Accounting For Public Sector and Civic Society

Accounting for Public sector and civil societ
Course Code AcFn3071
2015EC
Gondar, Ethiopia
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Table of contents
Contents
Principles of accounting and financial reporting of governmental entities
1. Overview of Financial Reporting for Governmental and NFP Entities

1.1 Distinguishing characteristics of Governmental and Not- for Profit entities.
1.2 Sources of financial reporting standards for Governmental and NFP entities in Ethiopia
1.3 Objectives of financial reporting in NFP entities
1.4 IPSAS versus IFRS
1.5 The Conceptual Framework for Public Sector Accounting [The IPSASB]
1.5.1 Objectives of financial reporting
1.5.2 Fundamental concepts Recognition, measurement, and disclosure concepts
2. Principles of accounting and financial reporting of governmental entities
2.1. Activities of government
2.2. Summary statement of principles
2.3. Summary Accounting characteristics of fund types
2.4. Budgeting and uses of budget
2.5 Classification of budget
2.6 Approaches to budgeting
3. Budgeting and Performance Reporting
3.1 Budgeting in the Public Sector
3.2 Classification of budget
3.3 Approaches to budgeting
3.4 Budgets and Outturn Reporting (IPSAS 24)
3.5.Performance Budgeting and Reporting
4. International Public Sector Accounting Standards [IPSAS]
4.1 Activities of Government
4.2 Summary statement of principles
4.3 Impairment of Non-Cash-Generating Assets [IPSAS 21]
4.4 Disclosure of Financial Information about the General Government Sector [IPSAS 22]
4.5 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS 23]
4.6 Presentation of Budget Information in Financial Statements [IPSAS 24]
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4.7 Cash Flow Statements [Cash Basis IPSAS]
5. Accounting for General and Special Revenue Funds
5.1 Definitions and purposes
5.2 Budgetary accounting
5.3 Revenue accounting
6. Accounting for Capital Project Fund
6.2 Classification of general capital assets
6.3 Sources and uses of cash flows
7. Accounting for Debt Service Fund
7.2 General long-term liabilities
7.3 Sources and uses of cash flows
7.4 Illustration on debt service fund
8. Accounting for internal revenue Funds
8.1 Accounting principles of proprietary funds
8.2 Financial statements of proprietary funds
9. Accounting and Reporting for the Federal Government of Ethiopia
9.1Historical overview of Ethiopian Government Accounting System
9.2 Federal Government Financial Management Structure
9.3 FGE Chart of accounts
9.4. Overview of IBEX and IFMIS
9.5. Basis of accounting
9.6. Legal Framework of FGE Financial Administration
9.7.Monthly Reports
9.8. Annual Financial statements
9.9. Federal Audit report
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Course Objectives & Competences to be Acquired
After successfully completing this course, the students should be able to:
 Identify characteristics and types of government and Not-For-profit organizations (NFP);
 Understand the budgeting framework of governmental units and other non-profit
organizations and help senior budget officials of the same in developing budgets
 Distinguish the legal and economic substance of transactions as opposed to the nature of
transactions in business organizations;
 Record the transactions and present fairly the financial statements of governmental units
and other non-profit organizations in conformity with legal requirements and accepted
accounting principles
Chapter One
Overview of Financial Reporting for Governmental and NFP Entities
Topics to Be Discussed:
 Distinguishing characteristics of Governmental and Not- for- Profit entities.
 Sources of financial reporting standards for Governmental and NFP entities
in Ethiopia
 Objectives of financial reporting in NFP entities
 The Conceptual Framework for Public Sector Accounting [The IPSASB vs
IFRS]
 Fundamental concepts
 Recognition, measurement, and disclosure concepts
 Learning Objectives:
 After studying this chapter, you should be able to:
 Identify and explain the characteristics that distinguish governmental and
not-for-profit entities from for-profit entities.
 Identify characteristics and types of government and Not-For-profit
organizations (NFP)
 Identify the authoritative bodies responsible for setting IPSAS and financial
reporting standards for all governmental and not-for-profit entities.
 Contrast and compare the objectives of financial reporting for government,
and not-for-profit organizations.
 Explain how management’s discussion and analysis (MD&A), basic financial
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statements, and required supplementary information (RSI) of SLG relate to
their comprehensive annual financial reports.
 Explain the different objectives, measurement focus, and basis of accounting of

the government wide financial statements and fund financial statements of
SLG.
1.1. Government and Non-for-Profit Entities
Entities or organizations that are established with operating purpose other than profit
making include:
A. Governmental Entities (Government)
B. Nonprofit (NP) Entities
What is a Government?
A government is a body that has the power to make and the authority to enforce rules and
laws within a civil, corporate, religious, academic, or other organization or group. For
the purpose the course Government and NFP Accounting, Government can also be
defined as an entity that provides such major services as administrative, social,
economic, and others either free from charge or with a “token” charge.
A government is an organized entity which, in addition to having governmental character,
has sufficient discretion in the management of its own affairs to distinguish it as
separate from the administrative structure of any other governmental unit. To be
regarded as a government, an entity must possess all three of these critical attributes:
existence as an organized entity, governmental character, and substantial autonomy.
Each is explained below.
1. Existence as an Organized Entity - Evidence of this attribute is provided by the
presence of some form of organization and the possession of some corporate powers,
such as perpetual succession, the right to sue and be sued, have a name, make contracts,
acquire and dispose of property, and the like. Designation of a class of governments in
law as “municipal corporations,” “public corporations,” “bodies corporate and public,”
and the like indicates that such units are organized entities.
2. Governmental Character - this characteristic is indicated where officers of the entity are
popularly elected or are appointed by public officials. A high degree of responsibility to
the public demonstrated by requirements for public reporting or for accessibility of
records to public inspection, is also taken as critical evidence of governmental
character. Governmental character is attributed to any entities having power to levy
property taxes, power to issue debt paying interest exempt from Federal taxation, or
responsibility for performing a function commonly regarded as governmental in nature.
An entity can also be recognized as having governmental character if it meets the
indicated requirements as to officers or public accountability. Thus, some districts or
zonal governments with no taxing powers are recognized as local governments because
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of provisions as to their administration and public accountability.
3. Substantial Autonomy - this requirement is met where, subject to statutory limitations
and any supervision of local governments by the state, an entity has considerable fiscal
and administrative independence. Fiscal independence generally derives from power of
the entity to determine its budget without review and detailed modification by other
local officials or governments, to determine taxes to be levied for its support, to fix and
collect charges for its services, or to issue debt without review by another local
government.
Some government agencies having considerable fiscal autonomy are classified as dependent
agencies of
Another government rather than as governments because of one or more of the following
characteristics:
 Control of the agency by a board composed wholly or mainly of parent

government officials.
 Control by the agency over facilities that supplement, serve, or take the place of
facilities ordinarily provided by the creating government.
 Provision that agency properties and responsibilities revert to the creating

government after agency debt has been repaid.
 Requirements for approval of agency plans by the creating government.
 Legislative or executive specification by the parent government as to the

location and type of facilities the agency is to construct and maintain.
 Dependence of an agency for all or a substantial part of its revenues on

appropriations or allocations made at the discretion of another state or local
government.
 Provision for the review and the detailed modification of agency budgets by
another local government.
Example of Governments in Ethiopia:
 Federal government of Ethiopia and its agencies
 The Nine Regional State Governments and Two Administrative City councils
 Zonal Level Local Governments, District Level Local Governments,
Municipality and Town Governments, Keble level local governments i.e.
Keble is the lower level government in Ethiopia.
Government is classified as Special Purpose Government and General Purpose
Governments. The Special
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Purpose Government is a government that provides a single service or few services to the
citizenry. For
Example: Transportation authorities can be taken as Special Purpose Government Entity.
The General
Purpose government provides a wide collection of services to the citizenry. Examples:
Federal government, State governments, zone government, cities, towns, villages, etc.
What is Not-for-profit (NFP) Entity?
NFP Entities are entities other than the government and that provides community services
either free from charge or with a “token” charge. The following are the essentials to classify
an entity as a not for-profit: Legally separate organizations its operating purpose is other
than to provide goods or services at a profit. It may not distribute surpluses Generating
profit is not an objective outlined in its legislation, regulations or constitution It does not pay
income tax or income tax equivalents – usually exempt from federal, state, and local
taxation It is not able to transfer ownership Nonprofit entities are classified into two:
governmental and non-governmental
Examples: Religious entities, community service providers, private educational and health
care entities, museums, and fraternal and social organizations, etc.
In Ethiopia, there are various Nongovernmental NFP entities registered by Ministry of
Justice.
Examples: Save the Children UK and Canada Family Guidance Association of Ethiopia
Dawn of Hope Ethiopia Menschen for Menschen Rift Valley Children and
Women Development Fund National Museum
Major Types of Governmental and Nonprofit Entities
 General Government – includes federal, state, county, city, town, village, special
districts
 Educational – includes kindergartens, primary and secondary schools, vocational &
technical
 schools, colleges, and universities
 Health and Welfare – Hospitals, Orphanages, the Red Cross and Red Crescent, etc
 Religious – churches, mosques, missions
 Charitable – includes many NGOs
 Foundations - private organizations that promote research and development for
improvement of human life.
1.2. Similarities & Differences: Governmental and NFP Entities
 Similarities
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 Lack of competitive market place .Governmental and NFP entities operate in an
environment which is difficult to set the quality and quantity of service or
product
 Use of fund accounting as a control device both classes of organization are

organized and operated on fund basis
 Significant investment in non-revenue producing activities

 Differences
 Government differs from NFP entities in the following manners:
 Public corporations and bodies which are politic
 Power ultimately rests in the hands of the people – public officials are
accountable to the general public and the legislative, judicial, and executive
bodies will have an impact on their operation
 People can vote and delegate that power to public officials
 Government is created by and accountable to a higher level government
 Government has the power to tax citizens for revenue – taxpayers are the
providers of resources but the contribution may not be voluntary and the tax
payers have little say in deciding how to use the resources.
 The budget is an expression of public policy and method of providing control.
 The nature of the political process has a significant influence on their operation
 They may have monopoly power on some its services
 Criteria for Determining NFP Entity as Government
 An entity is said to be a government if one of the following conditions are met:
 Public corporations and bodies politic
 Popular election of officers, or appointment of a controlling majority of the

governing body by officials of another government
 Potential dissolution by a government with net assets reverting to a government
 Power to enact and enforce a tax levy
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 Other NFP Organization differs from government with respect to the following
points:
 They are accountable to the resource providers (donors)
 The budget is an expression of the interest of the benefactors.
 The nature of the political system may not influence their operation
 The resource providers are donors, or volunteers and the contribution is mostly
voluntary.
IPSAS further distinguishes governmental entities from not-for-profit entities and from
NFP entity 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 government 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 of the lower levels and finance the activities.
1.3. Similarities and Differences: Business Entities and G & NFP Entities
 Similarities G and NFP Entities to Business Entities
 Both are integral part of an economic system

 Both acquire resources to provide goods or services
 Both use financial management processes
 Both need financial information systems
 Both undergoes cost analyses, control and evaluation techniques
Both may provide similar services – e.g. transportation systems; sanitation
services; utilities, stadiums, arenas, etc.
 Differences between Businesses and G&NFP Entities
 Organizational objectives
 Operational focus
 Sources of Financial Resources
 Accounting and Financial Reporting
 Evaluation of Performance and Operating Results
 Regulation and Control
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 Other Distinguishing Characteristics
1.4. Objectives of Financial Reporting for NFP Entities
Objectives of Financial Reporting For Government
-The objectives of financial reporting by public sector entities are to provide information
about the entity that is useful to users of GPFRs for accountability purposes and for
decision-making purposes (hereafter referred to as “useful for accountability and
decision-making purposes”) -Financial reporting is not an end in itself. Its purpose is to
provide information useful to users of GPFRs. The objectives of financial reporting are
therefore determined by reference to the users of GPFRs, and their information needs.
Governmental financial reporting objectives are influenced by the characteristics of the
state and local governmental operating environment and by the needs of those who use
governmental financial reports. IPSAS Concept Statement No. 1 set forth the following
three financial reporting (FR) objectives:
A. Financial Reporting should assist users is assessing accountability by:

