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JACQUELINE L. RECK

SUZANNE L. LOWENSOHN

EARL R. WILSON

Accounting for Governmental & Nonprofit Entities

16/e

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter

1

Introduction to Accounting and Financial Reporting for Governmental

and Not-for-Profit Entities

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Learning Objectives

After studying Chapter 1, you should be able to:

Identify and explain the characteristics that distinguish governmental and not-for-profit entities from for-profit entities

Identify the authoritative bodies responsible for setting GAAP and financial reporting standards for all governmental and not-for-profit organizations

Contrast and compare the objectives of financial reporting for state and local governments, the federal government, and not-for-profit organizations

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Learning Objectives (Cont’d)

Explain the minimum requirements for general purpose external financial reporting of state and local governments and how they relate to comprehensive annual financial reports

Explain and identify the required financial statements for state and local governments, the federal government, and not-for-profit organizations

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Welcome to Accounting for Governmental and Not-for-Profit Organizations

Welcome to the strange new world of accounting and financial reporting for governmental and not-for-profit (NFP) organizations

Why are accounting practices for these organizations very different from those of business organizations?Different purposes in societyFinanced by resource providers who do not expect

benefits proportional to the resources they provideManagement has a special duty to be accountable for

how resources are used in providing services

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What are Governmental Organizations?

General purpose governmentsProvide a broad array of servicesExamples: Federal government, state governments,

cities, towns, townships, villages, counties, boroughs, and parishes

Special purpose governmentsUsually provide only a single or just a few servicesExamples: Independent school systems, public colleges

and universities, public hospitals, fire protection districts, sewer districts, transportation authorities, and many others

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What are Not-for-Profit Organizations?

Legally separate organizationsUsually exempt from federal, state, and local taxationReligious, community service, private educational and

health care, museums, and fraternal and social organizations, among many other kinds of organizations

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Resource providers do not expect to receive proportional benefits

Lack of a profit motiveAbsence of transferable ownership rights

How Do Governmental and Not-For-Profit Organizations Differ from Business

Organizations?

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Power ultimately rests in the hands of the people People delegate power to public officials through the

election processEmpowered by and accountable to a higher level

governmentTaxation powers

How Do Governmental Entities Differ From Not-For-Profit Organizations?

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FASBBusiness organizations Nongovernmental not-for-profits GASBState and local governmental organizationsGovernmental not-for-profits FASABFederal government and its agencies and departments

Sources of GAAP andFinancial Reporting Standards

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Different financial report users with different needs

Governmental financial reporting focuses on stewardship and accountability for how public resources are raised and used to provide services

Why Governmental Financial Reporting Must Differ from Business Financial Reporting?

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Governmental financial reports are used 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

Objectives of Financial Reporting—State and Local Governments (SLG)

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“ACCOUNTABILITY is the cornerstone of all financial reporting in government “ (GASB Concepts Statement No. 1, par. 56)

Objectives of Financial Reporting—SLG (Cont’d)

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Q: What do we mean by accountability?

A: Accountability arises from 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

Objectives of Financial Reporting—SLG (Cont’d)

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Q: How does “interperiod equity” relate to accountability?

A: Interperiod equity is a government’s obligation to disclose whether current-year revenues were sufficient to pay for current-year benefits—or did current citizens defer payments to future taxpayers?

Objectives of Financial Reporting—SLG (Cont’d)

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Accountability is also the foundation of federal government financial reporting

Federal Accounting Standards Advisory Board (FASAB) standards are targeted at both internal users (management) and external users

Objectives of Financial Reporting—Federal Government

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Objectives of Financial Reporting—Federal Government (Cont’d)

Federal government financial reporting should assistreport users in evaluating: Budgetary integrity Operating performance Stewardship Adequacy of systems and controls

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Objectives of Financial Reporting—Not-for-Profit (NFP) Organizations

NFP financial reporting should provide informationuseful 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

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Minimum Requirement for General Purpose External Financial Reporting

Management’s discussion and analysis

Government-wide Fund financial financial statements statements

Notes to the financial statements

Required supplementary information (other than MD&A)

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Government-wide Financial Statements

Provide an aggregated overview of the

government’s net position and

change in net position, reported

for the government as a whole Assist in assessing operational accountability—

whether government has used its resources efficiently and effectively in meeting service objectives

