CHAPTER -I

Overview of Financial Reporting for Governmental

and NOT FOR PROFIT Entities

1-1
 Learning Objectives
After studying Chapter 1, you should be able to:
➢ Identify the distinguishing characteristics of Governmental and Not- for-
profit entities.
➢ Distinguish the authoritative bodies responsible for setting financial
reporting standards for governmental and not-for-profit entities.
➢ Understand the objectives of financial reporting in NFP entities
➢ Compare and contrast IPSAS versus IFRS.
➢ Understand the conceptual framework for Public Sector Accounting.
➢ Identify the fundamental concepts of recognition, measurement, and
disclosure for public Sector Accounting.

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 Introduction

▪ Organizations do exist to serve the public through provision of goods

and services.

▪ But the underline intention of serving the public might be different

from organization to organization.

▪ Some of them embarked in such activity with the aim of making more
money, whereas some are with aim of only serving the fundamental
needs of the public for free or on cost reimbursement basis.

▪ In this course we look closer to see those organizations with no

intention of making profit.
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1.1.Distinguishing Characteristics of Governmental & NFP Entities

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

from business organizations.

▪ Not surprisingly the accounting & financial reporting for governmental

and not-for-profit organizations are markedly different from accounting
and financial reporting for businesses.

▪ An understanding of how these organizations differ 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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1.1.Distinguishing Characteristics of Governmental & NFP Entities

▪ A non-profit ( not-for-profit) organization is a legal and accounting entity

that is operated for the benefit of society as a whole, rather than for the
benefit of an individuals.
▪ In its broad sense, the term non- profit refers to all entities that are not
in business to make a profit, exist to serve the societies in many forms.
▪ Thus, the term encompasses both governmental and other non for
profit entities or Non Government Organizations (NGOs).

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1.1.Distinguishing Characteristics of Governmental & NFP Entities

▪ Governmental entities:- are entities established to provide(render)

goods and services that are not feasible by business enterprise for the
society with out anticipating any direct return.
▪ Non Government Organizations (NGOs):- are non profit organizations
stand to serve the society in less coverage than governmental
organizations with no intensions of profit making.
▪ NGOs also differ from governmental organizations in which they have
specific purpose for their existence.

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1.1.Distinguishing Characteristics of Governmental & NFP Entities

▪ Generally government entities differ from business entities in the

following ways;

➢ Benefits are not proportional to resources provided

➢ Lack of a profit motive/Multiple objectives

➢ Absence of transferable/ absolute /equity/ ownership rights

➢ Power ultimately rests in the hands of the people
➢ Non-exchange transactions

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1.1.Distinguishing Characteristics of Governmental & NFP Entities

➢ Public service and accountability

➢ Scope of operations and regulation
➢ Adjustment approach to income and expenditure
➢ Sources of financial resources
➢ Coercive actions
➢ Publicity of Budget
➢ Nature of Perspective
➢ Essentials of Audit

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1.1.Distinguishing Characteristics of Governmental & NFP Entities

❖ In its Statement of Financial Accounting Concepts No.4, noted the

following characteristics that it felt distinguished governmental and not-
for-profit entities from business organizations:

a) 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.
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 a residual
distribution of resources in the event of liquidation of the organization.
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1.1.Distinguishing Characteristics of Governmental & NFP Entities

❖ The GASB also 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.

➢ Public corporations are incorporated in politics

➢ BOD/ executives/ are appointed y the governing body.

➢ Have the power to enact and enforce a tax levy.

➢ Their fundamental sources of revenues is tax.

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1.1.Distinguishing Characteristics of Governmental & NFP Entities

❖Even though governmental, NFPs and For Profit Organizations have

differences in the above facts, they are similar in the following ways;

➢ Both are an integral part of the economy.

➢ Both are uses capital, financial, human resources to perform their task.

➢ Both are influenced by scare resources.

➢ Both employ journals and ledgers, to produce financial reports which

summarize the information in a meaningful way to guide decisions.

11
1.2. Sources of Financial Reporting Standards for Governmental
and NFP entities

❖ Authority to establish accounting and reporting standards for not-for-

profit organizations is split between the FASB and the GASB because a
sizeable number of not-for-profit organizations are governmentally
owned.
❖ The GASB, FASB, and IASB are parallel bodies under the oversight of
the Financial Accounting Foundation for Governmental and NFP entities
and they are referred to as “independent standards-setting boards”.