 Providing information to determine whether current-year revenues are
sufficient to pay for current-year services ( Inter-period Equity)
 Demonstrating whether resources are obtained and used in accordance with
the entity's legally adopted budget, and demonstrating compliance with other
finance-related legal or contractual requirements
 Providing information to assist users in assessing the service efforts, costs,
and accomplishments of the governmental entity
ACCOUNTABILITY: is the cornerstone of all financial reporting in government
Accountability arises from the citizens’ “right to know.” It imposes a duty on public
officials to be accountable to citizens for raising public monies and how they are
spent.
Inter-period equity relates to accountability. Government officials are accountable
and have an obligation to disclose whether current-year revenues were sufficient to
pay for current-year benefits or not. If inter-period equity is not achieved, the current
citizens are deferring payments to future taxpayers.
B. Financial Reporting should assist users in evaluating the operating results of the
governmental entity for the year by:
 Providing information about sources and uses of financial resources
 Providing information about how it financed its activities and met its cash
requirements
Providing information necessary to determine whether its financial position
improved or deteriorated as a result of the year's operations
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C. Financial Reporting should assist users in assessing the level of services that
can be provided by the governmental entity and its ability to meet its obligations as
they become due by: Providing information about its financial position and
conditionProviding information about its physical and other non-financial resources
having useful lives that extend beyond the current year, including information that
can be used to assess the service potential of those resources Disclosing legal
or contractual restrictions on resources and the risk of potential loss of resources.
In general, financial reports are used in governmental entities primarily to: Compare actual
financial results with legally adopted budget Assess financial condition and results
of operations Assist in determining compliance with finance-related laws, rules,
and regulations Assist in evaluating efficiency and effectiveness
2. Objectives of Financial Reporting for NFP Entities
NFP 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
1.5. The Conceptual Framework for Public Sector Accounting Role of the Conceptual
Framework
The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) establishes the concepts that are to be applied in
developing International Public Sector Accounting Standards (IPSASs) and
Recommended Practice Guidelines (RPGs) applicable to the preparation and
presentation of general purpose financial reports (GPFRs) of public sector entities
The Conceptual Framework for General Purpose Financial Reporting by Public Sector
Entities (the Conceptual Framework) establishes the concepts that underpin general
purpose financial reporting (financial reporting) by public sector entities that adopt
the accrual basis of accounting. The International Public Sector Accounting Standards
Board (IPSASB) will apply these concepts in developing International Public Sector
Accounting Standards (IPSASs) and Recommended Practice Guidelines (RPGs)
applicable to the preparation and presentation of general purpose financial reports
(GPFRs) of public sector entities.
The primary objective of most public sector entities is to deliver services to the
public, rather than to make profits and generate a return on equity to investors.
Consequently the performance of such entities can be only partially evaluated by
examination of financial position, financial performance and cash flows. GPFRs
provide information to users for accountability and decision-making purposes.
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Therefore, users of the GPFRs of public sector entities need information to support
assessments of such matters as:
 Whether the entity provided its services to constituents in an efficient and effective
manner;
 The resources currently available for future expenditures and to what extent there
are restrictions or conditions attached to their use;
 To what extent the burden on future-year taxpayers of paying for current services
has changed; and
 Whether the entity’s ability to provide services has improved or deteriorated
compared with the previous year.
Types of financial reporting Special Purpose Financial Reports:-responds to the
requirements of users that have the authority to require the reporting entity to provide
the information that they need for their purposes directly to them. Examples include:
prudential regulation reporting requirements tax reporting requirements Standard
setters often describe as “special purpose financial reports” those financial reports
prepared to respond to the requirements of users that have the authority to require the
preparation of financial reports that disclose the information they need for their
particular purposes. The IPSASB is aware that the requirements of IPSASs have been
(and may continue to be) applied effectively and usefully in the preparation of some
special purpose financial reports.
General Purpose Financial Reports;-General purpose financial reporting (GPFR)aims
to provide useful financial information about the reporting entity to primary users who
cannot require the reporting entity to provide information directly to them.
The Conceptual Framework acknowledges that, to respond to users’ information
needs, GPFRs may include information that enhances, complements, and supplements
the financial statements. Therefore, the Conceptual Framework reflects a scope for
financial reporting that is more comprehensive than that encompassed by financial
statements. Objectives and Users of General Purpose Financial Reporting, identifies
the objectives of financial reporting and the primary users of GPFRs. It also outlines
the consequences of the primary users’ likely information needs for what may be
encompassed within the scope of financial reporting.
1.5.1. IPSAS vs IFRS
 International Public Sector Accounting Standards (IPSAS) standard-setter =
International Public Sector Accounting Standards Board (IPSASB)
 International Financial Reporting Standards (IFRS) standard-setter =
International Accounting Standards Board (IASB)
 IFRS for Small and Medium-sized Entities (IFRS for SMEs) standard-setter =
IASB Local financial reporting frameworks (eg US GAAP)various national
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standard-setters.
 IPSAS accrual: The Conceptual Framework for General Purpose Financial
Reporting by Public Sector Entities IPSAS cash basis (no conceptual
framework)IFRS: The Conceptual Framework for Financial Reporting by
business entities.
 The IFRS for SMEs: Section 2 Concepts and Pervasive Principles IPSAS
accrual;- Designed for the general purpose financial reporting by public sector
entities other than those that are primarily profit oriented IPSAS GPFRs provide
information about a public sector entity’s: Financial Position, Financial
Performance and Cash Flows Budget Information and Compliance with
Legislation or Other Authority Governing the Raising and Use of Resources
Service Delivery AchievementsProspective Financial and Non-financial
Information Explanatory Information
1.6. Financial Reporting for State and Local Government
1. 6.1. Minimum External Financial Reporting
The minimum requirements for general purpose external financial statements include
Management’s Discussion and Analysis (MD& A); Basic Financial Statements
(Government Wide Financial Statements, Fund Financial Statements, and Notes to
Financial Statements), and Required Supplementary Information (RSI) other than MD&
A as shown in the illustration below. Central to the minimum requirement of the new
reporting model is the MD & A. The MD&A is required supplementary information
(RSI)designed to communicate in narrative, easily readable form the purpose of the basic
financial statements and the government’s current financial position and results of
financial activities compared with those prior year. There are two categories of basic
financial statements, government-wide financial statements and fund financial
statements:
Government-Wide Financial Statements are intended to provide a highly aggregated
overview of a government’s net assets and results of financial activities. The
government-wide financial statements report on the government as a whole and assist
in assessing operational accountability –whether the government has used its resources
efficiently and effectively in meeting operating objectives.
Fund Financial Statements –– the other category of basic financial statements
prescribed by the new reporting model, assist in assessing fiscal accountability – with
budget plans and in compliance with pertinent laws and regulations.
2. Comprehensive Annual Financial Report (CAFR)
General purpose financial reporting includes not financial statements but also all other
means of communicating information that relate directly or indirectly to the information
provided by the accounting system. In addition to the minimum financial information,
“Every governmental entity should publish, as a matter of public record, a
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comprehensive annual financial report (CAFR). A CAFR includes introductory section,
financial section, and statistical section
A. CAFR: Introductory Section Introductory section includes such items as
 Title page
 Contents page
Letter of transmittal – a letter from the chief finance officer addressed to the chief
executive and governing body of the governmental unit or it may be a narrative over the
signature of the chief executive. The letter or narrative material should cite legal and
policy requirements for the report other (as desired by management)
B. CAFR: Financial Section
The financial section of a CAFR should include:
 Auditor’s report
 MD & A
 Basic Financial Statements
 Government-Wide Financial Statements
1. Statement of Net Assets
2. Statement of Fund Financial Statements Governmental Funds
 Balance Sheet
 Statement of Revenues, Expenditures, and Changes in Fund Balances
Proprietary Funds
 Statement of Net Assets
 Statement of Revenues, Expenses, and Changes in Fund Net Assets
Statement of Cash Flows Fiduciary Funds
1. Statement of Fiduciary Net Assets
2. Statement of Changes in Fiduciary Net Assets Notes to the Financial
Statement Required Supplementary Information (RSI) other than MD&A
Combining and individual fund statements and schedules
C. CAFR: Statistical Section a CAFR should contain a statistical section. The
statistical section typically presents tables and charts showing and charts showing
social and economic data, financial trends and the fiscal capacity of the government
in detail needed by readers who are more than casually interested in the activities of
the government unit.
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Chapter two
Principles of accounting and financial reporting of governmental entities
Chapter objectives
After completing this chapter, you should be able to:
 Explain the nature of the three major activity categories of a state or local
government governmental activities, business-type activities, and fiduciary
activities
 Discuss the basic accounting and Financial reporting principles for State and Local
Governments/SLGs/.
 Identify types of funds in each fund category and characteristics of each fund type.
 Explain how budgetary accounting contributes to achieving budgetary control over
revenues and expenditures
2.1. Activities of government
There are three major activity categories of a state and local governments.
1. Governmental Activities,
2. Business-Type Activities, and
3. Fiduciary Activities.
1. Governmental Activities;
Government provides certain core services called General Activities.
These are:
 A Protection of life and property ,police and fire protection,
 A Public works (streets and highways, bridges, and public Building),
 A Parks and recreation facilities and programs,
 A Cultural and social services
Governments also incur costs for general administrative support such as data
processing, finance, and personnel.
The above two comprise the major part of governmental type activities or simply
Governmental Activities
2. Business-type Activities
Governments also engage in business type activities. These include:
 Public utilities (electric, >hospital
 Water, gas and sewer utilities) > parking garages and lots
 Transportations system; > swimming pool
 Toll roads and to ll bridges; > stadiums and arenas
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 Airports;
Many of these activities are intended to be self supporting by charging users
for the services they receive.
Operating subsidies from general revenues are not uncommon, particularly for
transportation systems.
3. Fiduciary Activities
 Governments often act in a fiduciary capacity, either as an agent or trustee, for

parties outside the government.
 A government may serve as agent for other governments in the administering

and collecting of taxes.
 Governments serve also as trustees for amounts placed in trust from private
citizens
◦ for parks and other purposes,
◦ for escheat properties that revert to the government when there are no legal
claimants or heirs to a deceased individual’s estate, and
◦ For assets being held for employee pension plans.

Statement of principle accounting and FR for government entities
Currently there are 13 accounting and financial reporting principles for state and local
Governments. They are principles of
1. Accounting and Reporting Capabilities
2. Fund Accounting Systems
3. Types of Funds
4. Number of Funds
5. Reporting Capital Assets
6. Valuation of Capital Assets
7. Depreciation of Capital Assets
8. Long-Term Liabilities
9. Measurement Focus and Basis of Accounting
10. Budgeting, Budgetary Control,and Budgetary Reporting
11. Transfer, Revenue, Expenditure ,and Expense Account Classification
12. Common Terminology and Classification
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13. Annual Financial Reports
Principle Reporting No. 1: Accounting and Reporting Capabilities

A. governmental accounting system must make it possible both:
B. To present fairly and with full disclosure the funds and activities of the
government in conformity with IPSAS ,and
C. To determine and demonstrate compliance with finance related legal and
contractual provisions.
NOTE: if Government requires by law to follow practices different from IPSAS, they
may prepare two sets of financial statement. One in compliance with IPSAS, the other
withlegalrequirement.(special
Principle NO 2: fund accounting system
Governmental accounting system should be organized and operated on fund basis
A Fund is defined as a fiscal and accounting entity with a self-balancing set of accounts
reporting cash and other financial resources, together with all related liabilities and
residual equities or balances, and changes therein, which are segregated for the purpose
of carrying on specific activities or attaining certain objectives in accordance with
special regulations, restrictions or limitations.
Fiscal Entity refers to any entity that is concerned with some assets set aside for a
specific purpose, and Accounting Entity refers to anything that uses a double entry
accounting entity to balance the resources with claims to resources.
Fund and fund accounting is useful to:

1. To control and segregate resources that are externally restricted and
internally (managerially) designated which have accountability
obligation.
2. To ensure and demonstrate compliance with legal and administrative
requirements.
Principle No. 3: Types of Funds

SLGS, both general purpose and special purpose, should use 11 fund types asneeded.These
fund types are organized into three categories;
i. Governmental funds,
ii. Proprietary funds, and
iii. .Fiduciary funds.
Funds should be used by state and local governments to the extent that they have activities
that meet the criteria for using those funds
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i. Governmental Funds:-
Account for activities of a government that are carried out primarily to provide
services to citizens and that are financed primarily through taxes.
Governmental Funds are classified into five:
o General Fund,
o Special revenue funds,
o Capital projects funds,
o Debt service funds, and
o Permanent funds.
The General Fund (GF) – account for all financial resources except those
required to be accounted for in another fund.
 It is used to account for resources required to provide most of the basic
services provided by the governmental unit such as public safety, public
works, education, etc.
 Only one GF is used per government and most financial transactions related to
general government operating activities are recorded in the GF
Special Revenue Funds (SRFs) – to account for proceeds from specific revenue
sources (other than private purpose trusts or major capital projects) that are legally
restricted to use for specified purposes.
 The purpose of special revenue fund is to demonstrate that all revenues from
that source are used for the special purpose only.
 Example, a government earmarked 25% of current year revenue from value
added tax for draught affected people, special revenue fund may be
established to account for this revenue.
Capital Project Funds (CPFs) – accounts for financial resources to be used for the
acquisition or construction of major capital project facilities (other than those
financed by proprietary funds or fiduciary funds).
 They are used to account for financial resources segregated to pay for
construction or acquisition of long-lived capital assets: The construction of
bridge, buildings, road, dams, railway, hydroelectric power etc.
Debt Service Funds (DSFs) – are used to account for the accumulation of resources
for, and the payment of, general long-term debt principal and interest.
 Debt service funds does not account for a government’s long-term debt.
Rather, it monitors the financial resources currently available to satisfy long-
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term liabilities and also records the eventual payments.
Permanent Funds (PFs) – to account for legally restricted resources provided by trust
in which the earnings but not the principal may be used for purposes that support
the primary government’s programs (those that benefit the government or its
citizenry)
Note: similar permanent trusts that benefit private individuals, organizations, or other
governments that is, private purpose trust funds are classified as fiduciary funds).
ii. Proprietary Funds – account for a government’s ongoing organizations and

activities that are similar to those operated by for- profit organizations.
 This fund type normally encompasses operations where a user charge is
assessed so that determining operating income or cost-recovery isimportant.
 Two types of funds used by SLGS are classified as proprietary funds.
 Enterprise funds
 Internal Service funds
Enterprise funds (EFS) - to account for operations
A. That are financed and operated in a manner similar to private business
enterprises–where the intent of the governing body is that the costs
(expenses) of providing goods or services to the general public on a
continuing basis be financed or recovered primarily through user charges
external to government; or
B. Where the governing body have decided that periodic determination of
revenues earned, expenses incurred, and/or net income is appropriate for
capital maintenance, public policy, management control, accountability or
other purposes.
 Examples of activities that can be accounted through enterprise funds include
water and other utilities, airports, swimming pools and transit systems.
 According to IPSAS, a particular activity is accounted through enterprise fund
if it meets any one of the following criteria:
 Net revenues generated by the activity provide the sole security for the
debts of the security
 Laws or regulations require the activity’s costs to be recovered through fees
or charges
 Fees and charges are set at prices intended to recover costs including
depreciation and debt service.
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Internal Service Funds (ISFs) – to account for the financing of goods or services
provided by one department or agency to other departments or agencies of the
governmental unit, or to other governmental units, on a cost reimbursement basis.
 Like, enterprise funds, fees are charged but the service is performed for the
primary benefit of the government rather than for outside users
 ISFs are usually reported as governmental activities in the government-wide
financial statements because they primarily serve departments financed by governmental funds
iii. Fiduciary Funds – these are trust and agency funds that are used to account for
assets held by a governmental unit in a trustee capacity or as an agent for
individuals, private organizations, and other governmental unit.
 For these funds the government is acting as a collecting/disbursing agent or as a
trustee.
 Investment Trust Funds – account for external investment pools in which the assets
are held for other (external) governments, along with funds of the sponsoring
government.
 Assets, liabilities, net assets, and changes in net assets related to the equity of the
external participants are reported in this fiduciary fund.
 Private Purpose Trust Funds- report all other trust arrangements under which
principal and income benefit individuals, private organization or other governments.
Principle No. 4 : number of funds
 Governmental units should establish and maintain those funds required by

law and sound financial administration.
 Only the minimum number of funds consistent with legal and operating requirements
should be established because unnecessary funds result in inflexibility, undue
complexity, and inefficient financial administration.
 The fund types defined in the types of Funds Principle are to be used if needed by a
governmental unit to demonstrate compliance with legal requirements or if needed
to facilitate sound financial administration.
Principle No .5: reporting capital asset
 A clear distinction should be made between general capital assets and capital assets
of proprietary and fiduciary funds.
 Capital assets of proprietary funds should be reported in both the government-wide
and fund statements.
 Capital assets of fiduciary funds should be reported in only the statement of fiduciary
net assets.
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 All other capital assets of the governmental unit are general capital assets. They
should not be reported as assets in governmental funds but should be reported in the
Governmental Activities column in the government- wide statement of net assets.
Principle No .6: valuation of capital asset
 Capital assets should be reported at historical cost.