Focused on flow of economic resources, recognized on the accrual basis—similar to business organizations

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For now you should view a fund as a separate set of accounts used to account for resources segregated for a particular purpose (see Chapter 2 for the formal definition of “fund”)

Funds that focus on the flow of current financial resources are called governmental funds

Fund Financial Statements

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Fund Financial Statements (Cont’d)

Governmental fund financial statements assist in assessing fiscal accountability—whether the government raised and spent financial resources in accordance with budgetary, legal, and regulatory constraints

Governmental fund revenues and expenditures are recognized on the modified accrual basis—revenues are recognized when measurable and available for spending; expenditures when an obligation is incurred that will be paid from currently available financial resources

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Other fund categories (see Chapter 2): Proprietary funds report on business-like activities

of the government Fiduciary funds report on fiduciary (trust and

agency) activities of the government Both categories follow accounting principles

similar to businesses

Fund Financial Statements (Cont’d)

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Comprehensive Annual Financial Report (CAFR)

Introductory section

Financial section

Statistical section

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Title page Contents page Letter of transmittal Other (as desired by management)

CAFR - Introductory Section

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Auditor’s report Management’s discussion and analysis (MD&A) Basic financial statements (and notes thereto) Required supplementary information (RSI)

(other than MD&A) Combining and individual fund statements and

schedules

CAFR - Financial Section

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Management’s Discussion and Analysis (MD&A)

providing management’s

analysis of the government’s

financial performance

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Basic Financial Statements

Government-wide financial statements

Fund financial statements

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Tables and charts showing multiple-year trends in financial and socio-economic information (discussed in detail in Chapter 9)

CAFR - Statistical Section

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Overview of Federal Government Financial Reporting

Federal financial reporting occurs at two levels:U.S. Government-wide

Prepared by U.S. TreasuryMajor agencies and departments

Prepared by each agency and department following requirements established in Office of Management and Budget (OMB) Circular A-136

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U.S. Government-wide Financial Reporting

Management and data deficiencies in some agencies and departments continue to preclude fully auditable government-wide financial statements

The consolidated report includes:A “plain language” Citizen’s GuideA Management’s Discussion and Analysis (MD&A)Several financial statements (See Chapter 17)Supplemental information reporting on both budgetary

and proprietary (operating) financial activities, as well as reconciliation of the two activities

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Federal Agency and Department Financial Reporting

Major federal agencies and departments must prepare a performance and accountability report (PAR)

The PAR should include four sections:A Management’s Discussion and Analysis (MD&A) (e.g.,

overview of PAR and agency’s mission)Performance section containing the annual performance

report (APR) (e.g., information about agency’s goals and performance)

Basic financial statements (see names in the chapter)Other accompanying information (e.g., information about

tax burden, tax gap, challenges facing management, and revenue forgone)

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Overview—Not-for-Profit (NFP) Organization Financial Reporting

Primary purpose of NFP financial statements is to provide decision-useful financial information to resource providers, such as donors, members, and creditors

Resource providers share the need for information to assess:Services provided by the NFP and the ability to continue

to provide those servicesManagement’s performance and stewardship of

resources

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Not-for-Profit (NFP) Organization Financial Reporting (Cont’d)

FASB standards require that NFPs provide the following financial statements (See Chapter 13):Statement of financial position (i.e., balance sheet)Statement of activities (i.e., income statement)Statement of cash flowsStatement of functional expenses (voluntary health and

welfare organizations only)

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Not-for-Profit (NFP) Organization Financial Reporting (Cont’d)

Reporting requirements unique to NFP organizationsDemonstrating accountability for donor-imposed

restrictions by reporting net assets and changes in net assets in the three categories of (1) permanently restricted, (2) temporarily restricted, and (3) unrestricted

Reporting program service expenses separately from supporting service expenses. The latter include overhead (such as, non-program management and general expenses) and fund-raising expenses

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Concluding Comments

In this course you will become familiar with current GASB, FASAB, and FASB standards relative to governmental and not-for-profit organizations

Accounting and reporting for governmental and not-for-profit entities differ from those of for-profit entities because each type of entity has different purposes and reporting objectives

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“...Even when developed to the ultimate stage of perfection, governmental accounting cannot become a guaranty of good government. At best, it can never be more than a valuable tool for promotion of sound financial management...”

Professor R. M. Mikesell, 1951

END

A Quote from the Original Author