The financial worries of New York City in the early 1970s began registering in the bond market in October 1974, when the city first encountered difficulty selling its securities. These problems reached a crisis stage in 1976, and it was not until then that the bond rating services reduced the city’s bond rating. In this and other cases, the bond rating did not anticipate the crisis but underwent adjustment only after the reality had become evident. Many accountants and observers of the municipal capital markets assert that the causes of such misapprehension of the true financial picture in a government or other nonprofit organization are the use of fund accounting and the lack of good internal control and reporting systems. In New York City’s case, the General Accounting Office found that the city had a poor fund control structure, illegally transferred money among funds, and operated an uncontrolled program budgeting system. Additional examples of private nonprofits in trouble include hospitals that defaulted on loans and the 39 four-year colleges, 32 two-year colleges, and 37 other educational institutions that closed during the 1970s. Indeed, some board members of nonprofit enterprises have been sued for malpractice and faulty investment management.1 At the same time, private nonprofits, increasingly dependent on the financial markets for capital funds, must obtain and maintain satisfactory credit and bond ratings in order to get these funds. But that is not easy; private hospitals, for example, are viewed by the capital markets as so risky that a tax-exempt hospital bond, rated by Moody’s or Standard & Poor’s as equal in risk to a tax-exempt municipal revenue bond, usually carries an added interest cost of 40 to 160 basis points. Clearly these nonprofit organizations—including hospitals, educational institutions, religious groups, arts groups, social agencies, and museums, as well as municipalities—are under pressure to make their financial status better understood. Their managers, their board members or trustees, and taxpayers need to understand and deal with the reports that present their financial condition. Thus armed, they can press for better management of these institutions. One response to the problems we have cited has been the recommendation that business accounting and financial statement reporting procedures be adopted to make statements of nonprofit organizations less complex, more understandable, and thus easier to analyze. We take the opposite position and maintain that: 1. Nonprofit enterprises have financial structures that are different from those of businesses. 2. Nonprofits’ objectives differ from those of for-profit organizations to such a degree that similar formats would be misleading and would misdirect those evaluating the financial management of nonprofits. 3. Weaknesses in accounting controls, rather than in nonprofit accounting principles, have contributed to the difficulties that have plagued these nonprofit institutions. 4. Those who manage and deal with nonprofit institutions should have greater familiarity with the unique requirements of nonprofit financial structures and accounting practices. They should not rely on familiarity with business financial accounting and administration. The recommendations for reforming nonprofit accounting are plentiful. Most of them agree that the accounting structure for nonprofit institutions is unnecessarily complex, that the complexity inhibits intelligent financial analysis and management, and that drastic simplification of the financial statements is needed. The recommendations zero in on two targets for simplification. First, all nonprofits present financial statements for each group of funds, which are independent and self-balancing accounting entities within the structure. Generally a nonprofit organization has four (or more) fund groups and presents 3 financial statements per group, or 12 in all. Supposedly this creates information overload, and therefore aggregation of the funds into a consolidated set of statements would solve the problem. Second, many nonprofit organizations, particularly those in government, combine their financial accounting with their budgetary systems. They report actual revenues and expenditures and compare them with those budgeted. Anticipated expenditures are based on purchase orders, whose total is recognized as an encumbrance or obligation against the budget. Some accountants claim that this encumbrance accounting confuses the reader of the statement. The AICPA audit guide on colleges and universities enjoins them from recognizing encumbrances,2 and this practice has been urged for government organizations as well. These recommendations have been voiced by diverse and respected segments of the accounting community, ranging from representatives of the “big eight” accounting firms to the accounting faculties of a number of universities.3 Professional groups, such as the American Accounting Association, have recommended inclusion of consolidated statements as supplemental information in municipal financial reports.4 The U.S. Treasury has been issuing a prototypic consolidated set of financial statements for the federal government as a whole.5 The Financial Accounting Standards Board (FASB), recognizing