Essentials of Accounting for Governmental and Not-for-Profit Organizations

Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations
1-1 Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Overview of Chapter 1
Why study GNP accounting Differences in the environment that cause GNP accounting to differ from business accounting GNP accounting standard setters Fund Types Overview of financial statements

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Why Study GNP Accounting?

Governments and NFP organizations hire accountants CPA firms and states engage accountants to perform their audits As citizens and donors we wish to better understand how taxes and charitable donations are used
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The truth is that all men having power ought to be mistrusted.

James Madison

www.Seethespending.org US Attorney, Southern District

Women embezzle more than men; Men falsify financial statements more than women

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Types of Organization page 2

Public owned or controlled by governments Private NOT owned or controlled by governments
Businesses owned by individuals and exist to generate a profit for those owners Not-for-Profit no owners and the organization s purpose is something other than to provide goods or services for a profit.
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What are Not-for-Profit Entities?

Entities which exist solely to provide programs and services that are of public benefit
Provide services that may not be provided by local, state or federal government Incorporated in the state in which they do business Do not distribute surplus funds to owners or shareholders Tax exempt
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What are Government Entities?

Public corporations an instrumentality of the state, founded and owned in the public interest, supported by public funds, and governed by those deriving their authority from the state Bodies corporate and politic state, county, city

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What are Governmental Entities? General Purpose:

continued

Provide a wide variety of services such as highways, police & fire protection, etc. Federal government, State, City, County, etc.

Special Purpose:
Provide a single or limited number of services Public colleges & universities, school systems, water & sewer, hospitals, etc.

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Differences in the GNP Environment

Organizational Purposes: Governments exist for the well being of citizens by providing public services, not for the purpose of generating returns to owners.
Effectiveness and Efficiency More detailed financial reporting

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Differences in the GNP Environment

Sources of Revenues: Governments derive many of their resources from taxes and other non-exchange transactions.
Involuntary contributions No expectation of proportional share of benefits Timing of revenue recognition may be a problem

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Differences in the GNP Environment

Potential for Longevity: Governments very rarely go out-of-business. Long term view of operations Sustainability of services and Ability to meet future demand.

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Differences in the GNP Environment

Relationship with Stakeholders:
Accountability for public funds Use of Fund accounting: A fund is a separate reporting entity within governmental accounting system used to demonstrate compliance with legal restrictions

Financial reporting, guided by a set of generally accepted standards, is an effective means to control the actions of those entrusted with public resources.
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Differences in the GNP Environment

An annual budget should be adopted by every governmental unit Role of the Budget: Government budgets often carry the authority of law, preventing public officials from spending outside their budgetary authority. Budgetary control is reflected in government financial reports through a required comparison of actual amounts with budgeted amounts.
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U.S. STANDARD SETTERS page 5

Federal level
 FASAB - Federal Accounting Standards Advisory Board
 GAO Governmental Accountability Office  U.S. Treasury Department  OMB - Office of Management and Budget

State and Local Government (SLG)

 GASB - Governmental Accounting Standards Board

 Private (non-governmental) Not-for-profits

 FASB - Financial Accounting Standards Board

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STANDARD SETTERS cont d

State and Local - GASB formed in 1984  Covers basic governments and entities owned or controlled by governments  Predecessor: NCGA - National Council on Governmental Accounting Not-for-profits - FASB formed in 1973  Covers not-for-profits not related to government entities private nonprofit hospitals, colleges, museums, etc.  Predecessors:  Accounting Principles Board (1959-1973) and Committee on Accounting Procedures (19391959)
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Authoritative Literature
Statements, Interpretations, and Technical Bulletins are primary literature that specifies GAAP (generally accepted accounting principles) However, in absence of adequate guidance, auditors may look at other documents GAAP hierarchy (Illustration 1-2) guides the auditor in the priority of importance for accounting guidance

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State and Local Government: GAAP hierarchy

Category y

GASB (STATEMENT 55) State and Local Governments

GASB Statements and Interpretations GASB Technical Bulletins and, if cleared by the GASB, AICPA Industry Audit and Accounting Guides and Statements of Position AICPA Practice Bulletins that have been cleared by the GASB Implementation guides (Q&As) published by the GASB staff, and practices that are widely recognized and prevalent in state and local governments.
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A.

