Question

Suppose that the university elected to report as a special-purpose government engaged in governmental and business-type activities. How would the financial statements differ from those presented? What are the pros and cons associated with reporting under each approach? Explain.

Answer 1

This examines how to recognize the reporting requirements for special‐purpose governments engaged in governmental, business‐type, and fiduciary activities, identify the special purpose frameworks applicable to state and local governments, and identify the required disclosures for special‐purpose financial statements. Special‐purpose governments that are engaged in more than one program or that have both governmental, and business‐type activities should produce both fund financial statements and government‐wide financial statements. The alternative format can present the statement in a single column by first reporting expenses, followed by program revenues, and then general revenues. Other items like special and extraordinary items, and transfers would then be reported. Special‐purpose governments are separate legal entities that do not meet the definition of a general‐purpose government. Special‐purpose governments that are engaged in more than one program or that have both governmental and business‐type activities are required to produce both types of statements. Special‐purpose governments engaged only in a single governmental program can combine the fund financial statements and government‐wide statements using a columnar format.Special-purpose governments that are engaged in only business-type activities or fiduciary activities are not required to prepare the government-wide statements but need to prepare the proprietary or fiduciary fund statements. All governments must include MD&A, Notes and Required Supplementary Information.Public colleges and universities and other governmental not-for-profit organizations may choose to report as special-purpose governments engaged in only business-type activities, engaged in only governmental activities, or engaged in both governmental andbusiness-type activities.

A key objective of financial reporting is to provide information about an entity’s financial performance during a period of time. The financial reports of governments can provide information about an organization’s inflows (revenues) and outflows (expenditures or expenses) of cash and other resources. However, including only dollars and cents in a government’s financial statements does not provide the information necessary to assess theorganization’s performance. To report on its accomplishments, a government organization must also include nonfinancial data that relate to its objectives. The objectives will depend on the organization – examples would be a state or city, school, hospital, etc. Each type of organization has different objectives.

For governments, the budget is an important document. The budget is the result of the political process that includes almost all of the decisions made by the organization. Managers rely on an accounting system that provides them with ongoing data about whether they are on target to meet budget projections. The budget is a control device that helps prevent managers from overspending. Most governments are required by law to balance their operating budgets. If organizations fail to balance their budgets and borrow to cover operating deficits, then the cost of benefits enjoyed by their citizens today will be paid for by citizens tomorrow. Interperiod equity is a term that emphasizes that entities should not transfer the cost to future years. To maintain interperiod equity, the accounting systems of governments provide information about whether this objective (interperiod equity) is attained.

Small businesses often find themselves preparing business reports in the process of evaluating and planning for their long-term performance. It's usually a good idea for those preparing a financial report to understand some of the objectives of doing so and the potential limitations that might arise. Business reports are a powerful tool if used correctly, but only if those using reports are aware of their disadvantages.

Advantage: Performance Assessment and Comparison

Perhaps the most significant advantage of business reports is that they provide information to management and investors that is critical to decision-making. Business reports usually identify key areas of strength and weakness in the company's management, a running record of the business's performance and guidance for the company's strategic priorities. Financial statements give the company the ability to compare their performance with competitors or with previous time periods, both of which are critical for securing and maintaining growth.

Advantage: Regulatory and Creditor Compliance

Business reports are often required by government regulators and lending agencies. This is especially true for businesses that are publicly traded, which must regularly disclose their financial statements and other guidance that can be used by investors to evaluate the company's risk. In addition, both lenders and private investors usually want to review the company's reports to better understand how their money will benefit the company and assess their likelihood of earning a return.

Disadvantage: Cost of Time

While business reports are incredibly useful for management, they also have their limitations. There is often considerable cost of time and money in preparing reports, which has the potential to limit a business's financial and logistic ability to invest in operations or expansion.

Disadvantage: Not Always Accurate

Some reports are inadequate to get an accurate picture of the entire business, or of the financial conditions in which they operate. Reports may not always be as comparable as they appear – differences in accounting methods can create difficulty. Similarly, reports are also limited by the quality of the information that is available and the competence of those preparing them, so it's helpful to keep in mind any potential limitations in collecting meaningful data.

Disadvantage : Potential to Neglect Qualitative Information

Financial statements in particular are often limited to those aspects of the business that can be quantitatively reported, even though the business might enjoy significant assets along more qualitative measures. For example, a business that has hired well-qualified and motivated people will not account for doing so on a financial statement, even though this asset may outweigh a business's temporary financial shortcomings.