the importance of this matter, commissioned a research project by Robert N. Anthony of Harvard to delineate the relevant issues in accounting for nonprofit organizations.6 The only voice in defense of current practices has come from the nonprofits themselves.7 But their arguments have been unpersuasive and the tide seems to be going against them. In this article, we explain accounting for nonprofit enterprises, examine its relevance, and comment on the proposed changes. In our view, fund accounting and budgetary accounting should not be abandoned. Quite to the contrary, we find them to be such informative methods that we urge the adoption of some aspects of nonprofit accounting in businesses. Before we present these arguments, it is necessary to explain the nature of accounting in nonprofit organizations. What Is Fund Accounting?The funds of a nonprofit enterprise are like a collection of cookie jars in which resources for various purposes are stored. They consist of current funds, which account for resources to be expended for current operating purposes (similar to working capital); plant funds, which account for the fixed assets of the organization; endowment funds, which account for income-generating resources whose principal cannot be consumed but whose income can be used for various purposes; and special purpose funds, which account for resources used for specific objectives, such as a special assessment fund in a municipality, a fund for student loans in a college or university, and a debt fund to account for other long-term liabilities of the organization. The balance sheets for these funds account for the forms of investment of the capital, or the assets, of the funds. They also account for the sources of that capital. These sources are of two kinds: liabilities, owed to outsiders, and fund balances, representing capital generated internally. (The current fund balance is economically analogous to retained earnings in a business. Instead of being owned by the organization’s stockholders, however, the funds are held by the trustees.) Funds for current operations are usually subdivided into two groups: those, such as grant funds, that are limited by donors or grantors to certain uses and those that are unrestricted. Usually each fund statement indicates at the top which group its funds belong to. The remaining funds statements indicate the restrictions in more subtle ways. The endowment fund generally has a subdivision of its balance indicating how much of the endowment fund’s assets are “true” endowment, restricted by the donors, and how much are “quasi-endowment” or “funds functioning as endowment,” which the board has placed in the endowment fund. Being unrestricted, the quasi-endowment funds can be used in any manner and removed at the board’s discretion. Similarly, the fund balances of the plant fund indicate (1) how much of the plant fund’s assets are legally required to remain there by headings such as “funds for renewal and replacement” and “funds for retirement of indebtedness”; (2) how much of the assets are funds invested in existing plant; and (3) how much are unexpended resources placed there at the discretion of the board or received as gifts or grants for this purpose. So the fund accounting statements provide three essential pieces of information on resources: their purpose, the legal limits on their use attached by the donors, and the revocable decisions made by the board on their use. Although the format of the funds differs from one part of the nonprofit sector to another, this information is conveyed in the funds statements of all nonprofits. In hospitals, for example, funds are grouped first by their restricted or unrestricted nature and then by their purpose; but all three facts appear in the statements. Recognition of interfund transfers and loans calls for a set of accounts unique to nonprofit organizations. Such transfers and loans differ from expenses because they represent movements of capital, not consumption of capital. They may be legally necessary; for example, a bond indenture often requires the current fund to transfer cash to the debt or plant fund for debt service purposes. Discretionary transfers may also be made to carry out the board’s strategy. To finance renovation of a building, the directors may transfer a portion of the unrestricted fund balances and the equivalent amount of unrestricted liquid assets to the plant fund. Thus interfund transfers indicate either external demands on the disposition of capital (mandatory transfers) or the strategy of the board (non-mandatory transfers). The transfers are accounted for on the statement of changes in fund balances, a statement unique to nonprofit organizations. It records the revenues, expenses, and transfers that have caused the fund balance to change over the course of the reporting period. The direction of the transfers across the fund groupings is usually an excellent indicator of the long-term financial strategy of the organization. For example:
In addition, the statement of changes in fund balances documents the mix of funds received, a critical factor in the institution’s long-term financial mobility. If, for example, the institution attracts mostly restricted gifts, with few endowment or unrestricted gifts, its operating funds may eventually suffer. Similarly, if it receives few endowment gifts, its endowment principal may not grow sufficiently to generate the higher income needed in future years to keep pace with costs. Rationale for fund accountingFund accounting systems were devised to help trustees fulfill their legal obligation to use each of the institution’s various funds according to its guidelines. While businesses, of course, earn most of their operating revenues from the sale of their goods or services, nonprofits must rely on nonrevenue sources, such as gifts, endowment income, and donated services and goods. Moreover, as we indicated, revenue sources frequently have constraints placed on them. For example, a portion of a hospital’s revenues for services delivered often must be used to fund a plant replacement reserve. The trustees’ legal responsibility to secure the funds and keep them available for particular purposes does not always lapse once the money has been spent. If, for example, long ago they had received a gift for construction of a laboratory, the proceeds from the eventual sale of that structure may be unavailable for general purposes. A portion of the proceeds may have to be returned to the donor or reused for the original purpose in some manner. In business, capital expenditures are often funded solely by retained earnings or debt, but in the nonprofit sector they are also underwritten through appropriations or capital fund drives. The administrator of the organization manages the capital budget as a separate financial planning responsibility and maintains it as a special fund. If the institution decides to rely on operating funds and surplus (excess of revenues over operating expenditures) rather than on a loan, fund drive, or other external means to pay for or replace capital assets, it will transfer the amount available in the current operating fund balance to the plant fund. “Nonreciprocal” sources of revenue, such as gifts, could be accounted for with business accounting principles if they had no conditions placed on them. But each receipt or group of receipts calls for creation of a separately managed entity. For example, a gift of $10,000 raised by soliciting contributions from members of a college graduating class to establish a scholarship is reflected in a restricted fund balance sheet as follows: Cash: $10,000 Scholarship fund balance: $10,000. When a $3,000 scholarship is awarded to a student, the amount is included in tuition revenue and recorded as a transfer to an unrestricted current fund. The restricted fund balance sheet then appears as follows: Cash: $7,000 Scholarship fund balance: $7,000. The scholarship fund has effectively written a check for $3,000 to the student, who in turn has paid it to the college. The college would not generally have a cash account for each fund; it would keep all cash pooled in a limited number of bank accounts and all endowment fund investments pooled in a portfolio. The fund account provides control over the total amount available and the assets to be used for the particular purpose. Budgets & encumbrancesMany nonprofit organizations, particularly government ones, include their budgets in their financial statements. Their end-of-period reports compare budgeted events with actual events. Their interim balance sheets list an asset called “estimated revenues” that accounts for budgeted revenues and a liability called “appropriations” that accounts for anticipated expenditures. As revenues and expenses materialize, these accounts decline in magnitude to reflect the transfer from budgeted to actual transactions. They serve as a measure of progress in attaining the desired financial results. Government organizations incorporate budgets into their financial statements because their purpose is to execute the budget created by the legislative branch. Indeed, fund accounting originated in the thirteenth century as a result of the Magna Carta, which affirmed the rights of the English lords (or legislature) over the monarchy (or executive branch). The purpose of fund accounting and budgetary accounting—to help the legislature maintain control over the executive branch—has not changed in the intervening 700 years. By creating encumbrance or obligation accounts when a purchase order or similar kind of obligation is issued, many nonprofit institutions recognize commitments or obligations for future expenditures at a much earlier point than businesses do. The latter recognize such a future liability only when the goods or service is delivered and there is objective evidence of its value or when an outlay is fairly certain to be made, as in the case of contingencies. Encumbrance recognition measures future consumption of resources. The assumption of an obligation, noted during the fiscal period in which the encumbrance is acknowledged, is merely the first step in the process that, at some later point, will result in an actual expenditure. Nevertheless, the recognition of encumbrances provides very useful information about the resources available. When coupled with recognition of budgeted resource inflows, encumbrance accounting permits a continuous measure of the unencumbered resources that can be freely used to accomplish the fund’s