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1.2. Sources of Financial Reporting Standards for Governmental
and NFP entities

❖ Before the creation of the GASB and the FASB, financial reporting
standards were set by groups sponsored by professional organizations:
❖ The forerunners of the GASB (formed in 1984) were the National
Council on Governmental Accounting (1973–84), the National
Committee on Governmental Accounting (1948–73), and the National
Committee on Municipal Accounting (1934–41).
❖ The forerunners of the FASB (formed in 1973) were the Accounting
Principles Board (1959–73) and the Committee on Accounting
Procedure (1938–59) of the AICPA.
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1.2. Sources of Financial Reporting Standards for Governmental
and NFP entities

❖ In Rule 203 of its Code of Professional Conduct, the AICPA has

formally designated the GASB, the FASAB, and the FASB as the
authoritative bodies to establish generally accepted accounting
principles (GAAPs) for state and local governments including
governmental not-for-profit organizations, the federal government and
its agencies and business organizations and non-governmental not-for-
profit organizations, respectively.

❖ Illustration1-1 below, shows primary sources of financial reporting

standards for businesses, governments, and not-for-profit organizations.
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1-15
 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

▪ Every organization wants to be successful.

▪ Of course, in order to know if it is successful “success” must be defined

in terms of goal and then,

▪ The organization should measure its results against its goals.

▪ Measuring success is often thought of in terms of effectiveness

(achieving the goal at the highest level) and efficiency (achieving the goal
using the least amount of resources).

▪ In profit making entities all the activities are to increase the owner‘s
welfare, which is usually measured in terms of profitability.
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 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖But judging the performance of entities whose goal is not profit

maximization is more difficult and subjective.

❖Effectiveness and efficiency of NFPs cannot be measured in the same

way as for profits, since they do not operate for generating profit.

❖Evaluating performance to determine whether any service was best or

at the highest level possible is not simply an economic judgment but it
is a political and social as well.

❖So NFPs financial reporting should address such issues via

alternate mechanisms.
 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ Therefore, report should mainly emphasize for assuring the efficient

and effective utilization of resource by evidencing whether the
resources are spent as per the intended purpose and for attaining the
maximum possible goal.

❖ In its Concepts Statement No.1, par. 56, “Objectives of Financial

Reporting,” the GASB stated that “Accountability is the cornerstone
of all financial reporting in government...
 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

▪ Accountability arises from the citizens’ “right to know?” from where

public resources raising and to what purposes they are used/spent.
▪ It imposes a duty on public officials to be accountable to citizens for
raising public monies and how they are spent.

❖ Closely related to the concept of accountability as the cornerstone of

governmental financial reporting is the concept inter period equity
which is government’s obligation to disclose whether current-year
revenues were sufficient to pay for services provided that year or did
current citizens defer payments to future taxpayers?
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 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ Accountability is also the foundation of federal government financial

reporting (for both internal and external users).

❖ Federal government financial reporting should assist report users in

evaluating:
➢ Budgetary integrity
➢ Operating performance
➢ Stewardship
➢ Adequacy of systems and controls

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 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ Unlike FASB and GASB, which focus their standards on external financial
reporting, the FASAB its standards focus on financial reporting
concerned with both internal and external financial reporting.
❖ Accordingly, the FASAB has identified four major groups of users of
federal financial reports:
➢ Citizens,
➢ Congress,
➢ Executives, and
➢ Program managers.

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 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

Whereas financial reporting of NFP 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
❖ Like the FASB, the GASB continues to develop concepts statements
and standards that communicate the framework to establish consistent
financial reporting for entities within its jurisdiction.
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 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ However, the reporting objectives for not-for-profit organizations

emphasize decision usefulness over financial accountability needs,
presumably reflecting the fact that the financial operations of not-for-
profit organizations as compared to those of governments are generally
subject to less detailed legal restrictions.

❖ Illustration1.2 below shows comparison of financial reporting objectives

state and local governments, federal government, and not-for-profit
organizations.

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1-24
 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ The GASB, as well as the FASB, is concerned with establishing

standards for financial reporting to external users those who lack the
authority to prescribe the information they want and who must rely on
the information management communicates to them.

❖ The Board does not intend to set standards for reporting to managers
and administrators or others deemed to have the ability to enforce
their demands for information.
 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ As Illustration1.3 below, displays the minimum requirements for general

purpose external financial reporting under the governmental financial
reporting model specified by GASB Statement No. 34 (GASBS 34).

❖ Central to the model is the management’s discussion and analysis

(MD&A).