 The cost of a capital asset should include capitalized interest (not applicable to
general capital assets) and ancillary charges necessary to place the asset into its
intended location and condition for use.
 Donated capital assets should be reported at their estimated fair value at the time of
the acquisition plus ancillary charges, if any.
Principle No .7: depreciable of capital asset
 Capital assets should be depreciated over their estimated useful lives unless they are
either inexhaustible or are infrastructure assets using the mod if i.e. approach.
 Inexhaustible assets such as land and land improvements should not be depreciated.
 Depreciation expense should be reported in the government wide statement of
activities; the proprietary fund statement of revenues, expenses, and changes in fund
net assets; and the statement of changes in fiduciary net assets.
Principle No.8: reporting long term liability
 A clear distinction should be made between other Liabilities and general Liabilities.
 Liabilities directly related to and expected to be paid from proprietary funds should
be reported in the proprietary fund statement of net assets and in the government-
wide statement of net assets.
 Liabilities directly related to and expected to be paid from fiduciary funds should be
reported in the statement of fiduciary net assets.
 All other unmetered general Liabilities of the government should not be reported in
governmental funds but should be reported in the Governmental Activity column in
the government-wide statement of net asset.
Principle No.9: measurement focus and basis of accounting the basic financial statement
A. Government-wide Financial Statements
 The government-wide statement of net assets and statement of activities should be
prepared using the economic resources measurement focus and the accrual basis of
accounting.
 Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and
exchange-like transactions should be recognized when the exchange takes place.
 Revenues, expenses, assets, and liabilities resulting from non exchange transactions
21
should be recognized in accordance “Non exchange Transactions.”Code
B. Fund Financial Statements
1. Financial statements for governmental funds should be presented using the
current financial resources measurement focus and the modified accrual
basis of accounting.
 Revenues should be recognized in the accounting period in which they
become available and measurable.
 Expenditures should be recognized in the accounting period in which the
fund liability is incurred, if measurable, except for un matured interest on
general long-term liabilities, which should be recognized when due.
2. Proprietary fund statements of net assets and revenues, expenses, and

changes in fund net assets should be presented using the economic resources
measurement focus and the accrual basis of accounting.
3. Financial statements of fiduciary funds should be reported using the
economic resources measurement focus and the accrual basis of accounting,
except for the recognition of certain liabilities of defined benefit pension
plans and certain postemployment health care plans.
4. Transfers between funds should be reported in the accounting period in which
the inter fund receivable and pay able arise.
Principle No .10: budgeting and budgetary control budgetary reporting.
A. An annual budget(s) should be adopted by every governmental unit.
B. The accounting system should provide the basis for appropriate budget
arycontrol.
C. A common terminology and classification should be used consistently
throughout the budget, accounts, and financial statements.
 Budgetary comparison schedules should be presented for the General Fund
and each major special revenue fund that has a legally adopted budget as part
of the required supplementary information (RSI).
 Governments may elect to present the budgetary comparisons as part of the
basic financial statements.
Throughout the budget
Principle No. 11: common terminology and classification
 A common terminology and classification should be used consistently, the

accounts, and the financial reports of each fund.
22
 It is highly helpful to compare prior financial reports and current financial
reports.
Principle No. 12: transfer, revenue, expenditure and expense account classification
A. Transfers should be classified separately from revenues and expenditures

or expenses in the basic financial statements.
B. Proceeds of general long-term debt issues should be classified separately
from revenues and expenditures in the governmental fund financial
statements.
C. Governmental fund revenues should be classified by fund and source.
Expenditures should be classified by fund, function (or program),
organization unit, activity, character, and principal classes ofobjects.
D. Proprietary fund revenues should be reported by major sources, and
expenses should be classified in essentially the same manner as those of
similar business organizations, functions, oractivities.
E. The statement of activities should present governmental activities at least at
the level of detail required in the governmental fund statement of revenues,
expenditures, and changes in fund balance— at a minimum by function.
Governments should present business-type activities at least bysegment.
Principle No. 13: annual financial reporting
 Compressive Annual Financial Report (CAFR) should be prepared and
published,
 The minimum requirements for MD &A, basic financial statements and
required supplementary information other than MD &A discussed in the
first chapter.
2.2. Common accounting characteristics of fund type
1) Common Accounting Characteristics Governmental Funds
◦ Focus on fiscal accountability

◦ Measure and report current(expendable)financial resources
◦ Use modified accrual basis of accounting
◦ Account for and report revenues and expenditures
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◦ No capital assets or long-term liabilities accounted for in funds; no depreciation
reported in funds
◦ Budgetary accounts integrated in to the funds to achieve legal budgetary control

Required Financial Statements:
◦ A Balance Sheet
◦ A Statement of revenues, expenditures, and changes in fund balances
◦ A Reconciliation of total fund balances of governmental funds to total net assets
of governmental activities at the government-wide level
◦ A Reconciliation of total changes in fund balances of governmental funds to

total changes in net assets of governmental activities at the government-wide
level
2) Common Accounting Characteristics Proprietary Funds
◦ Focus on operational accountability

◦ Measure and report economic resources( a sin business accounting)
◦ Use full accrual basis of accounting
◦ Account for and report revenues and expenses
◦ Account for capital assets or long-term liabilities within the funds; report
depreciation
◦ Budgetary accounts not integrated in to the funds; should use budgeting for
planning and control
Required Financial Statements:
◦ A Statement of net assets
◦ A Statement of revenues, expenses, and changes in net assets
◦ A Statement of cash flows
Common Accounting Characteristics Fiduciary Funds
◦ Accounting for fiduciary funds is similar to that for proprietary funds,
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i.e., full accrual
◦ accounting and focus on flows of economic resources
◦ Capital assets and loitering or exceeding the budget typically carries
severe penalties for the administrator.
Given the unchanging nature of government budgets, and the penalties for non-compliance,
it logically follows that the accounting system should support the budget for keeping their
activities within the budgetary restrictions
Usefulness of budget
1. Budget is used for planning, especially in clarifying priority goals, community
programs and service goals.
2. Budget is used as a way of controlling the assigned resources; ensuring that they
are used for the intended purpose.
3. Budget is used to provide information to decision-makers and indicate to the
public what decisions have been made about the objectives of the government.
CHAPTER THREE
BUDGETING AND PREFORMANCE REPORTING
Budget: Are legally approved plans of financial operations embodying
the authorization of expenditures for specified purposes to be made
during the budget period and the proposed means of financing them.
Governments build budgets to demonstrate compliance with laws
and to communicate performance effectiveness.
Governmental budgets once fixed by law for the year, are generally unchangeable
without much effort.
Altering or exceeding the budget typically carries severe penalties for the
administrator.
Given the unchanging nature of government budgets, and the penalties for non-
compliance, it logically follows that the accounting system should support the
budget for keeping their activities within the budgetary restrictions
Usefulness of budget
Budget is used for planning, especially in clarifying priority goals, community
programs and service goals.
Budget is used as a way of controlling the assigned resources; ensuring that they
are used for the intended purpose. Budget is used to provide information to
decision-makers and indicate to the public what decisions have been made about
the objectives of the government.
CLASSIFICATION OF BUDGET
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Budgets reclassified differently considering different dimensions.
Based on Expenditure Program:
Current/operating budget: are concerned with the current year’s operating
expenditures.
Current Expenditures includes money spent to pay for goods or services. E.g.
salaries, wages, repairs and maintenance, telephones, petrol, stationery.
Current Expenditures are categorized in two large groups: Salary and Benefits and
Non-salary(Operating and Maintenance)
Capital budgets: deal with the acquisition of fixed assets.

The legislature will likely to plan for the acquisitions fixed assets several years in
advance which is called the Capital Program.
The Capital Program is accomplished by incurring Capital Expenditure (outlay)
for the acquisition of or improvement of fixed assets, including expenditures made
for Consultancy services.
Based on Legal Status;

Tentative budget: is budget which is instilling process.
This budget has not yet been officially approved.
Enacted budget: has been officially approved and is a binding legal document.
TF enacted Budget creates accountability for executives. Based on
based on flexibility;
Fixed budget: are those in which appropriation is fixed for total amount of Dollar
or Birr and the expenditure cannot be exceeded.
Flexible budget: fixes the cost per unit of goods and services.
If more units of goods and services are desired because of a change in
circumstances or need, the dollar amount of a flexible budget can be increased.
Based on preparers of budget;
Executive Budget: Budget prepared by executives.
Note: Budget preparation is an executive function, though the legislative may
revise the budget prior to approval.
Legislative Budget: legislative branch prepares the budget, possibly subject to
executive vote.
Joint Budget: a budget originated with joint legislative-executive committee.
Common Budget; a budget originated with a committee composed solely of
citizens
Approaches to budgeting
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There are two approaches to budgeting:
Modern (Rational) Approaches to budgeting:
They advocate thinking carefully about the relationship of inputs to outputs, with a
special concern for the outputs.
They also involve analyzing the costs and benefits of alternative methods of
achieving objectives. The idea that law-making bodies should focus on broad
policy objectives rather than details of spending for particular departments is
emphasized.
The three modern approaches to budgeting are Performance Budgeting; Planning-
Programming Budgeting (BB) and Zero-Base-Budgeting (ZBB).
Performance Budgeting:
Focuses on the outputs generated by the department or organizational unit, rather
than looking primarily at the cost of the inputs. The performance budget is mainly
concerned with only one year at a time. Basically, the process of making the
budget is follows. The governmental entity decides what type of services to offer.
The cost of one unit of the service is calculated. The entity decides how many
units of the service to offer
The budget is determined by multiplying units of service by the cost per unit
Planning-Programming-Budgeting(PPB):
PPB emphasizes broad policy goals, strategies and objectives, rather than details
of spending.
In looking at these broad goals and objectives, it considers long-range plans.
In those long-range plans, both ultimate goals and intermediate objectives must
be explicitly stated.
After formulating the long-range plans, it then evaluates costs and benefits of
different ways of meeting the goals and objectives. It also emphasizes the
government’s overall program, rather than a specific department
Zero-Base-Budgeting (ZBB):
ZBB is one method of continually evaluating programs and services.
The primary idea of ZBB is that each program must justify its
existence every year.
No program is assumed to be continuing from one year to the next.
In this approach, the starting point for the budget each year is zero.
First the program itself must be justified, then different way s of carrying out the
program are examined and the best in chosen
Limitations of the Modern Approaches to Budgeting
The budget process contributes or say try to manipulate the process for
their own gain.
They may be easily manipulated in the political process.
27
They need very high level of skill, understanding, time, and paperwork to
implement.
Traditional Approaches to Budgeting
The traditional approach to budgeting is called Object- of-Expenditure
(OOE) or Line-item Expenditure Budgeting which is still the most
widely used.
That is, items are listed line by line along with the appropriation to have inbuilt
control in the budgeting system.
The aim of the OOE budget is controlling expenditures.
The OOE is not so concerned about the number or quality of outputs generated by
the spending; it is concerned with the item purchased. Applied to the context of a
university, OOE would be more concerned with making sure each department used
no more than its supply of paper, rather than with the quality of education given, or
the number of diplomas and degree awarded. The objective of the OOE budget is to
simply list expected expenditures, and then say how much is required for each one. A
Federal Government of Ethiopian budget is a typical example of OOE budgeting.
CHAPTER FOUR
INTERNATIONAL PUBLIC SECTOR ACCOUNTANTING
STANDARED (IPSAS)
BACKGROUND
Due to the inherent character of their activities, public sector entities mainly hold non-cash
generating assets, but may also hold cash-generating assets. While cash-generating assets are
generating measurable future economic benefits based on return from commercial transactions,
the value of non-cash-generating assets is based on their service potential. Impairment rules are
therefore included in two separate standards:
– IPSAS 21Impairment of non-cash-generating assets;
– IPSAS 26 Impairment of cash-generating assets.
GENERAL PRINCIPLE
A loss in the future economic benefits or service potential of an asset, over and
above the systematic recognition of the loss of the asset’s future economic benefits
or service potential through depreciation. Impairment occurs when:
IMPAIRMENT MECHANICS
Assess at each reporting date whether any indication of impairment exists.
Consider both external indicators (e.g. cessation of the demand or need for
services provided by the asset) and internal indicators (e.g. physical damage,
evidence from
28
internalreportingthattheserviceperformanceofanassetisworsethanexpected). If
an indication exists, estimate the recoverable amount of the asset.
If the recoverable amount is lower than the carrying amount, reduce the carrying
amount to its recoverable amount.
Recognizethatreduction(=impairmentloss)asanexpenseinthestatementFinancialperf
ormance.
Depreciate/amortize the reduced carrying amount over the remaining useful life
of the asset.
IMPAIRMENT MECHANICS
Assess at each reporting date whether any indication of impairment exists.