objectives. Encumbrance recognition is particularly useful for government agencies because their primary mission is to control the flow of resources. (U.S. government officials are legally obliged to repay the money if they overcommit appropriated funds.) Encumbrance recognition is also used by organizations that have large long-term projects, such as defense contractors. Case of Pepys CollegeAs illustrated by a look at Pepys College, a conventional for-profit financial statement (Exhibit I) provides a simple but misleading picture of the college’s financial position. An analyst examining the corporate balance sheet might naively conclude that the fund balance presents a very strong financial picture, because on paper the net worth is $9,850,000, the current ratio is almost 3 to 1, and the small amount of debt could be retired easily by liquidating some marketable securities.  Exhibit I Balance Sheet of Pepys College on December 31, 1979, Private Sector Accounting (in $ Thousands) The fund accounting statement gives a much more accurate picture. An examination of the Pepys balance sheet (Exhibit II) suggests the following: Exhibit II Balance Sheet of Pepys College on December 31, 1979, Fund Statement (in $ Thousands)
These observations indicate that the institution is much less solvent than a corporate balance sheet shows. Under business accounting principles, the restrictions on assets and fund balances would no doubt be explained in elaborate footnotes, which usually are not read as carefully as the rest of the report. But fund accounting incorporates them into the body of the statement. To round out our review of fund accounting, let us take a brief look at the more complex statement of changes in fund balances (Exhibit III). This statement incorporates elements of a business income statement, the statement of changes in stockholders’ equity, and the statement of changes in financial position. It is not, however, strictly comparable to any of these because it reflects not only the movements of operating revenues and expenses but also the nonoperating sources and uses of capital; it traces these movements among funds; and it distinguishes between restricted and unrestricted resources. Exhibit III Pepys College—Statement of Changes in Fund Balance for the Year Ended December 31, 1979 (in $ Thousands) So for each group of funds of similar purpose and of material size, the statement reflects revenues flowing in, expenditures, and transfers of capital among funds. The statement enables management and the trustees to track resources. For each fund listed in Exhibit III, we shall examine the information that can be gleaned from the statement and suggest questions it should raise for any alert trustees reviewing it. Current funds, unrestrictedThese funds earned revenues of $560,000 from typical sources and had expenditures (excluding allowance for depreciation) of $220,000, thus producing a surplus of $340,000 before transfers. The transfers to endowment of $100,000 and to plant renewal of $40,000 reflect the trustees’ judgment about the need to build endowment and maintain the plant at a certain level. (The AICPA audit guide for colleges and universities leaves optional the recognition of depreciation in the plant fund. The audit guide permits no depreciation in the current fund for instructional and research activities.) Some would argue that the statement should report the net change in fund balance for current, unrestricted funds not as $200,000 but as $340,000 and should omit mention of subsequent transfers among funds. However, a detailed account of these transfers provides insight into the institution’s financing ability and the trustees’ interest in developing policies to maintain endowment and plant. Questions raised about the current unrestricted funds from reading this report may include:
Current funds, restrictedTheir only revenues were $40,000 of endowment income. Only $10,000 in scholarships was expended and $10,000 required to be reinvested in the endowment fund. The fact that the institution has received no additional restricted gifts and has used only a small portion of the fund’s balance raises questions about this fund:
Plant fundsThese funds are divided into two components: those expended and invested in fixed assets and those as yet unexpended. These funds increased by the $50,000 that is used and reported under expenditures for plant funds, unexpended. Two questions raised in reading the statement are (1) whether the $40,000 transferred from current unrestricted funds is an adequate addition to unexpended plant funds and (2) whether the unexpended total of $100,000 is enough for current requirements. These questions must be answered in light of what the trustees construe as the institution’s future ability to generate gifts for major additions. An important related issue is whether the prices charged for services rendered by the current fund cover wear and tear on plant assets. If the college cannot fund these replenishments through a capital fund campaign, the current fund transfer may be, in effect, a provision for depreciation or replacement of plant. Endowment fundsThese funds received gifts of $20,000, appreciated by $40,000, and received $100,000 transferred from the current fund account. Questions that might arise include:
Total, all fundsWhile this column reflects the total flow of funds and financial transactions, the net increase of $530,000 is not equivalent to the net increase in a corporation’s equity. Information about the sources of the funds is needed to evaluate Pepys’s financial management. Different types of nonprofits use additional or slightly modified statements. For instance, the balance sheet of a municipality differs from Exhibit II in the existence of the “reserve for encumbrances” account previously discussed. It is a direct reduction of the fund balance that limits the portion of the legislated monies available for future commitments. A municipality’s statement of revenues, expenditures, and encumbrances (Exhibit IV) reports operating encumbrances. It enables management to track resources, just as an internal project manager in a corporation tracks the budgeted costs of a program against actual costs. In Exhibit IV, funds are comparable to the individual projects in a project monitoring system. Exhibit IV A Municipality General Fund Statement of Revenues, Expenditures, and Encumbrances for the Year Ended December 31, 1979 (in $ Thousands) Answering the CriticsBecause of the complexity of the accounting statements, many accounting professionals have argued for aggregation of the several funds into two, restricted and unrestricted, and for cessation of budgetary and encumbrance accounting. Some critics of fund accounting would go even further and aggregate into one fund—were it not for legal requirements that justify differentiating between these two basic categories. (The law requires restricted funds to be separated from unrestricted funds in the books of account.) Whatever the merits of simplification, clearly it must be achieved at the cost of fuller information, By reducing the number of interfund transfers reported, aggregation would limit the disclosure of policies that reveal the financial management philosophy. Moreover, combining activities of the restricted current fund and the endowment fund would obscure the difference between operating capital and permanent capital. Another recommendation, already accepted for hospital fund accounting, calls for merger of the plant fund with the unrestricted funds, except for certain replacement reserves that are legally required by bond covenants. It is not clear, however, that plant funds are unrestricted. (Hospitals have adopted this reporting primarily because third-party insurance reimbursements are based on the operating costs of their unrestricted funds.) The arguments for aggregation rest on the notion that all the detail in financial statements confuses the users and aggregation would make the data more accessible to them.8 The obvious question is: Who are the users? One accountant has proposed the “grandmother test,” to see whether the financial statement of the particular nonprofit organization is understood by a grandmother of average intelligence.9 But none of the hundreds of researchers studying the problem has yet shown that a significant percentage of users are grandmothers or, for that matter, fit any other generalization. While many potential user groups can be listed, no one has documented the relative importance of each use to which they put financial statements.10 While one can applaud the sentiment that information should be accessible to all, proponents of the grandmother test or other fund-accounting-made-simple schemes fail to acknowledge that all communication is based on the assumption that the recipients understand the language. Philosophers assume that their readers follow logic. Accountants must assume that their readers can account—that is, they are educated in this discipline. That necessary condition is not fulfilled by many corporate executives, let alone by the grandmothers of the world.11 While that fact is regrettable, it will not be changed by oversimplification of accountants’ reports. Those arguing for aggregation also assume that users will find it easier to understand two funds than four funds; that is, the human mind can process the information in two columns of numbers but it will become short-circuited when confronted with four columns. A substantial body of literature, ranging from Alvin Toffler’s Future Shock to articles by accounting theorists, supports the argument that when ingestion of information reaches a certain point, an “overload” blocks further processing of data.12 No one, however, has conclusively located the point, and extensive research so far has turned up contradictory evidence.13 A test of the effect of aggregating municipal financial statements yielded inconclusive results.14 In fact, surveys of many users of the financial statements of nonprofits indicate that they want more information not less.15 While surveys are unreliable predictors of behavior in real situations, these results buttress the rationale for greater disaggregation rather than aggregation. In defense of budgetary accountingThe argument for the removal of budgetary accounting rests in part on a similar assumption—that the presentation of a budget and recognition of encumbrances and other future items are too complicated for the mythical user to decipher. But surveys of users