1. Accounting for Governmental & Nonprofit Entities
JACQUELINE L. RECK
SUZANNE L. LOWENSOHN
EARL R. WILSON
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 1
Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities

3. 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 1

4. 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 2

5. 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 society
Financed by resource providers who do not expect benefits proportional to the resources they provide
Management has a special duty to be accountable for how resources are used in providing services

6. What are Governmental Organizations?
General purpose governments
Provide a broad array of services
Examples: Federal government, state governments, cities, towns, townships, villages, counties, boroughs, and parishes
Special purpose governments
Usually provide only a single or just a few services
Examples: Independent school systems, public colleges and universities, public hospitals, fire protection districts, sewer districts, transportation authorities, and many others

7. What are Not-for-Profit Organizations?
Legally separate organizations
Usually exempt from federal, state, and local taxation
Religious, community service, private educational and health care, museums, and fraternal
and social organizations,
among many other kinds of
organizations

8. How Do Governmental and Not-For-Profit Organizations Differ from Business Organizations?
Resource providers do not expect to receive proportional benefits
Lack of a profit motive
Absence of transferable
ownership rights

9. How Do Governmental Entities Differ From Not-For-Profit Organizations?
Power ultimately rests in the hands of the people
People delegate power to public officials through the election process
Empowered by and accountable to a higher level government
Taxation powers

10. Sources of GAAP and Financial Reporting Standards
FASB
Business organizations
Nongovernmental not-for-profits
GASB
State and local governmental organizations
Governmental not-for-profits
FASAB
Federal government and its agencies and
departments

11. Why Governmental Financial Reporting Must Differ from Business Financial Reporting?
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

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

13. Objectives of Financial Reporting—
SLG (Cont’d)
“ACCOUNTABILITY is the cornerstone of all financial reporting in government “ (GASB Concepts Statement No. 1, par. 56)

14. Objectives of Financial Reporting—
SLG (Cont’d)
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

15. Objectives of Financial Reporting—SLG (Cont’d)
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?

16. Objectives of Financial Reporting— Federal Government
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

17. Objectives of Financial Reporting— Federal Government (Cont’d)
Federal government financial reporting should assist
report users in evaluating:
Budgetary integrity
Operating performance
Stewardship
Adequacy of systems and controls

18. Objectives of Financial Reporting— Not-for-Profit (NFP) Organizations
NFP financial reporting should provide information
useful 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

19. 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)

20. 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

21. Fund Financial Statements
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

22. 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

23. Fund Financial Statements (Cont’d)
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

24. Comprehensive Annual Financial Report (CAFR)
Introductory section
Financial section
Statistical section

25. CAFR - Introductory Section
Title page
Contents page
Letter of transmittal
Other (as desired by
management)

26. CAFR - Financial Section
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

27. Management’s Discussion and Analysis (MD&A)
Brief objective narrative
providing management’s
analysis of the government’s
financial performance

28. Basic Financial Statements
Government-wide financial statements
Fund financial statements

29. CAFR - Statistical Section
Tables and charts showing multiple-year trends in financial and socio-economic information (discussed in detail in Chapter 9)

30. Overview of Federal Government Financial Reporting
Federal financial reporting occurs at two levels:
U.S. Government-wide
Prepared by U.S. Treasury
Major agencies and departments
Prepared by each agency and department following requirements established in Office of Management and Budget (OMB) Circular A-136

31. 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 Guide
A 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

32. 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)

33. 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 services
Management’s performance and stewardship of resources

34. 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 flows
Statement of functional expenses (voluntary health and welfare organizations only)

35. Not-for-Profit (NFP) Organization Financial Reporting (Cont’d)
Reporting requirements unique to NFP organizations
Demonstrating 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

36. 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

37. A Quote from the Original Author
“...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