Consider both external indicators (e.g. cessation of the demand or need for
services provided by the asset) and internal indicators (e.g. physical damage,
evidence from
internalreportingthattheserviceperformanceofanassetisworsethanexpected).
If an indication exists, estimate the recoverable amount of the asset.
If the recoverable amount is lower than the carrying amount, reduce the carrying
amount to its recoverable amount.
Recognize that reduction (=impairment loss)as an expense in the statement of
financial performance.
Depreciate/amortize the reduced carrying amount over the remaining useful life
of the asset.
RECOVERABLE AMOUNT FORCASH- GENERATING ASSETS
Determination of the recoverable amount of an asset is different depending on

whether it is a cash generating asset or non-cash- generating asset. For a cash-
generating asset, it is the present value of the estimated future cash flows, derived
from the continuing use of the asset and its sale at the end of its use fullife.
Estimate the future operating cash flows:
− generally determined at the level of the cash-generating unit,
− estimated for the asset in its current condition.
Determine the discount rate to calculate the net present value of those cash
flows (reflects the time value of money and the risks specific to the asset).
RECOVERABLEAMOUNTFORNON-CASH- GENERATING ASSETS
For anon-cash-generating asset, it is the present value of the asset’s Remaining
service potential.
29
These following approaches can be used to determine the asset’s remaining
service potential:
Depreciated replacement cost (DRC): cost to reproduce or replace the gross
service potential of an asset (whichever is the lower), depreciated to reflect the
asset in its used condition;
restoration cost approach: DRC less the estimated restoration cost;
Service units approach: DRC reduced to the number of service units expected
from the impaired asset.
DISCLOSURES
Key disclosures include:
the criteria developed by the entity to distinguish cash-generating from non- cash-
generating assets;
the amount of (reversals of) impairment losses recognized in surplus or deficit of
the period, by class of assets;
for each material impairment loss recognized or reversed during the period:
explanation for the reason of the (reversal of) impairment, the segment to which it
belongs, whether the recoverable (service) amount is the fair value less costs to
sell or the value in use (and, in the latter case, the approach used);
Information on the discount rate and other assumption susedincal collating the
Recoverable amount of cash-generating assets;
- A sensitivity analysis about the impairment calculation smade.
KEY PRINCIPLES
Application of IPSAS 22 is not mandatory.

The GGS comprises all organizational entities of the general government as
defined in statistical bases of financial reporting.
Because GGS information is only relevant for governments as a whole
(national/federal/state/local), IPSAS 22 does not apply to government individual
controlled entities, international organizations or similar public sector entities
applying IPSAS.
KEY PRINCIPLES
In order to provide a useful bridge between the IPSAS financial statements and the
financial information prepared under statistical bases of reporting, IPSAS 22
requires disclosure of the following:
Disaggregation of the IPSAS consolidated financial statements according to the
GGS boundaries as follows: GGS, public (financial and non-financial)
30
corporations, eliminations in consolidation, total numbers included in the IPSAS
consolidated financial statements;
Minimum information that relates to the GGS: assets, liabilities, revenue and
expenses by major class, net assets/equity, revaluations, surplus or deficit,
cashflowsfromoperatingactivities,investingactivitiesandfinancingactivities.
QUESTION: Under IPSAS 22 „Disclosure of financial information about the general

government sector‟, governments must provide a reconciliation between their net surplus or
deficit as disclosed in their IPSAS financial statements and the surplus or deficit calculated under
government finance statistics rules.
True or false?
WHAT ARE REVENUE AND EXPENSES? THE UNDERLYING CONCEPTS

Changes in net financial position (primarily assets less liabilities) other than increases
arising from transactions with owners in their capacity as owners include:
Transformation of an asset (e.g. converting raw materials into finished goods; biological
transformation; depleting an asset’s service potential through huse) change in the value
of an asset or liability (eg changes in the price of commodities; interest rate change
effects on value of fixed-rate instruments) »Question: in economics does exchanging
assets (for example, exchanging inventory for cash or the right to receive cash) result in
a substantial change in equity? Choose one of: 1) Yes; or 2)
REPORTING FINANCIAL PERFORMANCE THE UNDERLYING
CONCEPTS(ANDSOME„CONCEPTS‟)
Surplus or deficit for the period is the difference between revenue and expense
reported on the statement of financial performance (note IPSAS accrual
specifies that some items of income and expense are presented directly in
equity, i.e. outside the statement of financial performance).The relevance of
revenue and expenses are enhanced by separate presentation of: items that arise in
the course of ordinary operations (for example, revenue from exchange
transactions); and those that do not (for example, incidental disposals of assets)Do
not offset expenses against income unless explicitly required
Presentingrevenueandexpensesoutsideofthestatementoffinancialperformance,ie
by exception reported directly in equity
Normally, all items of revenue and expense recognized in a period are included in surplus or
deficit.
Examples of items of revenue and expense that are prohibited from being included in
the statement of financial performance include:
Revaluation surpluses (see IPSAS 17); particular (a) gains and losses arising on
31
translating the financial statements of a foreign operation (see IPSAS 4); gains or
losses on re measuring available-for-sale financial assets
REVENUE OR OTHERINCOME
WHAT DO YOU THINK? (SLIDE 1 OF 2 SLIDES FOR THIS CHARITY)
Charity must present either on the face of the statement of financial performance or in
the notes, a sub-classification of total revenue, classified in a manner appropriate to the
entity’s operations.
How would Charity sub classify its total revenue (specify)? Charity’ s commercial
operations have three segments:
(i) motor vehicles;
(ii) (ii) cattle; and
(iii) Construction services.
The motor vehicle segment:
(i) retails new and second-hand vehicles;

(ii) (ii) rents „new‟ vehicles to others on short-term (up to
three-month) rentals; and
(iii) (iii) Repairs motor vehicles. The cattle segment breeds beef
cattle for slaughter.
The construction segment constructs specialized machinery for use in agriculture sector.
REVENUE OR OTHER INCOME
WHAT DO YOU THINK? (SLIDE 2 OF 2 SLIDES FOR THIS CHARITY)
Charity also disposed of the following property in 2017:all farmland in Region X because
its highest and best use is now residential housing the head-office building because the
staff moved into a new building the rental fleet because it was replaced with a new fleet
of vehiclesaherdofcattleculledbyorderoftheAgricultureMinistrybecausefootand mouth
disease was found to be prevalent in the herd (nominal compensation was received
from the Ministry)
DISTINGUISHING BETWEEN: IPSAS 23 REVENUE FROM NON-

EXCHANGE TRANSACTIONS; AND IPSAS 9 REVENUE FROM
EXCHANGE TRANSACTIONS
An exchange transaction is one in which the entity receives assets or services, or
has liabilities extinguished, and directly gives approximately equal value
(primarily in the form of goods, services, or use of assets) to the other party in
exchange. Examples of exchange transactions include:
(a) The purchase or sale of good so services; or
32
(b) The lease of property, plant and equipment at market rates.
Examples of non-exchange transactions include revenue from the
use of sovereign powers (for example, direct and indirect
taxes, duties, and fines), grants, and donations.
DISTINGUISHING BETWEEN EXCHANGE TRANSACTIONS AND NON-
EXCHANGE TRANSACTIONS (CONTINUED)
When there is a combination of exchange and non-exchange transactions bundled
in a single arrangement, the exchange and non- exchange transactions must be
bifurcated and each component must be accounted for separately. (Paragraph 10
of IPSAS23)When it is not immediately clear whether a transaction is an exchange
transaction or non-exchange transaction judgment must be exercised on the basis
of the substance of the transaction to make the determination. (Paragraph 10 of
IPSAS 23)When it is not possible to distinguish separate exchange and no
exchange components, the transaction is treated as a non- exchange transaction.
(Paragraph 41 of IPSAS 23)
DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGE

TRANSACTIONS TEST YOUR UNDERSTANDING: EXAMPLE 1
In 2017 Charity receives goods with a fair value of ETB1.5 million gifted from
Philanthropist (i.e no consideration and without any condition or stipulation).Is
Charity‟ s contract with Philanthropist (choose one of):
1) an exchange transaction;
2) a non-exchange transaction;
3) a combination of an exchange transaction and a non-
exchange transaction; or
4) It depends (specify on what)?
DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGE
TRANSACTIONS TEST YOUR UNDERSTANDING: EXAMPLE 2
In 2017 Charity buys goods with a fair value of ETB1.5 million from Supplier for
ETB1 million. Is Charity’s contract with Supplier (choose one of):
• an exchange transaction
• a non-exchange transaction
• combination of an exchange transaction and anon-exchange transaction; or
• It depends (specify on what Clue: would your answer be different if the discounter
flected a volume rebate rather than a subsidized price
DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGE TRANSACTIONS
33
TEST YOUR UNDERSTANDING: EXAMPLE 3
On 01/01/2017 Charity receives ETB2 million cash grant from a multi-lateral

development agency (MLDA). Charity has no obligation to repay MDLA and
there are no conditions or stipulations attached to the grant. Is Charity’s contract
with the MLDA (choose one of):
a combination of an exchange transaction and a non-
3) it depends (specify on what)?
DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGETRANSACTIONS

TEST YOUR UNDERSTANDING: EXAMPLE 4
On 01/01/2017 Charity receives ETB12 million funding from a multi- lateral
development agency (MLDA).
On 31/12/2018 Charity is contractually bound to pay MDLA ETB12.1 million to settle
the loan.
The market rate for a similar loan to Charity is 10%
Is Charity “contract with the MLDA (choose one
of)
3) a combination of an exchange transaction and anon-
4) It depends (specify on what)?
IPSAS23REVENUEFROMNON-EXCHANGETRANSACTIONS WHEN TO
RECOGNIZE AN ASSET FROM A NON-EXCHANGE TRANSACTION
Recognize an asset arising from a non-exchange transaction (or in particular

circumstances, a decrease in the carrying amount of a previously recognized
liability) when it gains control of resources that meet the definition of an asset and
satisfy the recognition criteria.
34
Recognition criteria: an inflow of resources from a non-exchange transaction,
other than services in-kind, that satisfies the definition of an asset must be
recognized as an asset when, and only when:
(a) It is probable that the future economic benefits or
service potential associated with the asset will flow to
the entity; and
(b) Thefairvalueoftheassetcanbemeasuredreliably.1
IPSAS 23 REVENUE FROM NON-EXCHANGE TRANSACTIONS TEST
YOUR UNDERSTANDING OF WHEN TO RECOGNISE AN ASSET
FROM A NONEXCHANGE .TRANSACTION: EXAMPLE
On 15/10/2017 Charity receives notification from Philanthropist that
Philanthropist has goods that could be of use to Charity. The gift is offered at no
consideration and without any condition or stipulation. 01/01/2017 Charity
inspects and accepts the goods from Philanthropist at Charity “premises.
Charity must recognize the asset (inventory) for the goods received from the
Philanthropist on (choose one of):
1) 15/10/2017whenPhilanthropistnotifiesCharityofthegoods;
2) 01/01/2017 (control of the goods passes to Charity);or
3) 31/12/2017 (balance sheet date).
IPSAS 23 REVENUE FROM NON-EXCHANGE TRANSACTIONS WHEN TO
ALSO RECOGNISE A LIABILITY FROM NON- EXCHANGE
TRANSACTIONS
In some cases, gaining control of the asset recognized in an non exchange
transaction also carries with it obligations that must be recognized as a liability.
When the asset is transferred subject to the transferee consuming it in providing

goods and services to third parties or the asset must be returned to the transferor,
the transferee considers whether, in substance, the requirement to return the asset
or other future economic benefits or service potential is enforceable, and would be
enforced by the transferor.
If the restriction is enforceable and would be enforced, recognize a liability

(because a condition exists).
The existence of a legal stipulation that is not a condition (i.e. a restriction does not
in itself trigger the recognition of a liability
IPSAS 23 REVENUE FROM NON-EXCHANGE TRANSACTIONS
TEST YOUR UNDERSTANDING OF WHEN TO RECOGNISE A
LIABILITY IN CONNECTION WITH AN ASSET NON-EXCHANGE
TRANSACTION: EXAMPLE
35
On 31/12/2017 Charity receives a substantial delivery of tinned food from
Philanthropist free of charge, on the strict condition that Charity uses the goods
only to provide free hot meals from its soup kitchens in Ethiopia. If Charity
decides to use the gifted tin food for any other purpose Philanthropist stipulates
that any of the unused tins it has provided to Charity must immediately be return to
Philanthropist.
Scenario A: despite the stipulation, Philanthropist’s practice is not to enforce it,
choosing rather not to provide any further support to any charity in breach of its
stipulations. On 31/12/2017 in addition to recognizing the asset (inventory) for the
goods received from the Philanthropist, must Charity also recognize a liability?
(Choose one of): 1) yes; 2) no; or 3) it depends

