Chapter1Financial Reporting for

Governmental and Not-for-Profit

Entities

Approximately: o 87,500 local governments exist in USo One million not-for-profit organizations

What types of Governmental and Not-For-Profit Organizations do you think of?

?

How do they get revenue?

?

What do they spend money on?

?

o Benefits are not proportional to resources provided

o Lack of a profit motiveo Absence of transferable ownership

rightso Services better society

How Do Governmental and Not-For-Profit Organizations Differ

From Business Organizations?

Power ultimately rests in the hands of the people People vote and delegate that power to public

officialsCreated by and accountable to a higher level

government (states, county, township, city)Power to tax citizens for revenueGoverned by budgets not markets

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

1) FASB Business organizations Nongovernmental not-for-profits

(YMCA) 2) GASB Governmental organizations Governmental not-for-profit

(U of MI) 3) FASAB Federal Government and its agencies

***Hospitals can fall into either group 1 of 2 above

Sources of GAAP andFinancial Reporting Standards

Governmental organizations typically have one or more of the following characteristics: Popular election of officers, or appointment of

a controlling majority of the governing body by officials of another government

Potential dissolution by a government with net assets reverting to a government

Power to enact and enforce a tax levy and impose charges

States can issue tax-exempt debt

Criteria for Determining Whether an NPO is Governmental

Budgets not annual reports are the most significant financial document

Budgets drive financial reporting Some can be legally binding Some must be balanced

Governments can seize assets of other governments within their jurisdiction!!!!!!

Additional Governmental Characteristics

Revenue does not indicate demand for services (Benton Harbor) No direct link between revenues and expenses

Many capital assets neither produce revenues or save costs (roads) so projects are evaluated differently

Some resources are restricted (land, cash, art)

Equity does not exist and ownership cannot be bought or sold

Additional Government Characteristics

“ACCOUNTABILITY is the cornerstone of all financial reporting in government “

REMEMBER ELECTED OFFICALS ARE OFTEN SHORT TERM FOCUSED !!!!!!!!!

“Interperiod Equity the concept that constituents pay for the services that they receive and do not shift the burden to their children “

Objectives of Financial Reporting

Q: What do we mean by accountability?

A: Accountability arises from the 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

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 (Doesn’t mean governments shouldn’t borrow) – For example – Interstate Highway System

Objectives of Financial Reporting

Users of Financial Reports

Governing BoardsInvestors & Creditors

Approx. $1.8 trillion bonds outstanding/bank loansCitizens/TaxpayersDonors/Grantors

United Way and Ford FoundationRegulatory and oversight agenciesEmployees

Financial reports are used primarily to: (CAFR’s) 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

Comprehensive Annual Financial Report (CAFR)

Introductory section

Financial section

Statistical section

Title page

Contents page

Letter of transmittal *

General information on organization structure

Other (as desired by management)

*From CEO or CFO about state of affairs

CAFR - Introductory Section

Auditor’s report

MD&A

Basic Financial Statements

Required Supplementary Information (RSI)

Combining and individual fund financial statements

and schedules (if required)

CAFR - Financial Section

Management’s Discussion and Analysis (MD&A)

Brief objective narrative providing management’s analysis of the government’s financial performance

Basic Financial Statements

Government-wide Financial Statements*

Statement of Net Assets (page 42)

Statement of Activities (page 43)

Fund Financial Statements (see next slide)

Notes to the Financial Statements

*Sometimes called Governmental Activities

Fund Financial Statements

Balance Sheet (Page 44) Statement of Revenues, Expenditures, and

Changes in Fund Balances - Governmental Funds with reconciliation (page 45-46)

Statement of Net Assets - Proprietary Funds (Page 51)

Statement of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Funds (Page 53)

Fund Financial Statements (Cont’d)

Statement of Cash Flows - Proprietary Funds Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net

Assets

Tables and charts showing multiple-year trends in financial and socioeconomic information

What information would be important?

CAFR - Statistical Section