 Hello and welcome to this session in which we will discuss the objective of financial reporting for governmental entities and I emphasize governmental entities because also you need to know the objective of... Hello and welcome to the session in which we will discuss the objective of financial reporting for governmental entities. Now as an accounting student you should have also learned the objective of financial reporting for business entities. So let's discuss the financial reporting objective for governmental entities and that is to provide relevant reliable and timely information. So the information that that provides is relevant to the decision makers, it helps them make a better decision. Reliable means the information is truthful, the information is reliable, the information is subjective and we want to provide this information on a timely basis as much as possible. To various stockholders, we're going to provide this information to users who are the users of the financial reporting for governmental entities. Usually the main target are the citizens or the voters of that government. So we have voters for the government, we could have legislative bodies, oversight bodies as well, and other interested parties, usually creditors. So we are giving information to these group of people for what purpose? Why are we giving this information to this group of people? We want them to make an informed decision assessing accountability. For governmental purposes, the cornerstone of governmental accounting is accountability, the right to know, the right to know by whom, usually by the voters. Now in contrast, if we want to compare and contrast this to something else, if we are dealing with business entities, in business entities, we are providing information to shareholders and creditors, people that give money to the company. This is who are, this is our main concern. For the government reporting, we are still giving relevant, reliable, timely information, but for voters, why give them the right to know what's going on? Why would they need this information to evaluate the efficiency and effectiveness of the government operation? Why is that important? Because when they want to vote, they want to see how did the current government conduct their business. So the primary objective can be summarized as follow. We're going to look at them as specific objective, accountability and transparency, and under accountability and transparency, I'm going to discuss planning and budgeting, compliance with business law and regulation. Those, they could also stand alone as a standalone reasons, but I like to have them under accountability and transparency, decision making, as well as financial performance evaluation. Now we are going to look at each financial objective separately. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Starting with accountability and transparency, what does that mean? It means we use financial reporting to demonstrate to show the responsible use of public funding. We have the money. We want to show through financial reporting that that money is being used responsibly by showing how resources are allocated, how are we using our assets to run the county, to run the city, to run the village, so on and so forth, usually by using a budget. And when we show this, this is going to promote transparency because that's also another important aspect of governmental reporting, is to show how the money is being used in a transparent manner, for what purpose to enable stakeholders, again usually the citizens, to hold the government accountable of its financial decisions and performance. What could be a good example of this when the city publishes their comprehensive annual financial report, which is CAFR, which we'll talk about later. We're going to have, we'll go over this report separately. Actually, I do, we went over it already, online allowing citizen to access and review how the city manage its finances during the fiscal year. So the CAFR would include financial statements and budget. Remember, the budget is a cornerstone because when you have a budget, you tell the citizens, this is what I plan to do and eventually you're going to compare to what you want to do. Okay. So by providing detailed information on revenues, expenses, fund balances, the city demonstrate accountability and transparency in its use of public resources. And why is that important? We have to be familiar with something called inter-period equity, which relate to the concept of accountability. And what is this inter-period equity you might see in your governmental accounting course or your CPA review course, inter-period equity? Simply put, we want to see if the current year revenue, whatever the, whatever the government entity is generating is sufficient to pay the current year, basically benefit or expenditure. Simply put, what we want to do in a particular period, let's assume year 20X5, whatever revenue we generate in 20X5, it covers the expenses for 20X5. We don't want to shift any expenditure from year 5 to year 6. So we don't want to kind of have expenditure here and don't pay for it. If we don't pay for it, what's going to happen? It's going to be an expenditure for year 6. What we do under those circumstances, we shifted the burden of current period to future taxpayer. We don't want to do this because inter-period equity is important. So it refer to the fair and balanced distribution of financial resources and obligation across different generation, different periods. Simply put, it's the principle that the current generation for that particular year should not unduly burden future generation with excessive debt or the third cost, nor should they deplete the resources or neglect their infrastructure maintenance, leading to future financial strength. Simply put, the people who are living in the city for this year, they should incur expenditure and revenues that relate to that specific year. We should not shift expenses to future use. If we overspend now, what's going to happen? Let's assume you live in that city. That city overspend. You leave the city. You move to another city. Then guess what? The future generation, it's going to pay for the expenditure that you enjoyed. So the key is to have this inter-period equity. That's part of the goal of financial reporting. Also planning and budgeting serve as a basis for planning, budgeting, and forecasting future financial needs. Again, budgeting is extremely important, especially you're going to notice when we go into the actual accounting. This will help you identify trends, potential issues, opportunity for improvements, which will enable the government make strategic decision and allocate resources efficiently, because you want the plan. You want to have the numbers. Financial reporting would allow you to do that. For example, a transportation agency uses its financial report to evaluate the conditions of its infrastructure and plan for a future capital project. And based on their financial position, available funding, anticipated expenses, that's all showing through the financial report, the agency developed a long-term capital improvement plan, prioritizing project to improve public transportation and maintain infrastructure effectively. We can do all of this if we have proper financial reporting. And that's the objective of it, is to help us plan and budget. Obviously compliance with laws and regulation, while financial report will make sure that government is in compliance with laws, regulation, accounting, standard, and this contribute to maintaining public trust in the government operations. If the government is complying with what they promise, that's really good. And usually what they promise is the big thing is the budget that they set up. They say, this is how much we're going to spend. This is how much revenue we are going to generate. This is how much expenses, taxes we are going to impose, and they're going to stick with it. For example, if the state grant was received for computerized classroom, were this fund used for computerized classroom? Are we complying with standards? Are we complying with regulations? This is what financial reporting will show you. Also financial reporting would always help in decision-making, provide essential information to stakeholders for evaluating government programs, services, and overall financial health. This helps them make more informed decision about how to allocate the resources, policy formulation, and overall physical policy, and at the end, who to vote for next, because that's what matters. For example, state legislature reviewed their financial statement of its public university system and assessed the additional funding needs. So financial reporting will help them make the decision, and this is why it's important. After evaluating the university's financial position and the effectiveness of their program, they might decide to allocate more funds to support higher education initiative. So obviously, the reason why you have financial reporting, even for private businesses, is decision-making. It will help you improve that decision-making. And also, you want to evaluate the performance, the financial performance of the entity, of the government. So financial reporting enabled the stakeholders. Now the stakeholders, again, could be the voters, could be the creditors to assess the government financial performance and its ability to meet its short-term and long-term obligation. For example, it could help in determining the government credit worthiness and its physical sustainability, because the government, and at some point, they need to borrow money. Well, if they need to borrow money, they need to prepare their financial statements. Their financial statements will help creditors assess, determine their credit worthiness. Well, whether we're going to lend the money or not, if we're going to lend the money, how much interest rate are we going to charge? So we evaluate their financial performance through financial reporting, and financial reporting should help us to do so. For example, a credit agency reviewed the accountee's financial statement to determine its credit worthiness. After analyzing factors such as the liquidity, debt level, revenue stability, agency assigns a credit rating, whether it's AAA, AA, AAA, BB, BB, so on and so forth, which influence the county's borrowing cost and ability to finance its project. So notice the objective of financial reporting is important, is important, because it helps users, voters, citizens hold the government accountable, have a transparency. Also, it helps the government do what? Raise money, like through looking at financial performance, help not the company, help the government make a better decision in decision making. What should you do now? Go to Farhat Lectures, look at additional MCQs, through false questions that's going to help you, whether you are studying for governmental accounting course, CPA exam, or some other professional certification. Good luck, study hard, and of course, stay safe.