YOUR UNDERSTANDING OF WHEN TO RECOGNISE A
LIABILITY IN CONNECTION WITH AN ASSETNON-EXCHANGE
TRANSACTION: EXAMPLE
On 31/12/2017 Charity receives a substantial delivery of tinned food from
Philanthropist free of charge, with as stipulation that Charity uses the goods only
to provide free hot meals from its soup kitchens in Ethiopia. If Charity decides to
use the gifted tin food for any other purpose Philanthropist stipulates that any of
the unused tins it has provided to Charity should immediately be return to
Philanthropist.
Scenario B: Philanthropist’s practice is to enforce its stipulation requiring Charity
to keep the tinned food it supplies separately from Charity’s other inventories and
performing period audits of their activities.
On 31/12/2017 in addition to recognizing the asset (inventory) for the goods
received from the Philanthropist, must Charity also recognize a liability? (Choose
one of): 1) yes; 2) no; or 3) it depends
IPSAS23REVENUEFROMNON-EXCHANGETRANSACTIONS WHEN TO ALSO
RECOGNISE REVENUE FROM NON- EXCHANGETRANSACTIONS
If an inflow of resource satisfies the definition of contributions from owners, it is
not recognized as a liability or revenue.
When an inflow of resources from a non-exchange transaction is recognized as an
asset it must be recognized revenue, except to the extent that a liability is also
recognized in respect of the same inflow.
As an entity extinguishes/part extinguishes the liability in respect of an inflow of
resources from a non-exchange transaction recognized as an asset, it must reduce
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the carrying amount of the liability recognized and recognize an amount of
revenue equal to that reduction.
IPSAS23REVENUEFROMNON-EXCHANGETRANSACTIONS WHEN TO ALSO
RECOGNISE REVENUE FROM NON- EXCHANGETRANSACTIONS
The timing of revenue recognition is determined by the nature of the conditions and their
settlement.
For example, if a condition specifies that the entity is to provide goods or services
to third parties, or return unused funds to the Transferor, revenue is recognized as
goods or services are provided.
IPSAS 23 REVENUE FROM NON-EXCHANGETRANSACTIONSTEST YOUR
UNDERSTANDING OF RECOGNISING REVENUE FROMNONEXCHANGE
TRANSACTIONS: EXAMPLE
On 31/12/2017 Charity receives a delivery of tinned food (with a fair value of
ETB1.2 million) from Philanthropist free of charge, with the stipulation that
Charity uses the goods only to provide free hot meals from its soup kitchens in
Ethiopia. If Charity decides to use the gifted tin food for any other purpose
Philanthropist stipulates that any of the unused tins it has provided to Charity
should immediately be return to Philanthropist.
Evenly over 2018, Charity uses the tinned food to provide free meals from its Ethiopiansoup
kitchens.
Scenario A: despite the stipulation, Philanthropist’s practice is not to enforce it,
choosing rather not to provide any further support to any charity in breach of its
stipulations.
How must Charity recognize revenue from the non-exchange transaction with
Philanthropist? (choose one of): 1) ETB1.2 million on 31/12/2017; 2) ETB100,000
each month in 2018; or 3) never because it did not pay for the tinned food and does
not charge for the meals it was used to provide.
IPSAS 23 REVENUE FROM NON-EXCHANGE TRANSACTIONS TEST YOU
UNDERSTAND OF RECOGNISING REVENUE FROM NONEXCHANGE
TRANSACTIONS: EXAMPLE (CONTINUED)
Scenario B: Philanthropist’s practice is to enforce its stipulation requiring
Charity to keep the tinned food it supplies separately from Charity’s other
inventories and performing period audits of their activities.
How must Charity recognize revenue from the non-exchange transaction with Philanthropist?
(Choose one of):
1) ETB1.2 million on 31/12/2017;
2) ETB100,000 each month in 2018;or
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3) Never because it did not pay for the tinned food and did not charge for the
meals it wasused to provide.
IPSAS23REVENUEFROMNON-EXCHANGETRANSACTIONS HOW TO
MEASURE REVENUE ARISING FROM NON- EXCHANGETRANSACTIONS
Revenue from non-exchange transaction: at the amount of the increase in net assets recognized
by the entity.
Asset acquired through a non-exchange transaction: its acquisition date fair value.
Exceptions apply, for example:
For biological assets in agricultural activity initial measurement is at acquisition-
date fair value less costs to sell (See paragraph 17 of IPSAS27)
Liability incurred through a non-exchange transaction: the best estimate of the

amount required to settle the present obligation at the reporting
date(seeSection19Provisions,ContingentLiabilitiesand Contingent Assets).
TEST YOUR UNDERSTANDING OF MEASURING REVENUE FROM
NONEXCHANGE TRANSACTIONS: EXAMPLE 1
On 01/01/2017 Charity receives ETB12 million funding from a multilateral
development agency (MLDA).
On 31/12/2018 Charity is contractually bound to pay MDLA ETB12.1 million to
settle the loan (ie ETB2 million is a grant on 01/01/2017 and the remaining ETB10
million bears interest at 10% per year).The market rate for a similar loan to Charity
is 10% per year.
How must Charity recognize revenue from the non-exchange

component of the transaction with MLDA? (Choose one of):
1) ETB2 million on01/01/2017;
2) ETB83,333 each month in 2017 and 2018;or
3) Another(specify…)

YOUR UNDERSTANDING OF MEASURING REVENUE FROM
NONEXCHANGE TRANSACTIONS: EXAMPLE2
On 01/01/2017 a Simian Mountain-based Charity receives a herd of 1,000 cattle
from a Philanthropist for free in support of Charity’s objectives of increasing the
productivity and profitability of cattle farming around the Simien
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Mountains by: improving the genetics of the cattle farmed in the area; and through
increasing economies of scale of local cattle farming by transforming it from
subsistence agriculture to community-wide commercial cattle ranching. Charity
observed the Philanthropist’s agent pay ETB20,000 per cow at the Kera Market
Centre auction in Addis Ababa on 31/12/2016.Charity is also aware that
Philanthropist paid :transactions costs at auction of ETV200 per cow on
31/12/2016 (a further ETB200 per cow transactions costs was also paid by the
seller);and a Livestock Transporter ETB900 per cow to move the cattle to
Charity‟s leasehold land in the foothills of the Simien Mountains on01/01/2017.
IPSAS 23 REVENUE FROM NON-EXCHANGE TRANSACTIONS TEST YOU
UNDERSTAND OF MEASURING REVENUE FROM NONEXCHANGE
TRANSACTIONS: EXAMPLE 2 (CONTINUED)At what amount must Charity
recognize revenue from none exchange transaction with Philanthropist on
01/01/2017?
Choose one of:
1) ETB21.1million;
2) ETB20.9million;
3) ETB20million;
4) ETB19.1million;
5) ETB19 million; or
IPSAS 23 REVENUE FROM NON-EXCHANGETRANSACTIONSHOW TO
RECOGNISE AND MEASURE SERVICES IN-KIND
An entity may (provided that it has control over the services in-kind, and is able to
measure their fair value reliably), but is not required to, recognize services in- kind
as revenue and as an asset (the asset is immediately consumed and typically
becomes an expense unless it forms part of the cost of another asset).
IPSAS 23 encourages the disclosure of the nature and type of services in-kind
received during the reporting period.
IPSAS23REVENUEFROMNON-EXCHANGETRANSACTIONS
ACCOUNTING FOR COSTS ASSOCIATED WITH NON-
EXCHANGETRANSACTIONS
Costs incurred in relation to revenue arising from a non exchange transaction are
not offset against the revenue arising from a non-exchange transaction. Such costs
are accounted for a separate transaction.
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TEST YOUR UNDERSTANDING: COSTS ASSOCIATED WITH NON-
EXCHANGETRANSACTIONS
In 2017 Charity receives from the Government of Ethiopia a grant of a building
(fair value = ETB1 million) from which to expand its operations. Charity
assesses the stipulation that the building be used for the Charity‟ s business to be
a restriction not a condition.
In 2017 Charity incurs obligations of ETB10, 000 for property transfer duty and
ETB100,and 000 in modifying the building to enable it to bet t reserve Charity‟
purpose. At natives applies to Charity? (See alternatives presented on the next
slide)
YOUR UNDERSTANDING: COSTS ASSOCIATED WITH NON
EXCHANGE TRANSACTIONS (CONTINUED)
At31/12/2017, which one of the following alternatives applies to Charity?
ETB1 million asset (PPE, building) and ETB1 million revenue from non-exchange
transaction
ETB110,000 asset (PPE, building) andETB110,000 liability(obligation for property
transfer duty and building modification costs)
ETB1,110,000 asset (PPE, building); ETB1 million revenue from no exchange
transaction; and ETB110,000 liability (obligation for property transfer duty and
building modification costs)
IPSAS 24 applies to charities that make publicly available(because they are required to
or because they elect to) the approved budget(s) for which they are held accountable.
It does not require approved budgets to be made publicly available, nor does it require
that the financial statements disclose information about, or make comparisons with,
approved budgets that are not made publicly available.
IPSAS 24 PRESENTATION OF BUDGET INFORMATION IN FINANCIAL

STATEMENTS
IPSAS 24 requires a comparison of budget amounts and actual amounts arising from
execution of the budget to be included in the financial statements. When IPSAS 24
applies it also requires disclosure of an explanation of the reasons for material
differences between the budget and actual amounts.
IPSAS 24 PRESENTATION OF BUDGET INFORMATION IN FINANCIAL

STATEMENTS
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When financial statements and the budget are not prepared on a comparable basis,
present reconciliation to the following actual amounts presented in the financial
statements, identifying separately any basis, timing, and entity differences:
If the accrual basis is adopted for the budget, total revenues, total expenses and net cash
Flows from operating activities, investing activities, and financing activities; and
ii) If a basis other than the accrual basis is adopted for the budget, net cash flows from
operating activities, investing activities, and enhancing activities.
Compliance with IPSAS 24 is helpful in discharging accountability obligations and
enhances the transparency of financial statements by demonstrating: compliance with
the approved budget and, where the budget and the financial statements are prepared on
the same basis, their financial performance in achieving the budgeted results.
Chapter 5
Accounting for General and Special Revenue Funds
The General Fund
General ledger budgetary control accounts include
 Estimated revenue
 Estimated other financing sources
 Appropriations
 Estimated other financing uses
 Encumbrances
And related Operating Statement control accounts include:
 Revenue
 Other financing sources
 Expenditures
 Other financing uses have been discussed in detail
The necessity of subsidiary ledger that supports the budgetary control account and their related
statement account is also disused. In this chapter, common transactions and events arising from
the operating activities and appropriate accounting entries and financial statements of any
potential local governmental unit will be presented and discussed. Operating transactions and
events affect the governmental unit’s government wide accounting records and financial
statements as well as those of its General Fund. Thus, transactions are recorded, where
appropriate, in both the general journal used to collect financial information for government –
wide financial reporting and the general journal for the General Fund. Subsidiary ledger accounts
41
as well as general ledger accounts will be illustrated for the General Fund. The accounting
structure illustrated in this chapter is entirely applicable to special revenue funds of state and
local governmental unit as well as to general funds.
Illustrative Case: Beginning Financial Statements

Assume that at the end of a fiscal year 2014 the following government – wide Statement of Net
Assets (only for governmental activities) and the general fund balance sheet are presented for the
town of DM.
TOWN OF DM
STATEMENT OF NET ASSETS
DECEMBER 31, 2014
Measurement Focus and Basis of Accounting

As discussed in previous chapters, the Government Wide Statement of Net Assets reports
financial position using the economic resources measurement focus and the accrual basis of
accounting––using accounting principles similar to accounting for business entities. In contrast,
the General Fund Balance Sheet reports financial position using the current financial resources
measurement focus and the modified accrual basis of accounting. Although both of these
statements represent financial position at the same point in time, even a fundamental comparison
reveals dramatic differences.
42
Government Wide Statement of Net Assets
 Reports both capital assets and long term liabilities
 Information reported in the governmental activities column of the Statement of Net
Assets includes financial information for all governmental activities, not just for the
General Fund
 GASB recommended Net Asset Format – Assets minus liabilities equals net assets
 Reports information in a more condensed manner than the General Fund balance sheet
General Fund Balance Sheet
 Reports only current financial resources and current liabilities to be paid from current
financial resources
 Reports only recourses and obligations of the General Fund only
 Traditional balance sheet format – Assets equals liabilities and fund equity
The arithmetic difference between total financial resources and total liabilities of the fund is the
fund equity. In the balance sheet of DM Town, a portion of fund equity is reserved because not
all purchase order issued in the Fiscal Year 2014 was filled by the end of that year. A portion of
fund equity that is reserved for the purchases order outstanding is shown in the balance sheet as
Reserve for Encumbrance.
A portion of fund equity not reserved for expenditure is known as Fund Balance (Available for
Appropriation). This is the excess of financial resources over actual liabilities and amounts
expected to become liabilities when good and services on order at balance sheet data are
received.
Recording Transactions during the FY: Recording the Budget

A budget should be recorded in the account of each fund for which a budget is legally adopted.
The total estimated revenue and appropriation for Fiscal Year (FY) 2015 is as follows:
On January 1, the Town Council approved revenue budget of Br 3,986,000 and appropriation
budget of Br 4,180,000. Estimated Revenue consists of Br 2,600,000 Property taxes; Br 13,000
Interest & penalties on delinquent taxes; Br 480,000 sales taxes; Br 220,000 licenses and
permits; Br 308,000 Fines and forties; Br 280,000 Intergovernmental revenue; Br 70,000
Charges for service; and Br 15,000 Miscellaneous revenue.
The Appropriation budget includes Br 660,000 General government; Br 1,240,000 Public safety;
Br 910,000 Public works; Br 860,000; Health and welfare; Br 315,000 Parks and recreation; Br
180,000 Contribution to retirement plans; and Br 15,000 Miscellaneous appropriations.
Record the journal entry on the first day of the new fiscal
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Chapter 6
Accounting for Capital Project Fund
The reason for creating a fund to account for capital projects is the same as the reason for
creating special revenue funds—to provide a formal mechanism to enable administrators to
ensure revenues and other financing sources dedicated to a certain purpose are used for that
purpose and no other, as well as to enable administrators to report to creditors and other grantors
of capital projects fund resources that their requirements regarding the use of the resources are
being met.
Capital projects funds differ from the General Fund and special revenue funds in that the latter
categories have a year-to-year life, whereas capital projects funds have a project-life focus.
Legal Requirements
Since a government’s power to issue bonds constitutes an ever-present hazard to the welfare of
its property owners in particular and its taxpayers in general, this authority is ordinarily limited
by legislation. The purpose of legislative limitation is to obtain a prudent balance between public
welfare and the rights of individual citizens. In some jurisdictions, most bond issues must be
approved by referendum; in others, by petition of a specified percentage of taxpayers.
44
Illustrative Transactions—Capital Projects Funds
GASB standards require the use of the same basis of accounting for capital projects funds as for
the other governmental fund types. Proceeds of debt issues should be recognized by a capital
projects fund at the time the issue is sold rather than the time it is authorized because
authorization of an issue does not guarantee its sale. Proceeds of debt issues should be recorded
as Proceeds of Bonds or Proceeds of Long-Term Notes rather than as Revenues, and they should
be reported in the Other Financing Sources section of the statement of revenues, expenditures,
and changes in fund balance.
To defray engineering and other preliminary expenses, the sum of $50,000 was borrowed on a
short-term basis from National Bank. Because this transaction affects both the Fire Station
Capital Projects Fund and governmental activities at the government-wide level, the following
entry is made in both journals:
Fire Station Capital Projects Fund and Governmental Activities:

1. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Short-Term Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total purchase orders and other commitment documents issued for supplies, materials, items of
minor equipment, and labor required for the part of the project to be performed by the town’s
employees amounted to $443,000.
(Since the authorization is for the project, not for a budget year, it is unnecessary to include any
year, in the account titles.) The following budgetary control entry is made in the capital projects
fund but is not recorded at the government-wide level.
Fire Station Capital Projects Fund:
2. Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,000
Reserve for Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,000
A contract, in the amount of $1,005,000, was signed for certain work to be done by a private
contractor. As with Entry 2, only the capital projects fund is affected.
Debits Credits
45
3. Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,005,000
Reserve for Encumbrances . . . . . . . . . . …………….. . . . . . . . . . . . . . . . . . . 1,005,000
Special engineering and miscellaneous costs that had not been encumbered were paid in the
amount of $48,000. These costs are deemed to be properly capitalized as part of the fire station.
Debits Credits
4a. Construction Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …….. . . . . . . . . . . 48,000
Governmental Activities:
4b. Construction Work in Progress . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ………. . . . . . . . . . . . . . . 48,000
Entries 4a and 4b highlight a major difference between accounting for a governmental fund and
governmental activities at the government-wide level. Accounting for a governmental fund
focuses on the inflows and outflows of current financial resources on the modified accrual basis;
accounting for governmental activities focuses on the inflows and outflows of economic
resources, including capital assets, on the accrual basis used in accounting for business
organizations.
When the project was approximately half finished, the contractor submitted a bill requesting payment of $495,000.
Fire Station Capital Projects Fund: Debits Credits
5a. Reserve for Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . .. . 495,000

Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …….. . . . . 495,000
5b. Construction Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……... . . . . . . 495,000
5c. Construction Work in Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,000
Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……….. . . . . . . 495,000
Entries 5a and 5b record conversion of an estimated liability to a firm liability eligible for payment upon proper
authentication. Contracts Payable records the status of a claim under a contract between the time of presentation and
verification for vouchering or payment.
Payment in full was received from the other governments that had agreed to pay part of the cost of the new fire
station.
46
6a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. . . . . 300,000
6b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 300,000
Program Revenues—Public Safety—
Capital Grants and Contributions . . . . . . . . . . . . . . . . . ……….. . . 300,000
The National Bank loan was repaid with interest amounting to $1,000.
7a. Interest Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Short-Term Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Cash . . . . . . . . . . . . . . ……... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000
7b. Expenses—Interest on Notes Payable . . . . . . . . . . . . . . . . . . . . . . 1,000
Short-Term Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Cash . . . . . . . . . . . . . . . . . ………. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000
Chapter 7
Accounting for Debt Service Fund
This chapter describes the kinds of debt and other long-term liabilities that are termed “general
long term liabilities.” General long-term liabilities are those that arise from activities of
governmental funds and that are not accounted for as fund liabilities of a proprietary or
fiduciary fund. General long-term liabilities are reported as liabilities in the governmental
activities column of the government-wide Statement of Net Assets, but are not reported as
liabilities of governmental funds.
Types of long term bonds
Bond is a written promise to pay principal and interest in the future. It is commonly classified
into two types, as Serial Bond and Term Bond.
Term bond is a bond which is paid once at maturity with related interest and the objective of
DSF for this type of bond is to accumulate the resource to retire this bond at maturity.
Serial bond is a bond which is paid at regular time intervals with interest which is calculated on
the remain balance and in DSF resources are accumulated or received as needed to service the
debt and no significant balance are carried over from one period to the next.
47
Accounting for debt service fund
Purpose - it is established for the accumulation of resources for and payment of general long
term liabilities principal and its related interest.
Financing sources
 Special taxes
 Premiums accrued interests on bonds issue
 Investment income
 Residual equity transfer; for example after the completion of the project any excess may
transfer to DSF from CPF
Although DSF makes interest and principal payment on general long term debt, the liability for
general long term debt is recorded in the governmental activities journal not in the DSF. Thus
the records of DSF and governmental activities journal should be coordinated. As long term
debts are retired through the expenditures in the DSF the liability recorded in the governmental
activities is reduced.
When a general obligation serial bond is issue, a proceeds received is recorded in the CPF; if it is
designed for the construction of long term projects. At the same time any entry for the bond
liability is recorded in the governmental activities journal. For example assume the serial bond
with face value of $500,000 was issued at face value for the construction of city Hall on January
1, 2002, the following entry would be recorded as follows in the governmental activities journal:
Government activities
Cash ……………………………………………. 500,000
Bonds payable …………………………. 500,000
As the serial bonds are retired trough the DSF, entries are made in the governmental activities
journal to reduce the recorded obligation. For example assume that DSF of city Hall construction
paid $50,000 principal of the serial bond on July 1, 2002 the following entry is required under
the governmental activities and DSF journal.
DSF
Expenditure ………………………………………………… 50,000
Cash ………………………………………………… 50,000
Governmental activities
Serial bonds payable………………………………………… 50,000

Cash…………………………………………………. 50,000
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Chapter 8
Accounting for Internal revenue Funds / Internal Service Funds /
A logical name for a fiscal and accounting entity created to account for resources used for
providing centralized services is internal service fund. Traditionally, the reason for the creation
of funds in this category was to improve the management of resources. In recent years, large
numbers of governmental units have experienced a shortfall of revenues with an increase in the
demand for governmental services. Consequently, many governmental units have turned to user
charges as a means of financing operations formerly financed by tax revenues and
intergovernmental revenues. In order to determine whether user charges are commensurate with
operating costs, and to improve the ability of administrators and governing bodies to determine
that costs are reasonable in relation to benefits, it is desirable for the activities to be operated and
accounted for on a business basis. Thus many activities formerly operated on a purely
noncommercial basis and accounted for by governmental funds are now accounted for by
proprietary funds: enterprise funds and internal service funds.
Activities that produce goods or services to be sold to the general public are accounted for by
Enterprise Funds. Activities that produce goods or services to be provided to departments or
agencies or a governmental unit, or to other governmental units, on a cost-reimbursement basis
are accounted for by Internal Service Funds. (Internal service funds are sometimes called
intergovernmental service funds, working capital funds, revolving funds, and other similar
names.)
49
Activities accounted for in enterprise funds are referred to as business-type activities for purpose
of financial reporting at the government-wide level. Although internal service funds are
accounted for internally as business type activities, their transaction predominantly involve sales
of goods or services to, or inter fund transactions with, the General Fund and other funds that
comprise the governmental activities of a government.
Unlike the General fund and other major governmental funds for which a budget is legally
adopted, proprietary funds are not required by GASB standards to record budgets in their
accounting systems. Some governmental units do, however, require all funds to operate under
legally adopted budgets. In such cases, GASB standards permit, but do not require, the
integration of budgetary accounts in the manner described in Chapter 3 and 4 General and
Special Revenue Funds.
Internal Service Funds
Although the reason for the establishment of an internal service fund is to improve financial
management of scarce resources, it should be stressed that a fund is a fiscal entity as well as an
accounting entity; consequently, establishment of a fund is ordinarily subject to legislative
approval. The ordinance, or other legislative action, that authorizes the establishment of an
internal service fund should also specify the source, or sources, of financial resources to be used
for fund operations. The original allocation of resources to the fund may be derived from transfer
of assets of another fund, such as the General Fund or an Enterprise Fund, intended as a
contribution not to be repaid, or a transfer in the nature of a long-term interfund loan to be repaid
by internal service fund over a period of years. Alternatively, or additionally, the resources
initially allocated to an internal service fund may be acquired from the proceeds of a tax-
supported bond issue or transfer from other governmental units that anticipate utilizing the
service to be rendered by the internal service fund. Since internal service funds are established to
improve the management of resources, it is generally considered that they should be operated,
and accounted for, on a business basis. Application of this general truth to a specific case can
lead to conflict between managers who wish the freedom to operate the fund in accord with their
professional judgment, and legislators who wish to exercise considerable, control over the
decisions of the internal service fund managers, which means managers want to operate ISF on
business basis, but legislators want significant control over the investments in supplies.
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Chapter 9
Accounting and Reporting for the Federal Government of Ethiopia
Goals achieved by FGE Accounting System
The FGE accounting system achieves three goals: budget control, cash control, and
accountability. Budget control
 The ability of the accounting system to report expenditure consistent with budgetary
principled and
 Including accounting for commitments in the system. A commitment is an amount of
budgeted funds that is reserved for a specific future expenditure. Any committed
budgeted funds are no longer available for future commitments. Commitments are made
against the budget when a purchase order is approved.
Cash control
 Maintaining the balance of cash at bank and cash in safe in a general budget.
 Clarifying the responsibilities and duties of the cashier and the accountant for cash at
bank and cash in safe. The cashier handles cash in safe, while the accountant is assigned
overall responsibility for cash in safe and specific responsibility for the checkbook and
cash at bank.
 Applying double entry bookkeeping techniques in the accounting system. Double entry
bookkeeping creates a set of self balancing account ledgers (general ledger), Because the
account ledgers are self balancing accounting records in a general ledger, So cash also
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in controlled by double entry bookkeeping. Therefore a running cash balance in the
register ledger reflects the actual cash available.
 Employing a modified cash basis of accounting when accounting for transactions, the
modified cash basis of accounting allows the accounting system to recognize revenue
and expenditure consistent with the budgetary process and financial low.
Accountability
 Imploring a general ledger system. Each accounting unit maintains a general ledger for
each source of funding, so each unit maintains a balanced and continuous record of its
responsibilities and performance. A set of financial reports can be produced from any
single general ledger or from any combination of general ledgers.
 Creating the ability to record and report on any assets and liabilities using a cost method
of valuation. The FGE a accounting system included a simplified process for recording
any assets and liabilities in a set of registers and in a general ledger that is independent of
accounting for transactions using a modified cash basis of accounting.
 Establishing a system of financial reporting that produces two reports for use by
government and a statement of changes in cash position for use by interested parties
outside of Budget and Actual for revenue and expenditure and a statement of Net assets.
 Every attempt is made to design a system that is consistent and clear. To permit
jurisdictions some ability to adapt the system to their capacity, the design allows
implementation of the system initially for recording other assets and liabilities using the
cost method can be deferred for later implementation.
Changes in the FGE accounting system

The Federal government of Ethiopia (FGE) accounting system used in 1994 EC has been in
service for more than hast a century. The system has been revised at various times and the
revisions through time house brought major changes in recording, summarizing and reporting of
the government financial information.
The federal government decided that there was a need to revise the current accounting process as
an integral part of the civil service Reform. The civil service Task force, formed in the prime
minister’s office, began the revision process. Further study and implementation responsibilities
were given to the accounts Reform Team established by the ministry of finance and Economic
Development (MOFED)
The overall strategy of the civil service Reform for accounts is to mode from strictly cash
controls to on emphasis on management and accountability.
Systems and procedures for professionals working in the FGE accounting Cashier and
Accountant In the FGE accounting system of cash control, the cashier's function and the
accountant's function are distinct. Cash consists of currency and checks. The cashier's function is
to maintain and control cash in the safe. The accountant's function is to maintain and control cash
at the bank. Only the cashier can receive currency and checks and make disbursements in
currency. Daily, the cashier should count cash on hand and reconcile ending cash on hand to the
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cash book. The cash in safe is controlled by an imprest system. When cash is received as per the
budget or other sources, the cashier will:
 Issue a cash receipt,
 Segregate the cash received from cash available to disburse,
 Deposit the cash received intact in the bank as soon as practical, usually daily, and
 Surrender copies of all cash receipts and a copy of the bank deposit slip to the accountant.
In the impress system, a balance is established for cash in safe. The accountant issues this
amount of cash to the cashier using a check. When cash is disbursed to establish the Impress
Fund, the cashier will issue a receipt voucher. If the amount of cash in safe is to be replenished,
the cashier will surrender all payment vouchers to the accountant. The accountant will replenish
the cash in safe by issuing a check to the cashier for the total amount of the payment vouchers
that are surrendered. The replenishment should return the balance of cash in safe to the
established level.
The accountant's responsibility for cash is to maintain a record of the total cash position of the
entity, including cash at the bank and cash in the safe. The accountant records cash movements
that flow through the cashier and cash movements that flow directly through the bank. Direct
cash movements through the bank normally include bank transfers and charges, checks written,
and any other transactions that do not require cash handling by the cashier. When a Public Body
has more than one cashier, one cashier is designated as the main cashier. The other cashiers are
designated as assistant cashiers. Each Public Body is responsible for organizing assistant and
main cashiers. However, some general principles apply. Assistant cashiers are responsible for:
 Collection of Cash
 Issuing deposit and/or receipt vouchers
 Making deposits at Bank
The main cashier is responsible for:

 Reconciling cash and vouchers for each assistant cashier
 Depositing cash in the bank
 Disbursing cash for the proper functioning of the Public Body
 Managing the petty cash
Chart of Accounts of FGE Accounting Systems