❖ The MD&A is required to disclose certain notes and supplementary

information (RSI) other than MD&A that are required designed to
communicate in narrative, the purpose of the basic financial statements
and the government’s current financial position and results of financial
activities compared with those of the prior year in easily readable form.
 1.3. Objectives of Financial Reporting in State and Local
Governments and in NFP Entities

❖ GASBS 34 prescribes two categories of basic financial statements, government-

wide and fund financial statements.
❖ Government-wide financial statements are intended to provide an aggregated
overview of a government’s net assets and changes in net assets and assist in
assessing operational accountability-whether the government has used its
resources efficiently and effectively in meeting operating objectives.
❖ Fund financial statements, is present current/short term financial resources and
assist in assessing fiscal accountability of the government whether it has raised
and spent financial resources in accordance with budget plans and in compliance
with pertinent laws and regulations.
❖ Other funds, referred to as proprietary and fiduciary funds, account for the
business-type and certain fiduciary activities of the government.
1-28
 Comprehensive Annual Financial Report (CAFR)

❖ Serious users of governmental financial information need more detail

than is found in the MD&A, basic financial statements, and RSI (other
than MD&A).
❖ For state and local governments, much of that detail is found in the
governmental reporting entity’s called comprehensive annual financial
report (CAFR).
❖ GASB provides standards for the content of a CAFR in its annually
updated publication Codification of Governmental Accounting and Financial
Reporting Standards.
 Comprehensive Annual Financial Report (CAFR)

▪A CAFR prepared in conformity with these standards should contain the

following sections:

Introductory section

Financial section

Statistical section

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Comprehensive Annual Financial Report (CAFR)

CAFR - Introductory Section

❖ Title page

❖ Contents page

❖ Letter of transmittal

❖ Other (as desired by management)

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 Comprehensive Annual Financial Report (CAFR)

CAFR - Financial Section (GASBS 34)

❖ Auditor’s report
❖ Basic Financial Statements-(Government-wide & fund financial statements)
❖ Required Supplementary Information (RSI)(Other than MD&A)
❖ Combining and individual fund statements and schedules

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Comprehensive Annual Financial Report (CAFR)

Management’s Discussion and Analysis (MD&A)

Brief objective narrative

providing management’s
analysis of the government’s
Financial performance

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Comprehensive Annual Financial Report (CAFR)

CAFR - Statistical Section

Tables and charts showing multiple-year

trends in financial and socio-economic
information

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 1.4. IPSAS versus IFRS

❖ IPSAS is International Public Sector Accounting Standards issued by

International Public Sector Accounting Standards Board (IPSASB) is an
independent standard setting board supported by the International
Federation of Accountants (IFAC). Whereas;
❖ IFRS is a globally recognized set of standards for the preparation of
financial statements by business entities.
❖ The IPSASB issues IPSAS, dealing with financial reporting under cash
basis of accounting and under accrual basis of accounting where by the
requirements to these standards are applicable public sector.
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 1.4. IPSAS versus IFRS

❖ The IPSASB (and its predecessor, the IFAC Public Sector Committee)
has been developing and issuing accounting standards for the public
sector since 1997,and guidance, and other resources for use by the
public sector around the world.

❖ IPSAS are aimed for application to the general-purpose financial

reporting of all public sector entities other than Government Business
Enterprises (GBEs) are expected to apply IFRS.

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 1.4. IPSAS versus IFRS

Why adopt IPSAS?

▪ The adoption of IPSAS by government aims to improve both the quality

and comparability of financial information reported by public sector
entities around the world.

▪ Financial reports prepared in accordance with IPSAS allow users to

assess the accountability for all resources the entity controls and make
decisions about providing resources to, or doing business with, the
entity.

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 1.4. IPSAS versus IFRS

Why adopt IPSAS?

Currently the adoption of IPSAS is being considered by a number of
jurisdictions and the current period can best be described as a process of
transition, and the situation continues to evolve as governments around
the world make decisions about their financial reporting.
The following are the summary of the entire IPSASs recommended
practice guideline within conceptual framework.