of financial statements indicate that they want more information about budgeted events.16 Security analysts have been agitating for more forward-looking data in corporate annual reports, including data on capital expenditures, construction plans, and future financing. Nonprofit enterprises have a more basic need for this kind of budgetary information. Profit is an inappropriate measure for these organizations. Existing to benefit society as a whole or particular groups in it (students, the sick, the needy), they are by definition not for profit. The appropriate measure of their performance is the level of benefits achieved, not revenues. But the ability to measure that level is obviously quite limited. Although our society clearly profits from education of our children, it is impossible to put an objective value on that education. So such benefits are not included in the accounting statements of nonprofit organizations. The revenues and expenses spelled out in financial statements are incomplete measures of performance. For example, the large negative fund balance in the consolidated balance sheet of the U.S. government represents, in part, an investment in future social benefits. The investments made to achieve these benefits should be counted as assets and expensed as the benefits manifest themselves. But because of our inability to measure benefits, the government expenses the investments and puts no corresponding asset on the balance sheet. The resulting financial statements must be interpreted differently from corporate statements. A deficit in a nonprofit enterprise may mean that it has invested in activities benefiting future generations. The nonprofit organization tries to make a match; the generation that gets the benefits also pays for them through future tax payments. The deficit is not necessarily a signal of failure or a cause for concern, as it is in a business. For nonprofit organizations, therefore, traditional corporate reporting is almost meaningless. How, then, should their performance be measured? By comparing actual performance with that intended or budgeted. In the case of private nonprofits, the reporting format is structured to provide performance measurement information showing the extent to which management complied with the wishes of the board, in the case of government organizations, the format measures performance in executing the budgetary mandate of the appointed and elected officials who represent the public. The funds represent external restrictions on the use of resources, while the budget represents legislatively mandated restrictions on the distribution of monies. Expand to business accounting?There is good reason to believe that the reader of a corporate financial statement could benefit from having access to the same kind of information. Indeed, some aspects of fund accounting already appear in business accounting; FASB Statement 14, on reporting for segments of a business enterprise, is an example. Just as segments of restricted and unrestricted funds must be reported to permit evaluation of the management of these funds, the segments of a business need to be identified with respect to performance and assets. In addition, the distinction between current and fixed resources is already made on most balance sheets.17 But the distinctions are made on only one financial statement. If a full-scale adaptation of fund accounting were made, the line-of-business reporting would be used for all statements, not merely for the income statement and the assets on the balance sheet, and the distinction between current and fixed capital would be maintained on the statement of operation as well as on the balance sheet. Furthermore, information about interfund transfers and loans of capital would reveal much about management’s strategy, particularly in the case of capital-intensive companies with obsolete fixed assets where knowledge about capital replacement and financing plans is essential. Encumbrance accounting, in which all current commitments as well as liabilities are monitored regularly, could be a useful mode of reporting for businesses in difficult positions, such as in a bankruptcy reorganization. Encumbrance accounting shifts disclosure out of the footnotes and into the body of the statements. The greater exposure can result in pressure for more accurate reporting and better management of these commitments. In 1979, for example, Chrysler Corporation announced that it needed billions of dollars for plant expansion and replacement and claimed it could not finance the investments without government assistance. But Chrysler’s 1978 annual report gave no indication of commitments (encumbrances) for plant expansion, fixed asset additions budgeted to complete retooling, or the amount of internally generated funds that might be available to underwrite these additions. This information would have helped stockholders and analysts to grasp the magnitude of Chrysler’s need for external financing and to estimate the financial impact of its declining earnings on cash flow, dividends, and the cost and feasibility of borrowing funds. Budgetary accounting is potentially useful for any company because it provides a clear articulation of management’s plans as well as a report of its