23 Specialised, not-for-profit and public sector entities Flashcards
The accounting requirements for not-for-profit and public sector entities are moving closer to those required for profit-making entities. However, they do have different goals and purposes.
What organisations do we have in mind when we refer to Not-for-profit and public sector entities? These are the most obvious examples:
(a) Central government departments and agencies (b) Local or federal government departments (c) Publicly funded bodies providing healthcare (in the UK this would be the NHS) and social housing (d) Further and higher education institutions (e) Charitable bodies
Conceptual framework for not-for profit entities The International Federation of Accountants (IFAC) published Phase 1 of a Public Sector Conceptual Framework in January 2013. It has four chapters as follows:
(1) Role and authority of the Conceptual Framework (2) Objectives and users of general purpose financial reporting (3) Qualitative characteristics (4) Reporting entity
In preparing the conceptual framework IFAC had to bear in mind that not-for profit entities have different objectives, different operating environments and other different characteristics to private sector businesses. Some of the issues that arise in considering financial reporting by not-for-profit entities are:
Insufficient emphasis on accountability/stewardship A need to broaden the definition of users and user groups The emphasis on future cash flows is inappropriate to not-for-profit entities Insufficient emphasis on budgeting
Accountability/stewardship
Not-for-profit entities are not reporting to shareholders, but it is very important that they can account for funds received and show how they have been spent. In some cases, resources may be contributed for specific purposes and management is required to show that they have been utilised for that purpose. Perhaps most importantly, taxpayers are entitled to see how the government is spending their money. T/F
Not-for-profit entities are not reporting to shareholders, but it is very important that they can account for funds received and show how they have been spent. In some cases, resources may be contributed for specific purposes and management is required to show that they have been utilised for that purpose. Perhaps most importantly, taxpayers are entitled to see how the government is spending their money
Users and user groups
The primary user group for not-for-profit entities is providers of funds. In the case of public bodies, such as government departments, this primary group will consist of taxpayers. In the case of private bodies such as charities it will be financial supporters, and also potential future financial supporters. There is also a case for saying that a second primary user group should be recognised, being the recipients of the goods and services provided by the not-for-profit entity. T/F
Users and user groups The primary user group for not-for-profit entities is providers of funds. In the case of public bodies, such as government departments, this primary group will consist of taxpayers. In the case of private bodies such as charities it will be financial supporters, and also potential future financial supporters. There is also a case for saying that a second primary user group should be recognised, being the recipients of the goods and services provided by the not-for-profit entity
Cash flow focus The financial statements of not-for-profit entities need to provide information which will enable users to assess an entity’s ability to generate net cash inflows. Not-for-profit entities need to generate cash flows, but other aspects are generally more significant – for instance, the resources the entity has available to deliver future goods and services, the cost and effectiveness of those it has delivered in the past and the degree to which it is meeting its objectives. T/F
Cash flow focus The financial statements of not-for-profit entities need to provide information which will enable users to assess an entity’s ability to generate net cash inflows. Not-for-profit entities need to generate cash flows, but other aspects are generally more significant – for instance, the resources the entity has available to deliver future goods and services, the cost and effectiveness of those it has delivered in the past and the degree to which it is meeting its objectives.
Budgeting: Another issue is whether financial reporting should include forecast information. For not-for-profit entities, budgets and variance analyses are more important. In some cases, funding is supplied on the basis of a formal, published budget. T/F
Budgeting Another issue is whether financial reporting should include forecast information. For not-for-profit entities, budgets and variance analyses are more important. In some cases, funding is supplied on the basis of a formal, published budget.
International public sector accounting standards The IPSASB is developing a set of International Public Sector Accounting Standards (IPSASs), based on IFRSs. To date the following IPSASs have been issued:
(1) Presentation of Financial Statements (2) Cash Flow Statements (3) Net Surplus or Deficit for the Period, Fundamental Errors and Changes in Accounting Policies (4) The Effect of Changes in Foreign Exchange Rates (5) Borrowing Costs (6) Consolidated Financial Statements and Accounting for Controlled Entities (7) Accounting for investments in Associates (8) Financial Reporting of Interests in Joint Ventures (9) Revenue from Exchange Transactions (10) Financial Reporting in Hyperinflationary Economies(11) Construction Contracts (12) Inventories (13) Leases (14) Events After the Reporting Date (15) Financial Instruments: Disclosure and Presentation (16) Investment Property (17) Property, Plant and Equipment (18) Segment Reporting (19) Provisions, Contingent Liabilities and Contingent Assets (20) Related Party Disclosures (21) Impairment of Non-Cash-Generating Assets
Private sector Not-for-profit entities in the private sector have the following characteristics:
Their objective is to provide goods and services to various recipients and not to make a profit They are generally characterised by the absence of defined ownership interests (shares) that can be sold, transferred or redeemed They may have a wide group of stakeholders to consider (including the public at large in some cases) Their revenues generally arise from contributions (donations or membership dues) rather than sales Their capital assets are typically acquired and held to deliver services without the intention of earning a return on them
Public sector Nor-for-profit entities in the public sector have similar key characteristics to those in the private sector. They are typically established by legislation and:
Their objective is to provide goods and services to various recipients or to develop or implement policy on behalf of governments and not to make a profit They are characterised by the absence of defined ownership interests that can be sold, transferred or redeemed They typically have a wide group of stakeholders to consider (including the public at large) Their revenues are generally derived from taxes or other similar contributions obtained through the exercise of coercive powers Their capital assets are typically acquired and held to deliver services without the intention of earning a return on them
Cost of transition While there has been a general assumption that for public sector entities the move to the accruals basis will result in more relevant and better quality financial reporting, no actual cost-benefit analysis has been undertaken on this. One of the arguments in favour of the adoption of the accruals basis is that it will be possible to compare the cost of providing a service against the same cost in the private sector. It will then be possible to see how goods and services can be most cheaply sourced. T/F
Cost of transition While there has been a general assumption that for public sector entities the move to the accruals basis will result in more relevant and better quality financial reporting, no actual cost-benefit analysis has been undertaken on this. One of the arguments in favour of the adoption of the accruals basis is that it will be possible to compare the cost of providing a service against the same cost in the private sector. It will then be possible to see how goods and services can be most cheaply sourced.
Public sector entities These will have performance measures laid down by government. The emphasis is on economy, efficiency and effectiveness. Departments and local councils have to show how they have spent public money and what level of service they have achieved. Performance measurement will be based on Key Performance Indicators (KPIs). Examples of these for a local council could be:
Number of homeless people rehoused % of rubbish collections made on time Number of children in care adopted
Public sector entities use the services of outside contractors for a variety of functions. They then have to be able to show that they have obtained the best possible value for what they have spent on outside services. This principle is usually referred to as Value For Money (VFM). In the UK, local authorities are required to report under a system known as Best Value. They have to show that they applied ‘fair competition’ in awarding contracts. Best Value is based on the principle of the ‘four Cs’:
(1) Challenging why, how and by whom a service is provided (2) Comparing performance against other local authorities (3) Consulting service users, the local community etc. (4) Using fair Competition to secure efficient and effective services