1-38
IPSAS Description
IPSAS 1 Presentation of Financial Statements
IPSAS 2 Cash Flow Statements
IPSAS 3 Accounting Policies, change in Accounting Estimates and Errors.
IPSAS 4 The Effects of Changes in Foreign Exchange Rates
IPSAS 5 Borrowing Costs
IPSAS 6 Consolidated and Separate financial statements superseded by
IPSAS34(separate) and IPSAS35(consolidated)
IPSAS 7 Financial reporting under Cash Basis of Accounting
IPSAS 8 Interest in Joint Ventures arrangements superseded by IPSAS37
IPSAS 9 Revenue from Exchange Transactions.
IPSAS10 Financial Reporting in Hyperinflationary Economies
IPSAS11 Construction Contracts
IPSAS12 Inventories
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IPSAS Description
IPSAS13 Leases
IPSAS14 Events After the Reporting Date
IPSAS15 Financial Instruments: Disclosure and Presentation superseded by
IPSAS 28 (presentation), IPSAS 29 (recognition & measurements)
and IPSAS 30 (Disclosures)
IPSAS16 Investment Property
IPSAS17 Property, Plant and Equipment
IPSAS18 Segment Reporting
IPSAS19 Provisions, Contingent Liabilities and Contingent Assets
IPSAS20 Related Party Disclosures
IPSAS21 Impairment of Non-Cash-Generating Assets
IPSAS22 Disclosure of Financial Information About the General
Government Sector
IPSAS23 Revenue from Non-Exchange
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Transactions (Taxes and Transfers)
IPSAS Description
IPSAS24 Presentation of Budget Information in Financial Statements
IPSAS25 Employee Benefits superseded by IPSAS 39
IPSAS26 Impairment of Cash-Generating Assets
IPSAS27 Agriculture
IPSAS28 Financial Instruments: Presentation
IPSAS29 Financial Instruments: Recognition and Measurement
IPSAS30 Financial Instruments: Disclosures
IPSAS31 Intangible Assets
IPSAS32 Service Concession Arrangements: Grantor
IPSAS33 First-time Adoption of Accrual Basis IPSASs
IPSAS34 Separate Financial Statements
IPSAS35 Consolidated Financial Statements

1-41
IPSAS Description
IPSAS36 Investments in Associates and Joint Ventures
IPSAS37 Joint Arrangements
IPSAS38 Disclosure of Interests in Other Entities
IPSAS39 Employee Benefits
IPSAS40 Public Sector Combinations
IPSAS41 Financial Instruments
IPSAS42 Social Benefits
RPG 1 Reporting on the Long-Term Sustainability of an Entity’s Finances
RPG 2 Financial Statement Discussion and Analysis
RPG 3 Reporting Service Performance Information
RPG is Recommended Practice Guidelines.

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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

▪ The objective of the IPSASB is to serve the public interest by

developing high-quality financial reporting standards and other
publications for use by public sector entities around the world in the
preparation of general purpose financial reports.
▪ The adoption of International public sector accounting standards
[lPSASs] aims to improve both the quality and comparability of financial
information of public sector entities around the world, that enhance the
quality and transparency of public sector financial reporting and used to
provide better information to decision makers(users).
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

▪ To do so IPSASB is bounded by its conceptual framework which is a

coherent systems of concepts and standards that must be flow in
financial statements preparation and reporting for public sector entities.
▪ The conceptual framework for general purpose financial reporting by
public sector entities establishes;
➢ The concepts,
➢ Standards [IPSAS] and
➢ Recommended Practices Guidelines [RPG] that are applicable to the
preparation and presentation of general purpose financial reporting
[GPFRs] of public sector entities. 1-44
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

• The conceptual framework don’t establish standards that override the

requirements related to the recognition, measurements and presentation
of transactions and other events and activities that are reported in both
national and international standards orRPGs [para1.2].
• The financial reporting by public sector entities that apply IPSASs and
RPGs to national, state & local governments as well as to a wide ranges
of other public sector entities including;
✓ Ministers, departments, programs, boards, commissions and agencies;
✓ Public sector social security funds, trust and statutory authorities; and
✓ International governmental organizations.
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

▪ Generally IPSASs are designed to apply to public sector entities that are;
a) Responsible for the delivery of services to benefit the public and /or to
redistribute and income and wealth;
b) Mainly finance their activities directly or indirectly by means of taxes
and/or transfers from other levels of government, social contributions,
debts or fees; and
c) Do not have a primary objective to make profits.

1-46
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

• Some of the factors that IPSASB considered in the development of the

conceptual framework are;
✓ The volume and financial significance of non exchange transactions;
✓ The importance of approved budget;
✓ The nature of public sector programs and longevity of the public sector;
✓ The nature and purposes of assets and liabilities in public sector;
✓ The regulatory role of public sector entities; and
✓ The relationship to statistical reporting.

