making economic, social, and political decisions and in assessing accountability primarily by:
• Comparing actual financial results with the legally adopted budget.
• Assessing financial condition and results of operations.
• Assisting in determining compliance with finance-related laws, rules, and regulations.
• Assisting in evaluating efficiency and effectiveness.
Financial reporting should help to achieve accountability and is intended to assist report users in evaluating:
• Budgetary integrity.
• Operating performance.
• Adequacy of systems and controls.
Not- for- profit organizations
Financial reporting should provide information useful in:
Making resource allocation decisions.
Assessing services and ability to provide services.
Assessing management stewardship and performance
Assessing economic resources, obligations, net resources, and changes in them.