A chart of accounts is a system of coding used to identify and classify financial entities and
events. The current chart of accounts, described in the Budget Reform Manual incorporates
detailed codes for items of domestic revenue, external assistance, external loans, and items of
expenditure. This unit completes the FGE chart of accounts by adding detailed codes for
transfers, assets, liabilities, letters of credit and net assets/equity. The classification of the chart
of accounts is structured in a systematic manner and facilitates the recording of transactions and
the reporting of information in accordance with the budget. The chart of accounts treats all
detailed account codes as temporary accounts and permanent accounts. Temporary accounts are
accounts that begin each year with a zero balance. Permanent accounts are detailed account
codes whose balance at the end of a year becomes the balance in the account at the beginning of
the next year. Revenue, expenditure and cash transfers are temporary account code categories.
Account codes in these categories:
 are always treated as temporary accounts, and
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 begin each year with a zero balance.
Assets, liabilities and net asset/equity are permanent account code categories. Account codes in
these categories:
 are always treated as permanent accounts, and
 begin each year with the account balance as long as they had at the end of the previous year.
In other words, these accounts are not closed.
Chart of Temporary Accounts The Budget Reform Team under the Expenditure Management
and Control Sub-Program of the Civil Service Reform designed codes in the chart of accounts
for detailed coding of:
 Items of domestic revenue, external assistance and external loans using code numbers 1000
through 3,999, and
 Transfers using code numbers 4000 through 4099.
 Items of expenditure using code numbers 6,000 through 6,999.
The Budget Manual created account codes for the FGE chart of accounts as follows:
 Items of domestic revenue using account codes 1000-1799,
 External assistance using account codes 2000-2999,
 External loans using account codes 3000-3999,
 Transfers using code numbers 4000 through 4099, and
 Items of expenditure using account code 6000-6999.
Chart of Permanent Accounts The Accounts Reform Team under the Expenditure
Management and control Sub-Program of the Civil Service Reform designed codes for detailed
coding of:
 Assets using code numbers 4100 through 4999.
 Liabilities using code numbers 5000 through 5499.
 Letters of Credit using code numbers 5500 through 5599.
 Net Assets/Equity using code numbers 5600 through 5699.
Although a general description of these account codes is described here, refer the account titles
with their corresponding codes in Annex 1 and 2 presented at the end of this module for detail
and complete list of accounts. Assets: As written by different scholars at different times, Assets
are resources controlled by an entity as a result of past events and from which future economic
benefits or service potential are expected to flow to the entity. The categories of assets in the
FGE accounting system are: cash and cash equivalents, receivables, goods in transit, stocks,
fixed assets, loans receivable, investments, liabilities, letters of credit, and net assets/equity.
Cash and cash equivalents: Cash is cash on hand and cash at bank. Cash equivalents are short-
term, highly liquid investments that are readily convertible to known amount of cash and which
are subject to an insignificant risk of change in value. Receivables: receivables are amounts
owed to (given to) a government unit by another government unit, a person, or a non-government
entity except public enterprises. Salary advances to employees and advances to suppliers are two
examples of receivables commonly occurring in FGE transactions. Goods in transit: Goods in
transit are goods that are owned by the FGE but not yet in the FGE's possession. Typically, these
are goods that are purchased overseas using a letter of credit. Stocks: Stocks are goods that are
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consumed in less than one year. Fixed assets: Fixed assets are physical items that are expected
to have a useful life of longer than one year and have a certain minimum value. Loans
receivable: Loans receivable are amounts due from public enterprises over a period of time
exceeding one year. Investments: Investments are FGE investments in public enterprises and
private organizations that are held for more than one year.
Liabilities: Liabilities are formally defined by the Institute of Public Sector Accounting
standards as "present obligations of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits or
service potential." Liabilities are better defined by example. The categories of liabilities in the
improved and expanded accounting system are:
 Payables. Payables are obligations to pay that are due in less than one year. Examples of FGE
payables are deposits, grace period payables, treasury bills, and retention on contracts.
 Long-term debt. Long-term debt is an obligation to pay that is due in more than one year.
Letters of Credit: A letter of credit represents a guarantee to pay suppliers with cash
set aside in bank account restricted for that purpose. Net assets/equity: Net
assets/equity is formally defined by the Institute of public sector accounting standards
as "the residual interest in the assets of the entity after deducting all its liabilities." Net
assets/equity is the balance remaining after liabilities are deducted from assets. This
balance represents the equity interest of Regional and Federal Governments.
Basis of Accounting
A transaction is an economic event that affects the financial position of the government. The
basis of accounting is the basic set of principles and rules employed by the accounting system to
determine when and how to record transactions. The cash basis of accounting is a basis of
accounting that recognizes transactions and other events when cash is received or paid. Although
organization’s earnings and related operating activities are continuous, they are reported at
specific intervals (i.e. an accounting period or budget year) in order to provide useful information
for decision-making on a timely basis. Some activities may begin and end during the accounting
period, while others may require two or more accounting periods for completion. Budget year for
FGE is from Hamle 1 to Sene 30. In summary, accrual accounting is based on cash flows but
reports transactions and other events with cash consequences at the time the transactions occur
rather than at the time cash is received or paid. Accrual accounting is also superior to cash-basis
accounting from the standpoint of measuring financial statement elements.
The FGE accounting system employs a modified cash basis of accounting. Modified cash basis
of accounting is a compromising basis of accounting between the two extreme bases of
accounting. It adopts features from both bases of accounting. Most transactions are recorded
using cash basis of accounting and some transactions are recorded using accrual basis of
accounting. The modified cash basis of accounting in FGE means that cash basis applies except
for recognition of the following transactions:
 Revenue and expenditure are recognized when aid in kind is received.
 Expenditure is recognized:
When payroll is processed.
At the end of the year when a grace period payable is recognized.
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When goods are received or services are rendered if payment for the goods or services was
rendered in advance.
When cash moves from an unrestricted to a restricted bank account to meet the requirements of
a letter of credit. When cash moves out of he restricted account, no expenditure is recognized.
 Intergovernmental transfers are recognized in the absence of actual cash movement.
 Transactions resulting from salary withholdings are recognized in the absence of actual cash
movement.
The modified cash basis of accounting is consistent with the budgeting process and produces
information useful for comparing budgeted and actual revenue and expenditure. The modified
cash basis accounting system requires the same temporary accounts as the cash basis of
accounting plus the following permanent accounts: cash and cash equivalents, receivables and
payables. The FGE accounting system employs a combination of temporary and permanent
accounts. All account balances at the end of the year may not have a zero balance. So, a process
is necessary that distinguishes temporary accounts and sets them to zero. The process of setting
the balance in temporary accounts to zero is called closing the accounts, and the process is
performed by a closing entry. The closing entry is an accounting activity that takes place at the
end of each budget year. This process requires a net assets/equity account.
All assets and liabilities are not recognized in the modified cash basis accounting system. Only
those receivables and payables included in the chart of accounts are included in the system. The
modified cash basis accounting system produces financial information that is reported in a
Statement of Changes in Cash Position and a Statement of Budgeted versus Actual Expenditure.
Asset and liability accounts other than cash, receivables, payables, and letters of credit are
included in the chart of accounts to allow institutions that have the capacity to maintain
accounting records of all assets and liabilities. These other assets and liabilities are recorded
using the cost method. The cost method values assets at their original cost and liabilities at the
amount still due. Recording these other assets and liabilities is an option for the future in the
FGE accounting system. Every transaction that is recorded by accounting has two aspects: effort
and reward, source and use, cash inflow and expenditure. The purpose can be, for example,
expenditure, revenue deposit, or transfer. The FGE accounting system uses double-entry
bookkeeping. Double-entry bookkeeping means that both aspects of each transaction are
recorded in the accounting records with at least one debit and one credit so that the total amount
of debits and the total amount of credits are equal to each other. The advantages of double-entry
bookkeeping are numerous, including:
 All aspects of the transaction are properly recorded in accounts.
 The accounts are self-controlling because the total of all debits must equal the total of all
credits; therefore, many errors are easily detected and corrected.
 Modified cash basis of accounting can be introduced.
FGE Basic Accounting Equation is as follows:

Asset = Liabilities + Net Assets/Equity
Cash & Cash Equivalents + Receivables = payables + Letters of Credit + Net
Assets/Equity
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Financial Administration The financial administration in FGE mainly involves Ministry of
Finance and Economic Development (MOFED) and Regional Finance and planning offices and a
Public Body. The specific Federal and Regional government administrative authorities and the
required organizational structure in public bodies are illustrated in the following Figure 2.1
Figure 2.1 Structure of Financial Administration in the Budget Process
Ministry of Finance and Economic Development
Public Body
Project or Sub-Agency
Budgetary Institution Sub-

Project or Sub-Sub-Agency
The following are responsibilities of MOFED, Budgetary Institutions, Accounting unit,