1-47
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

▪ 1.5.1 Objectives of financial reporting

▪ The financial reporting is not the end it self, instead its purpose is
provide useful information to users.
▪ The primary objective of most public sector entities is to deliver
services to the public rather than to make profit and generate a return
on equity to investors.
▪ Consequently such entities can not be evaluated examination of financial
performance and cash flows rather using accountability that aid to asses
whether the fund is used to its intended purpose.
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

▪ 1.5.1 Objectives of financial reporting

▪ Hence the objectives of financial reporting by public sector entities are
to provide information about the entity that is useful to users in
assessing accountability and decision making purposes.

▪ Therefore, the objectives of financial reporting are, determined by

reference to the users and their information needs.

▪ On basis of users and their information needs, objectives of financial

reporting can be either: General Purpose Financial Reporting or Special
Purpose Financial Reporting.
1-49
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

▪ Therefore, the users of the GPFRs of public sector entities need

information to support assessment of such matters as;
1. Whether the entity provided its services to constituents in an efficient
and effective manner;
2. The resources currently available for future expenditures and to what
extent there are restrictions or conditions attached to their use;
3. To what extent the burden on future-year taxpayers of paying for
current services has changed; and
4. Whether the entity’s ability to provide services has improved or
deteriorated compared with the previous year.
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

1.5.1.1 Objectives of General Purpose Financial Reporting(GPFR)

▪ GPFRs are a central component of, and support and enhance,
transparent financial reporting by governments and other public sector
entities intended to meets the information needs of users who are
unable to require the preparation of financial reports tailored to meet
their specific information needs.
▪ GPFRs encompass f/statements including their notes that enhances,
complements and supplements the financial statements prepared at the
whole-of- the government level in accordance with IPSASs.
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

1.5.1.1 Objectives of General Purpose Financial Reporting(GPFR)

▪ GPFRs of public sector entities are developed primarily to respond the
information needs of services recipients (citizens) and resources providers
(taxpayers, donors, lenders and others) who do not posses the authority to
require the public sector entity to disclose the information they need for
accountability and decision making purposes.
▪ The legislature/similar body, and the members of the parliament/similar
representatives body/ are also primary users of the GPRFS.
▪ Therefore, the primary users of the GPFRs are service recipients and their
representatives and resources providers and their representatives unless
identified otherwise. 1-52
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

1.5.1.2 Objectives of Special Purpose Financial Reporting(SPFR)

▪ SPFRs financial information prepared and provided to those who have
the authority to require the preparation of reports tailored to meet
their specific information needs such as;
➢ Regulatory and oversight bodies,
➢ Audit firms ,
➢ Sub-committee of the legislature or other governing bodies,
➢ Central agencies and budget controllers,
➢ Entity management,
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

1.5.1.2 Objectives of Special Purpose Financial Reporting(SPFR)

➢ Lending institutions,
➢ Rating agencies,
➢ Providers of developments and other assistances and etc.
▪ Such users may also use the information provided by GPFRs.

▪ The scope of the financial information reported for both general

purpose and special purpose, establish the boundary around the
transactions, other events and activities and is determined by the
primary information users and the objective of financial reporting.
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

1.5.2. Fundamental Concepts: Recognition, Measurement, and

Disclosures o Elements of Financial Statements.
▪ Financial statements portray the financial effects of transactions and
other events which share common economic characteristics.
▪ These broad classes are termed as elements of financial statements
which building blocks from which financial statements are constructed.
▪ These building blocks are provide users with information that meets the
objectives of financial reporting & achieves the qualitative characteristics
of financial reporting while taking into account the constraints on
information included in GPFRs. 1-55
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]
1.5.2. Fundamental Concepts: Recognition, Measurement, and
Disclosures o Elements of Financial Statements.
▪ The elements that are defined in this context are; assets, liabilities,
income/revenue/ expenditure/expense and change in net assets.
▪ Information Provided by GPFR are;
▪ The financial position.
▪ The financial performance and
▪ The cash flows

1-56
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

1.The financial position:-financial position of public sector entity enable

users to identify the resources of the entity and claims to those resources
at the reporting date. I provide information as input to assessment;
➢ To what extent the management has discharged its responsibilities for
safeguarding and managing the resources of the entity
➢ To what extent resources are available to support future service
delivery activities and changes during the reporting period in the
amount and composition of resources and claims to those resources.
➢ The amounts and timing future cash flows necessary to service and
repay existing claims to the entity's1-57resources.
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