performance in executing the plans. The SEC’s recently adopted “safe harbor” rule, which encourages businesses to publish earnings forecasts, demonstrates acceptance of the value of such data. These forecasts could not be made without budgetary systems. Improvement of proceduresIn urging the universal adoption of certain nonprofit accounting practices, we do not mean to praise the state of the art as a whole; in both theory and practice it leaves much to be desired. Little theory lies behind accounting for nonprofits, particularly government organizations. The nomenclature is peculiar and inconsistent, and some fundamental issues, such as the recognition of depreciation, valuation of gifts in kind (like art and books), and the standardization of reporting by municipalities, remain to be resolved. The practice of accounting in nonbusiness enterprises is even less admirable. For example, a recent survey found that of a group of 100 cities studied, 70% had qualified opinions for at least some funds due to noncompliance with generally accepted accounting principles or inadequate disclosure, or both.18 These results are far better than those obtained in a 1975 survey; it found that 93.8% of the municipalities were not even audited.19 There is still considerable room for improvement. Many hospitals, voluntary organizations, and educational institutions need better information systems to generate accounting data in a form that allows them to improve control of receivables and program costs and to coordinate these data with nonaccounting data. Furthermore, their financial statements should be more accessible to users and potential users in order to promote the kind of accountability that corporations have to their shareholders. Because nonprofit organizations enjoy tax-exempt status, any taxpayer should have the right to examine their financial statements and compare their financial performance with their objectives and accomplishments. Purposeful ComplexityFund accounting was developed to present fairly the financial transactions unique to nonprofit organizations. The problem of the complexity of their accounting statements should be resolved not by simplification but by better education of users about the meaning and purpose of the components of a fund accounting statement and by greater accessibility to these statements. The weaknesses of nonprofit accounting would be more fruitfully addressed by resolving problems in nomenclature and quality of accounting information than by converting fund accounting to the simpler (but increasingly complex) for-profit standards. The decade ahead will see substantial improvement in governmental accounting and in non-profit accounting generally. As these sectors become increasingly important parts of our society, it is essential that we have some basis for establishing reasonable accountability and economic valuation of what they are doing. At the present time, historical financial reporting is, first, entirely custodial and, second, primarily cash-oriented. I don’t believe this approach can give either investors or citizens a reasonable picture of what is happening. There has got to be an accrual accounting approach that addresses problems of generational equity—i.e., whether or not the activities of a municipality at a particular point in time are drawing upon the past or upon the future or contributing to the past or to the future. Good accrual accounting will measure costs accurately and compare those costs with current levels of taxation; it will tell people whether or not they are borrowing from the future or operating on a currently sustainable basis… Now, I’m not arguing for imposing the commercial accounting model on government. There is a fundamental distinction between governmental and commercial accounting. In governmental accounting, benefits do not necessarily flow in as revenues, so there is no inherent connection between revenues and expenses as there is in the commercial model. At the same time, government needs good measures of cost, and needs to integrate those cost measures with levels of taxation so that it and its citizens understand what is really happening at any point in time. I hope cost-benefit analysis will develop to the point where a reader of government financial statements can get some information about the benefits of government services, but I don’t think we will ever have a one-figure net income for government that tells us how well government delivered services during the period… Ultimately, we need accountability. We need to understand what is happening and whether or not costs are being reasonably accumulated, reasonably incurred compared with other entities that are incurring costs. And, as noted, we need to examine whether or not the current tax base is paying for the past, paying for the future or contributing to the past or the future. Finally, nonprofit accounting offers numerous insights into financial management and planning that are not readily available in business accounting:
The need for this sort of information has been endlessly examined in business accounting. Fund accounting provides a good example of how this need can be met. References 1. See John C. Perham, “Nonprofit Boards under Fire,” Dun’s Review, October 1979, p. 108. 2. American Institute of Certified Public Accountants (AICPA), Committee on College and University Accounting and Auditing, Audits of Colleges and Universities (New York: AICPA, 1973), p. 7. Besides this audit guide, the AICPA has issued similar publications for other nonprofit enterprises. They are Accounting Principles and Reporting Practices for Other Nonprofit Organizations (published in 1978); AICPA Industry Audit Guide on Audits of State and Local Government Units (1975); Hospital Audit Guide (1972); and Audits of Voluntary Health and Welfare Organizations (1974). 3. See, for example, Sidney Davidson, David O. Green, Walter Hellerstein, Albert Mandansky, and Roman L. Weil, Financial Reporting by State and Local Government Units (Chicago: Center for Management of Public and Nonprofit Enterprises of the Graduate School of Business, University of Chicago, 1977), p. 2; Coopers & Lybrand and the University of Michigan, Financial Disclosure Practices of the American Cities (New York: Coopers & Lybrand, 1976); Price Waterhouse & Co., Position Paper on College and University Reporting (New York: Price Waterhouse & Co., 1975). 4. American Accounting Association, “Report of the 1966–70 AAA Committee on Not-for-Profit Organizations,” supplement to Accounting Review (1971), p. 81. 5. U.S. Treasury, Consolidated Financial Statements (Washington, D.C.: Government Printing Office, 1976, 1977). 6. Robert N. Anthony, Financial Accounting in Nonbusiness Organizations: An Exploratory Study of Conceptual Issues (Stamford, Conn.: Financial Accounting Standards Board, 1978). 7. See, for example, National Association for College and University Business Officers (NACUBO), Response to Price Waterhouse & Co. Position Paper on College and University Reporting (Washington, D.C.: NACUBO, Special Reports 76-1, March 1976). 8. See, for example, Price Waterhouse & Co.’s position paper, 1975. 9. Malvern J. Gross, “How to Make Your Financial Reports Easy to Understand,” Association Management, September 1973, p. 65. 10. See Arie Y. Lewin and James H. Scheiner, Requiring Municipal Performance Reporting: An Analysis Based upon Users’ Needs (Durham, N.C.: Graduate School of Business Administration, Duke University, May 1977); and K. Fred Skousen, Jay M. Smith, and Leon W. Woodfield, User Needs: An Empirical Study of College and University Financial Reporting (Washington, D.C.: NACUBO, 1975). 11. See Vincent C. Brenner, “Are Annual Reports Being Read?” National Public Accountant, November 1971, p. 16. 12. See, for instance, Lawrence Revsine, “Data Expansion and Conceptual Structure,” Accounting Review, October 1970, p. 704; and Henry Miller, “Environmental Complexity and Financial Reports,” Accounting Review, January 1972, p. 31. 13. See Harold M. Schroeder, Michael J. Driver, and Siegfried Streufert, Human Information Processes (New York: Holt, Rinehart & Winston, 1967). 14. James M. Patton, “An Experimental Investigation of Some Effects of Consolidating Municipal Financial Reports,” Accounting Review, April 1978, p. 402. 15. The Council of State Governments, “State and Local Government User Survey” (Lexington, Ky.: unpublished study, 1970); Touche Ross & Co. and the First National Bank of Boston, Urban Fiscal Stress: A Comparative Analysis of 66 U.S. Cities (New York: Touche Ross & Co., 1979). 16. John H. Engstrom, “User Views of Budget Information” (Athens, Ga.; University of Georgia School of Accounting, unpublished survey, 1977). 17. This point was also made by William J. Vatter, The Fund Theory of Accounting and Its Implications for Financial Reports (Chicago: University of Chicago Press, 1947), p. 60. 18. Ernst & Whinney, How Cities Can Improve Their Financial Reporting (Cleveland: Ernst & Whinney, 1979). 19. John E. Peterson, Robert W. Doty, Ronald W. Forbes, and Donald D. Bourque, “Searching for Standards: Disclosure in the Municipal Securities Market,” Duke Law Journal, vol. 6, 1976, p. 1188. A version of this article appeared in the July 1980 issue of Harvard Business Review. Is a segment of an organization where the manager controls revenues costs and investments?Answer: An investment centerA segment of an organization responsible for costs, revenues, and investments in assets. is an organizational segment that is responsible for costs, revenues, and investments in assets. Investment center managers have control over asset investment decisions.
What is segmented revenue?Segment revenue: revenue, including intersegment revenue, that is directly attributable or reasonably allocable to a segment. Includes interest and dividend income and related securities gains only if the segment is a financial segment (bank, insurance company, etc.). [
What are segments in financial statements?Segment reporting breaks down the operations of a company into manageable pieces, or segments. Public companies must then record detailed financial statements for each operating segment. The goal is to increase transparency for creditors and investors, especially regarding the company's most important operating units.
Has control over cost revenue and investment?A responsibility center is a business segment whose manager has control over costs, revenues, or investments in operating assets.
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