B.

C.

D.

Concepts Statements
Concepts project began in the 1970s to guide the standard setters in establishing GAAP Concepts statements guide the development of new standards
These are not intended as authoritative GAAP, concepts statements but are used for guidance only if no other literature addresses an issue
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Concepts Statements
All three standard setting bodies have a series of Concepts Statements:
FASAB federal government FASB private entities GASB state and local governments

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FASAB Concepts:

Objectives for Federal Financial Reports

Budgetary Integrity demonstrate budget regulations were adhered to Operating performance help evaluate service, efforts, and accomplishments Stewardship show the impact on operations and investments Systems and controls they are adequate indicate whether

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FASB Concepts Statement No. 6: Objectives of NFP Financial reports Main Objective of NFP Financial Statements is
To provide information useful to present and potential resources providers and others in making decisions about allocating resources to the NFP organization

Which emphasizes that

Donors, government grantors and banks are primary users

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GASB Concepts Statements: Statement #1 Objectives

GASB #1 Objectives of Financial Statements:
o Allow comparison of actual with budgeted results o Help users assess financial condition and results of operations
o o Accountability: To justify the raising of public resources and the purposes for which they are used Users: o Citizens o Legislature and oversight officials o Investors o Creditors

o Show compliance with laws, rules and regulations o Assist in evaluating efficiency and effectiveness
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GASB Concepts Statements: Statement #2

Service Efforts and Accomplishments Reporting (covered in Chapter 13) and amended by Concepts Statement 5 Includes both Financial and Nonfinancial measures of performance
Nonfinancial performance measures: Economic Development Council # of business prospects interested in locating; # contracts made with firms interested in locating

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GASB Concepts Statements: Statement #3

Communication Methods in General Purpose Financial Reports that Contain Basic Financial Statements Established the framework for what information is presented in:
Basic Financial Statements Notes Required Supplementary Information Supplementary Information

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GASB Concepts Statements: Statement #3

Financial reports are much more inclusive than those prepared under FASB standards Comprehensive Annual Financial Report (CAFR)
Introductory section: title page, contents, letter of transmittal, description of government, etc. Financial section:
Auditors report, MD&A, Basic financial statements, Required supplementary information

Statistical section: demographic and economic data, financial trends, fiscal capacity, etc.
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Basic Financial Statements

Government-wide Statements
Statement of Net Assets
Similar to business balance sheet Similar to business income statement

Statement of Activities

Fund Financial Statements

Detailed reports of governmental, proprietary, and fiduciary activities Illustrated in Chapter 2

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Ill. 1-3
page 11

Fiduciary Funds are not included in governmentwide

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What is a fund - as the term is used for state and local government accounting?
Represents a part of the activities of some organization Is an accounting entity Self-balancing set of accounts, reflecting the assets, liabilities, net assets, and changes in those balances Segregates resources for specific activities In such a way as to ensure compliance with appropriate regulations or restrictions
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Types of FUNDS pages 14-16

Governmental: Used to account for provision of general citizen services Proprietary: Used to account for business-like activities of the governmental body. Fiduciary: Used to account for resources for which the government is acting as an agent or a trustee
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Governmental FUNDS page 14

General Fund: financial resources for basic government services every government body must have one general fund Capital Projects Funds: financial resources restricted for capital outlays: building projects, infrastructure improvement projects, etc. Debt Service Funds: financial resources restricted to expenditure for principal and interest on government debt issues Special Revenue Funds: proceeds of specific revenue sources that are restricted for a specified purpose Permanent Funds: Earnings on resources, but not principal, may be used for purposes that support government programs
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Proprietary FUNDS page 14