2. Financial performance:- used o assess matters such as whether the

entity has acquired resources economically and used them effectively
and efficiently to achieve its services delivery objectives.
▪ The costs of service delivery and the amounts and the sources of cost
recovery during the reporting period will assist users to determine
whether;
➢ the operating costs were recovered from taxes,
➢ users charges, contributions and transfers were financed by increasing
the level of indebtedness of the entity.
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]

3. Cash flows:- Cash flows information contributes to assess the financial

performance and the entity's liquidity and solvency.
▪ It indicates how the entity raised and used cash during the period
including its borrowing and repayments of borrowing and its acquisition
and sales of i.e. property, plant and equipment.
▪ It support assessments of the entity’s compliance with sources and
spending mandates of cash flows.

1-59
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]
1.5.2. Fundamental Concepts: Recognition, Measurement, and Disclosures
▪ Like business entities, the GPFRs of public sector entities should possess
the following qualitative characteristics and Constraints of the financial
information;
✓ Relevance
✓ Faithful representation
✓ Understandability
✓ Timelines
✓ Comparability and
✓ Verifiability
▪ Constraints: materiality, cost-benefits & balanced b/n qualitative characters
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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]
1.5.2. Fundamental Concepts: Recognition, Measurement, and Disclosures
▪ Recognition is the process of admitting an item into financial statement
that meets the definition of an element and can be measured in away
that achieves the qualitative characteristics and takes account of the
constraints on information included in GPFRs
▪ As per the definition above, there two criteria of recognition;
➢ An item satisfy the definition of an element and
➢ Can be measured in away that achieves the qualitative characteristics
and takes account of constraints on information in GPFRs.

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1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]
1.5.2. Fundamental Concepts: Recognition, Measurement, and Disclosures
▪If it is determined that an element is exist and definition is satisfied,
immediately uncertainty about the amounts of service potential or ability
to generate economic benefits represented by that element is taken into
account in the measurement of that element.
▪This process of attaching monetary value to an item is called
measurements.
▪There are many uncertainty associated with measurements which can be
managed using appropriate measurement bases.
▪ The following are summary of measurement bases for assets & liabilities
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▪Exhibit 1.1. Summary of measurement bases for assets
1-63
▪Exhibit 1.2. Summary of measurement bases for liabilities 64
 Definitions of Measurements Bases for Assets

1. Historical Costs:-are consideration given to acquire or develop an asset, which

is the cash or cash equivalents or the value of other consideration given at the
time of asset acquisition or development.
2. Market value:- the amount for which an asset could be exchanged between
knowledgeable, willing parties in arm’s length transaction.
3. Replacement Cost:- is the most economic cost required for the entity to
replace the service potential of an asset( including that the entity will receive
from its disposal at the end of its useful life) at the reporting date.
4. Net selling price:-the amount that an entity can obtain from the sale of the
asset after deducting the costs of sale.
5. Value in use:-the present value of the asset’s remaining services potential or
ability to generate economic benefits if it continues to be used and of the net
value that the entity will receive from its disposal at end of its useful life.
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 Definitions of Measurements Bases for Liabilities

1. Historical Cost:-the consideration received to assume an obligation, which is

the cash or cash equivalents or the value of other consideration received at
the time of the liability is incurred.
2. Cost of fulfillment:- the cost that the entity will incur in fulfilling the obligations
represented by the liability, assuming that it does so in the least costly
manner.
3. Market value:- the amount for which a liability could be settled between
knowledgeable, willing parties in arm’s length transaction .
4. Cost of Release:- is the term used in the context of liability to refer to the
same concept as net selling price in the context of assets which is the amount
that either the creditor will accept or the third party would charge to accept
the transfer of the liability at the time of exit from the obligation.
5. Assumption Prices:- is the term used in the context of liability to refer to the
same concepts as replacement cost for assets, which is amount that an entity
would rationally be willing to accept in exchange for assuming an existing
liability. 1-66
1.5 The Conceptual Framework for Public Sector Accounting
[The IPSASB]
1.5.2. Fundamental Concepts: Recognition, Measurement, and Disclosures
▪ Disclosures provide information about an items that meet many but not
all the characteristics of the definition of an element. i.e. provide
information on items that meet the definition of an element but cannot
be measured in a manner that achieves the qualitative characteristics
sufficiently to meet the objectives of financial reporting.
▪ Derecognition is the process of evaluating whether changes have been
occurred since the previous reporting date warrant removing an
element that has been previously recognized in the financial statements
and removing the item if such changes have occurred.
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