Reporting Entity, Cashier and Accountant in the financial administration in the Budget process
and within the Public Body
Figure2.2: Structure of financial administration within public Body
Ministry of Finance and Economic Development (MOFED) MOFED administers the
financial system for the federal government and has the highest level of administrative authority.
MOFED consists of a:
 Budget Department that prepares and distributes notification of approved federal budgets and
administers the budget.
 Central Accounts Department that receives monthly repots and compiles financial statements
for the federal government.
 Central Treasury Department that receives and distributes cash from central treasury.
 Credit and Investment Department that manages the federal government's investments and
debt.
This is not a complete description of MOFED or its departments. This is description of their
roles and responsibilities within the accounting system. Budgetary Institution (BI) Budgetary
Institutions are defined as those institutions that are fully or partially financed by Government.
The budget process assumes the appropriation of budgets. The appropriated budget is the budget
approved by the Council of people's Representatives (CPR). The appropriated budget is broken
down by:
 Recurrent and capital expenditure for the federal government, and
 Subsidy for each regional government
The federal government's portion of the appropriated budget is assigned to projects and sub-
agencies within PBs and broken down by sources of funding (domestic, assistance and loan).
This is called the approved budget. The approved and appropriated budget is published in the
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Negarit Gazeta. A PB's entire approved budget is assigned to projects and sub-agencies under its
immediate administrative control. The budget of a PB is the total budget of its projects and sub-
agencies. A project or sub-agency may allocate any portion of its approved budget to sub-
projects or sub-sub-agencies. The budget of a sub-project or sub-sub-agency is called an
allocated budget. A sub-project or sub-sub-agency for which a budget is allocated is always at a
different location from the project or sub-agency. A notification of any allocation is sent to
MOFED. Projects, sub-agencies, sub-projects, and sub-sub-agencies are defined and coded in the
chart of accounts. Any entity that receives an approved or allocated budget from a PB's approved
budget is called a Budgetary Institution (BI). Generally:
 PBs are ministries, authorities, and commissions.
 BIs are projects, sub-agencies, sub-projects, and sub-sub-agencies.
 BIs are administered by PBs.
 The entire approved budget of a PB is assigned to BIs.
Accounting Unit For cash management, another entity is created: the Bank Account (BA). The BA is not
coded in the chart of accounts and does not receive a budget. However, it is important for cash
Management and control. The FGE accounting system includes the BA in the accounting system. A PB
may administer many BIs and many BAs, or a PB may have only one BI and one BA. Each BA:
 Is managed by an accountant.
 May:
 Have its own cashier,
 Share a cashier with other BAs, or
 Have no cashier associated with it (like foreign currency bank accounts)
 Handles cash flows:
 For one or more than one BI, and
 From one source of financing (domestic, assistance or loan).
 For more than one type of budget (capital/recurrent).
An accounting unit is the unit that initially captures and records transactions into the accounting
system. If a BA handles cash for only one BI(BI/BA), the accounting unit:
 Processes transactions for the BI/BA,
 Maintains registers for the BI/BA,
 Maintains a general ledger for the BI/BA.
 Maintains subsidiary ledgers for:
 Asset accounts.
 Liability accounts.
 Letters of credit.
 Prepares a monthly report for the BI/BA.
A complete set of accounts and general ledger is maintained for each BI by bank accounts,
because each source of funding is budgeted distinctly, and the cash from each source is
physically separated in distinct bank accounts. Each month, a monthly report is prepared from
the general ledger for the Bank Account (BA). Cash ledger cards in the general ledger control the
cash balances in the bank and in the safe. If more than one BI shares a single BA, the accounting
unit:
 Processes transactions for all BIs.
 Maintains a register for the BA.
 Maintains a general ledger for the BA.
 Maintains subsidiary ledgers for:
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 Items of expenditures by BI and by type of budget.
 Asset accounts.
 Liability accounts.
 Prepares a monthly expenditure report for each BI.
 Prepares a consolidated monthly Trial Balance for the BA.
One general ledger is maintained for the BA. The only records maintained for each BI are
accounts in subsidiary ledgers for items of expenditure. Monthly, the subsidiary ledger
information is used to prepare an expenditure report for each BI. These reports are consolidated
with information from the general ledger into a monthly report for the BA. The balances of cash
in safe and cash in bank are maintained in ledger cards of general ledger for the BA. Reporting
Entity A reporting entity is the entity that sends monthly reports to MOFED. Although the
accounting unit prepares monthly reports, every accounting unit may not send monthly reports
directly to MOFED. The reporting entity may be the accounting unit or a higher level of
authority (perhaps a PB). Each of the following may apply to a reporting entity:
 A reporting entity may be an accounting unit, and an accounting unit may consist of only one
BI. Therefore, a single BI may be a reporting entity.
 A reporting entity may be a PB that receives the monthly reports from several accounting
units.
Whoever sends the reports to MOFED is the reporting entity. Therefore, the reporting entity is
not, necessarily, an accounting unit. Public Bodies with Branch Bank Accounts Some PB s
establishes operations or branches in more than one location, and opens a bank account at each
branch. These branch bank accounts do not receive or send transfers directly to MOFED. The
public Body uses Branch bank accounts for operations within the Public Body. They are blocked
at the end of the year. Some public Bodies maintain other types of bank accounts for special
purposes, such as deposits. These are not blocked at the end of the year and are not considered
branch bank accounts. Depending on the capacity of the PB, accounting for the branch bank
account can be handled in one of the two ways:
 If there is sufficient capacity, each branch bank account can be treated as an accounting
unit.
 If there is no sufficient capacity, each branch bank account can be treated as a safe.
Branch Bank Account treated as Accounting Unit If the branch bank account is treated as an
accounting unit:
 A general ledger is established for the branch bank account
 Cash movements between the main bank account of the PB and the branch bank account are
recorded as transfers,
 Subsidiary ledgers are established fro each BI receiving funds from the branch bank account,
and
 A monthly report is prepared and sent to the accounting unit of the PB's main bank account
Accounting for Transactions This topic will try to explain issues related to authorization of
Transactions, capturing Transactions when they occur, and recording transaction in the
accounting system, summarizing transactions by accounts, and reporting to appropriate
authorities. Accounting for transactions means recognizing/recording daily economic activities.
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Transactions cause increases and decreases to revenue, receipts from external assistance, receipts
from external loans, expenditures, transfers, cash and cash equivalents, receivables, payables,
letters of credit. Most transactions involve only domestic currency, but a few transactions
involve foreign currency. No accounting unit handles both types of currencies; an accounting
unit's transactions are either all domestic currency or all foreign currency. The processes for
handling both types of currency are the same, but the forms used in the processes differ.
Although accounting for transactions provides a complete picture of the economic activity, the
picture of the economic resources owned and owed is incomplete. Other assets and liabilities that
result from transactions complete the picture. As indicated in MOFED and DSA Project manual,
January 2002,Manual 3 Volume assets, other liabilities and I include:
 Stocks
 Goods in transit
 Fixed assets
 Long-term loans
 Investments
 Long-term debt
Authorization of transactions
Authorization of transactions is not limited under the jurisdiction of the FGE accounting system.
Financial law, proclamations and directives determine who has authority and how to exercise
that authority. However, a basic tenet of the financial law is that expenditure is controlled by the
budget. The process that maintains budget control over expenditure is included in the description
of the accounting system (MOFED and DSA Project manual, January, 2002). Capturing
Transactions When They Occur Transactions are captured by the first document prepared by the
accounting unit when the transaction occurs. The source document varies depending on the
nature of transaction. Examples include:
 Receipt vouchers when cash is received,
 Payment vouchers when expenditures are made, and
 Journal vouchers when the transaction does not involve cash.
The accounting unit prepares the source document when the transaction occurs and may be
supported by another document received from an external party. For example, a bank statement
may show a charge that supports a payment voucher, or a tax bill may support a cash receipt. The
other document is a supporting document only; the accounting unit must prepare a source
document when the transaction occurs (MOFED&DSA Project, Manual 3 Volume I, January
2002). The source document contains the information necessary to record the transaction in the
accounting system. Generally, an accountant in the accounting unit prepares the source
document.
Recording Transactions in the Accounting System
The accountant in the accounting unit records information from the source document in a
transaction register. The transaction register is the book of original entry into the accounting
system. A transaction register is maintained for each accounting unit (BA). Transactions are
recorded in the transaction register from source documents as they occur. The transaction register
is designed to provide sufficient information to record the transaction in the general ledger.
Summarizing Transactions by Account
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Each transaction recorded in the transaction register affects the balance of two account
codes by the same amount, but one is a debit and the other is a credit. Each debit and
credit amount for each transaction must be recorded on a ledger card in the general
ledger. An accountant in the accounting unit performs this activity (MOFED and DSA
Project manual, January, 2002). In the general ledger of the accounting unit, the
accountant must record the amount of the transaction as a debit or as a credit,
depending on how the amount is recorded in the transaction register, on the
corresponding ledger cards for the two accounts involved in the transaction
(MOFED&DSA Project manual, January, 2002). Each ledger card contains the identity
of the BA, the account code, and the running total of debits and credits recorded on the
card. The balance in an account is the difference between the total debits and total
credits recorded on the ledger card (MOFED and DSA Project manual, January, 2002).
General and Subsidiary Ledgers: Description of Ledgers A ledger is the entire
group of accounts maintained by an accounting unit. The ledger summarizes
transactions by accounts. The ledgers summarize the transaction information from
registers in the form of accounts that facilitate reporting of financial results.
Transactions are recorded in the register, but reports are produced from the ledgers.
Two types of ledgers are maintained in the FGE accounting system: General Ledgers
and Subsidiary Ledger (MOFED and DSAS Project manual, December, 2002).
General Ledger A ledger card is maintained for every account code recorded in the
register. Every amount that is entered as either a debit or credit on the Register is also
entered to the corresponding debit or credit column of the appropriate ledger card. The
aggregate of all such ledger cards is the general ledger. The general ledger is a set of
self-balancing ledger cards because at all times the total debits and the total credits
recorded in the general edger are equal. The general ledger is maintained to classify
information reported in the Register by respective account codes. All transaction
amounts recorded in the Register are entered on ledger cards in the general ledger. The
balances for all individual accounts are maintained in the general ledger. Because the
general ledger serves as a basis to prove that the net cumulative debit and credit
balances of all accounts are equal, the general ledger simplifies and improves the report
generation process (MOFED and DSA Project manual, December, 2002). Subsidiary
Ledger The accountant maintains a general ledger for each register. Where more than
one BI shares the same bank account, the accounting unit maintains one Register and
one general ledger for the bank account. A system of control accounts in the general
ledger and supporting subsidiary ledgers is used to maintain sufficient account balance
detailed to facilitate management reporting requirements. A control account is an
account in the general ledger that maintains the total balance of all related accounts in a
subsidiary ledger. A subsidiary ledger is a ledger that is separate from the general
ledger and contains transaction details of each control account in the general ledger.
Any account in the general ledger that requires more detail than simply the total
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account balance becomes a control account with a Subsidiary Ledger (MOFED and
DSA Project manual, December, 2002). A ledger card is maintained for every control
account code recorded in the general ledger. Either every amount that is entered as a
debit or credit on a control account's ledger card in the general ledger is also entered to
the corresponding debit or, credit column in the subsidiary ledger card. The aggregate
of all subsidiary ledger cards for a single control account is the subsidiary ledger. For
example, expenditure account code 6111 salary expense has a ledger card in the general
ledger that contains all salary expenses recorded in the transaction register .A set of
subsidiary cards, one for each BI, also is maintained for expenditure account code
6111.At all times, the net cumulative balance of debits and credits recorded in the
subsidiary ledger is equal to the respective net cumulative balance of debits and credits
of the corresponding control account in the general ledger (MOFFED and DSA Project
manual, December,2002).
Analysis of Transactions Required for Monthly Reports Cash Transfers Cash
transfers are cash movements among government units. Cash transfers may be made in
the form of currency, checks or direct cash movement between bank accounts. Cash
transfers in the form of currency are described in section 12 of this unit. Other cash
transfers are described hereunder in the sub-topics such as: cash transfers between bank
accounts at public bodies and MOFED, cash transfers between bank accounts at public
bodies and MOFED, cash transfers between public bodies, cash transfers within a
public body,
Cash Transfers: Between Bank Accounts at Public Bodies and MOFED Cash is
transferred from MOFED bank accounts to bank accounts of public Bodies, and cash is
transferred from bank accounts of public Bodies to MOFED bank accounts. These
transfers are done in the form of: Checks, and Direct bank transfers evidenced by bank
advices. When cash is transferred from a public Body or from MOFED, a payment
voucher is prepared as the source document for entry in the transaction Register. When
Ge/Be/We 12/1 is received from MOFED, a Receipt Voucher is the source document.
The Receipt Voucher should be prepared when Ge/Be/We 12/1 is received; when the
bank advice is received, it should be attached with the Receipt Voucher and the
Ge/Be/We 12/1. Until the bank advice is received, this will be a reconciling item for the
bank reconciliation. Ge /Be/We 12/1 is a document used by MOFED to order banks.
Cash transfers between bank accounts at public Bodies and MOFED are reported
monthly, in the month they occurred on Me/He/ 24 part 1 and 2. MOFED maintains a
subsidiary ledger for each transfer account code. The subsidiary ledger accounts are
established for each public Body. Subsidiary ledgers aid consolidation in the general
ledger of MOFED and improve cash control (MOFED and DSA Project manual,
December, 2002).
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Monthly Reports : Revenue/Assistance/Loan Report: According to MOFED and
DSA Project manual, December 2002, the only monthly reports verified by Ministry of
Finance and Economic Development is the transfer report and the Trial Balance. The
transfer Report is verified by Ministry of Finance and Economic Development to
ensure that all disbursements to an accounting Unit by Ministry of Finance and
Economic Development and all disbursements from an Accounting Unit to Ministry of
Finance and Economic Development are accounted for within the accounting system to
enhance control over cash transfers. The Trial Balance is verified by Ministry of
Finance and Economic Development to ensure that the total debits and credits are equal
and that general Ledgers are balanced. Also, Ministry of Finance and Economic Development
verify the cash balance for the domestic source of finance from the trial Balance to enhance
cash management practices at federal level. All other monthly reports that are submitted to
Ministry of Finance and Economic Development serve as input documents to consolidate
reports and produce financial statements at the Federal Level. The Inspection Department and
the Office of The Auditor General verify these reports. All monthly reports are prepared in two
copies. The original copy is sent to Ministry of Finance and Economic Development and the
second copy is retained as a permanent record at the reporting entity. The
Revenue/Assistance/Loan Report provides information on the year-to-date revenues of an
accounting unit from each source of finance. The purpose of the revenue/Assistance/Loan
Report is to facilitate consolidation of the actual revenues, assistance and loan collected by the
FGE and Regional State to facilitate comparison of budgeted revenues to actual revenues by
account category (MOFED and DSA Project manual, January, 2002).
BIRANA COLLEGE
Department of Accounting &finance distance student’s individual assignment (50%)
For the course of Accounting for public sector and civil society (AcFn3071)
Part –I:-Say true if the statement is correct or say false if the statement is
incorrect (1%each)
1. A government is a body that has the power to make and the authority to enforce
rules and laws within a civil, corporate, religious, academic, or other organization or
group.
2. A government is an organized entity which, in addition to having governmental
character, has sufficient discretion in the management of its own affairs to
distinguish it as separate from the administrative structure of any other
governmental unit.
3. A loss in the future economic benefits or service potential of an asset, over and
above the systematic recognition of the loss of the asset’s future economic benefits
or service potential through depreciation.
4. Governmental accounting system must make it possible both.
63
5. NFP Entities are entities other than the government and that provides community
services either free from charge or with a “token” charge.
6. International Public Sector Accounting Standards (IPSAS) standard-setter =
International Public Sector Accounting Standards Board (IPSASB)
7. Governments often act in a fiduciary capacity, either as an agent or trustee, for parties
outside the government.
8. General purpose financial reporting includes not financial statements but also all
other means of communicating information that relate directly or indirectly to the
information provided by the accounting system.
9. IPSAS 24 requires a comparison of budget amounts and actual amounts arising

from execution of the budget to be included in the financial statements.
10. The construction segment constructs specialized machinery for use in agriculture sector.
Part- II: - choose the best answer from the given alternative (2%each)
11. NFP financial reporting should provide information useful in:
A. Making resource allocation decisions
B. Assessing services and ability to provide services
C. Assessing management stewardship and performance
D. Assessing economic resources, obligations, net resources, and changes in them
E. All of the above
12. Financial Reporting should assist users in evaluating the operating results of the
governmental entity for the year by:
A. Providing information about sources and uses of financial resources
B. Providing information about how it financed its activities and met its cash
requirements
C. Providing information necessary to determine whether its financial position
improved or deteriorated as a result of the year's operations
D. All of the above
13. Governmental Funds are classified into
A. General Fund,
B. Special revenue funds,
C. Capital projects funds,
D. All of the above
14. What are the Required Financial Statements:
A. A Statement of net assets
B. A Statement of revenues, expenses, and changes in net assets
64
C. A Statement of cash flows
D. All of the above
Part-III: - work out (5points each)
1. List and explain general Governmental Activities
2. List and explain the major fund types
3. List and explain Zero-Base-Budgeting (ZBB)
4. List and explain Goals achieved by FGE Accounting System
5. Budget year for FGE is from---------- to--------
6. According to MOFED and DSA Project manual, December 2002, the only
monthly reports verified by Ministry of Finance and Economic
Development is the ------------- report and the -----------
65

Accounting For Public Sector and Civic Society

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Accounting For Public Sector and Civic Society

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Accounting for Public sector and civil societ

Course Code AcFn3071

1. Overview of Financial Reporting for Governmental and NFP Entities

 Explain the different objectives, measurement focus, and basis of accounting of

 Control of the agency by a board composed wholly or mainly of parent

 Provision that agency properties and responsibilities revert to the creating

 Requirements for approval of agency plans by the creating government.

 Legislative or executive specification by the parent government as to the

 Dependence of an agency for all or a substantial part of its revenues on

 Use of fund accounting as a control device both classes of organization are

 Significant investment in non-revenue producing activities

 Government differs from NFP entities in the following manners:

 Public corporations and bodies which are politic

 People can vote and delegate that power to public officials

 Government is created by and accountable to a higher level government

 The budget is an expression of public policy and method of providing control.

 They may have monopoly power on some its services

 Criteria for Determining NFP Entity as Government

 An entity is said to be a government if one of the following conditions are met:

 Public corporations and bodies politic

 Popular election of officers, or appointment of a controlling majority of the

 Potential dissolution by a government with net assets reverting to a government

 Power to enact and enforce a tax levy

 They are accountable to the resource providers (donors)

 The budget is an expression of the interest of the benefactors.

 Both are integral part of an economic system

A. Financial Reporting should assist users is assessing accountability by:

 Governments often act in a fiduciary capacity, either as an agent or trustee, for

 A government may serve as agent for other governments in the administering

◦ for parks and other purposes,

◦ For assets being held for employee pension plans.

Principle Reporting No. 1: Accounting and Reporting Capabilities

Fund and fund accounting is useful to:

Principle No. 3: Types of Funds

ii. Proprietary Funds – account for a government’s ongoing organizations and

 Governmental units should establish and maintain those funds required by

 Capital assets should be reported at historical cost.

2. Proprietary fund statements of net assets and revenues, expenses, and

 A common terminology and classification should be used consistently, the

A. Transfers should be classified separately from revenues and expenditures

◦ Focus on fiscal accountability

◦ Budgetary accounts integrated in to the funds to achieve legal budgetary control

◦ A Reconciliation of total changes in fund balances of governmental funds to

◦ Focus on operational accountability

Capital budgets: deal with the acquisition of fixed assets.

Based on Legal Status;

Assess at each reporting date whether any indication of impairment exists.

Determination of the recoverable amount of an asset is different depending on

- A sensitivity analysis about the impairment calculation smade.

Application of IPSAS 22 is not mandatory.

QUESTION: Under IPSAS 22 „Disclosure of financial information about the general

WHAT ARE REVENUE AND EXPENSES? THE UNDERLYING CONCEPTS

The motor vehicle segment:

(i) retails new and second-hand vehicles;

DISTINGUISHING BETWEEN: IPSAS 23 REVENUE FROM NON-

DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGE

DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGE TRANSACTIONS

On 01/01/2017 Charity receives ETB2 million cash grant from a multi-lateral

DISTINGUISHING BETWEEN EXCHANGE AND NON-EXCHANGETRANSACTIONS

Recognize an asset arising from a non-exchange transaction (or in particular

When the asset is transferred subject to the transferee consuming it in providing

If the restriction is enforceable and would be enforced, recognize a liability

IPSAS 23 REVENUE FROM NON-EXCHANGE TRANSACTIONS TEST