Enterprise Funds: Resources obtained primarily through the sale of goods and services to parties external to the government:
Airports; City Pool; Water department

Internal Service Funds: Services provided by one government department to another government department.
Motor pools; Print shops

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Fiduciary FUNDS page 15

Agency Funds: Government acts as a collecting/disbursing agent.
County taxes to be disbursed to cities within the county

Pension Funds: Pension and employee benefit funds Investment Trust Funds: External portion of investment pools Private-purpose Trust Funds: all other trust arrangements under which principal and income benefit individuals, private organizations or other governments
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How Many Funds Are Needed?

Must have one and only one General fund May not need one of every fund type
No outstanding long-term debt? Don t need a debt service fund.

More than one of some types of funds

Four building projects? A government might use four capital projects funds; or could possibly combine some.

Exact number depends on judgment.

Use the minimum number that will allow compliance with legal and other restrictions

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Overview of Fund Financial Statements

Governmental
Balance Sheet Statement of Revenues, Expenditures, and Changes in Fund Balance

Proprietary
Statement of Net Assets (Balance Sheet) Statement of Revenues, Expenses, and Changes in Fund Net Assets Statement of Cash Flows

Fiduciary
Statement of Fiduciary Net Assets (Balance Sheet) Statement of Changes in Fiduciary Net Assets
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Reporting Perspectives
Internal government accounting still tends to emphasize individual funds (pools of money) Government-wide reports are an attempt to aggregate data into a format more familiar to users business-type financial statements Different perspectives require different accounting bases and measurement foci:
Accounting basis defines when transactions and events are recognized in the financial statements Measurement focus defines what items are to be reported in the financial statements.
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Accounting Methods pages 12 and 13

Accrual Basis/Economic Resources Measurement Focus:
General business concepts of revenue and expense apply when recording exchange-like transactions Both current and long-term assets and liabilities are recognized in the financial statements

Modified Accrual Basis/Current Financial Resources Measurement Focus:

Revenues recognized when funds are measurable and available for expenditures of the current period; Expenditures are recognized when a liability is incurred Does not report long-term assets
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Expenses vs Expenditures
Under accrual accounting, expenses are recognized when the related resource or service is used
Purchase of Building is recorded as an asset Depreciation expense on fixed assets is recognized over the service life of the asset

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Expenses vs Expenditures
Expenditures under modified accrual are recorded when the liability is incurred
Equipment purchases are treated as expenditures as soon as you are obligated to pay when the goods arrive Long-term assets, such as equipment, are not listed on the fund balance sheet

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More Implications of Modified Accrual

Issuance of bonds is treated as a Financing Source, inflow on activity statement
Long term debt is not listed on the fund Balance Sheet Payments of principal on long-term debt are treated as an expenditure

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Long-Term Assets and Debt in Government-Wide vs. Fund Statements

Governmental fund balance sheets generally show only short-term assets and liabilities Proprietary fund balance sheets show both short-term and long-term assets and liabilities Government-wide statements must report short-term and long-term assets and liabilities in the Statement of Net Assets
Therefore, total assets and liabilities will differ

between the two types of statements Statements will include a reconciliation schedule
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Summary of Accounting by State and Local Governments

Fund
Governmental and Business-Type General Special Revenue Capital Project Debt Service Permanent Enterprise Internal Service

Basis of Accounting / Measurement Focus Accrual/ Economic Resources Modified Accrual / Current Resources

Financial Statements

Government-Wide Governmental Funds

Statement of Net Assets Statement of Activities Balance Sheet Statement of Revenues, Expenditures, and Changes in Fund Balance Statement of Net Assets Statement of Revenues, Expenses and Changes in Net Assets Statement of Cash Flows Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net Assets

Proprietary Funds

Accrual / Economic Resources

Fiduciary

Agency Pension Trust Investment Trust Private Purpose Trust

Accrual / Economic Resources

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Chapter 1: Introduction to Accounting and Financial Reporting

The End

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