1. 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
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 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
Overview of financial statements
Fund Types

3. 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

4. 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.
Sources of Revenues: Governments derive many of their resources from taxes and other non-exchange transactions.

5. Differences in the GNP Environment
Potential for Longevity: Governments very rarely go out-of-business. This long term view of operations changes the focus of accounting to a longer-term focus on the sustainability of services and the ability to meet future demand.
Relationship with Stakeholders: Governments have an obligation to demonstrate accountability for public funds.
Role of the Budget: Government budgets often carry the authority of law, preventing public officials from spending outside their budgetary authority.

6. How Accounting Must Adapt to GNP Environmental Differences
Traditional view of the equity accounts must be modified
Budget compliance may be more important than income measurement
When do we recognize revenue for non-exchange transactions?
Reports must reflect the existence of restrictions on the use of certain resources
Non-financial performance measures are relatively more important

7. U.S. STANDARD SETTERS Federal level State and Local Government (SLG)
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

8. 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 ( ) and Committee on Accounting Procedures ( )
Note: Private and state colleges under different std.

9. 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

10. State and Local Government: GAAP hierarchy
Category
GASB (Statement 55)
State and Local Governments A.
GASB Statements and Interpretations B.
GASB Technical Bulletins and,
if cleared by the GASB, AICPA Industry Audit and Accounting Guides and Statements of Position C.
AICPA Practice Bulletins that have been cleared by the GASB D.
Implementation guides (Q&As) published by the GASB staff, and
practices that are widely recognized and prevalent in state and local governments.

11. 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

12. Concepts Statements
All three standard setting bodies have a series of Concepts Statements:
FASAB – federal government
FASB – private entities
GASB – state and local governments

13. 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 — indicate whether they are adequate

14. 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

15. GASB Concepts Statements: Statement #1 – Objectives
Citizens have a right to know why resources are being raised and how they will be used
GASB #1 Objectives of Financial Statements:
Allow comparison of actual with budgeted results
Help users assess financial condition and results of operations
Show compliance with laws, rules and regulations
Assist in evaluating efficiency and effectiveness

16. Concept 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

17. Concept 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

18. How Do GASB’s Objectives Differ from Business Objectives?
There is more emphasis on
The budget
Legal compliance
Efficiency and effectiveness measures other than net income
GASB Concepts Statement No. 2 explains that nonfinancial measures (i.e. measures other than dollars) are required to assess effectiveness

19. Codifications
The GASB, FASB and FASAB publish codifications (organized versions) of accounting standards. As you would expect, the GASB Codification includes statements, interpretations and technical bulletins issued by the GASB. However the Codification also includes level-B standards issued through AICPA Audit and Accounting Guides and Statements of Position.

20. Using the GASB codification
Codification references are presented in two parts: the first (section) identifies a topic and the second identifies a paragraph within the codification.

21. Format of Codification References
Section #s
Topics
General Principles
Broad Financial Reporting Requirements
Letters (A – Z)
Specific Balance Sheet or Operating Accounts
Double letters
Specialized Industries or Reporting Units
Paragraph #s
Level of Authority
GASB Standards (Level A GAAP)
Definitions
GASB Technical Bulletins and AICPA Audit and Accounting Guides and Statements of Position (Level B GAAP)
AICPA Practice Bulletins (Level C GAAP)
Non-authoritative discussions

22. Required Content of Governmental Financial Reports

23. Overview of Basic Financial Statements
Government-wide Statements
Statement of Net Assets (Statement of Net Position after 2013)
Similar to business balance sheet
Statement of Activities
Similar to business income statement
Fund Financial Statements
Detailed reports of governmental, proprietary, and fiduciary activities
Illustrated in Chapter 2

24. Overview of Fund Financial Statements
Governmental — general citizen services
Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund Balance
Proprietary — business-like activities such as water utility
Statement of Net Assets (Statement of Net Position after 2013) Statement of Revenues, Expenses, and Changes in Fund Net Assets/Position
Statement of Cash Flows
Fiduciary — holding money in trust for others
Statement of Fiduciary Net Assets (or Net Position)
Statement of Changes in Fiduciary Net Assets (or Net Position)

25. Reporting Perspectives
Internal 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

26. Accrual and Modified Accrual Basis
Accrual Basis/Economic Resources Measurement Focus:
General business concepts of revenue and “expense” apply when recording exchange-like transactions
Modified Accrual Basis/Current Financial Resources Measurement Focus:
Applies to funds financed by taxes and other involuntary contributions

27. Modified Accrual Basis
Revenues are recorded when “measurable and available”
For example, property taxes revenues are recorded as revenues if levied this year and collected this year, or soon enough after the year end to still pay current year bills
Outflows are called “expenditures”
Expenditures are recorded in the fund when a liability is incurred

28. Implications for Revenues Under Modified Accrual Basis
In the absence of an earning process, when should revenue be recognized?
GASB (and FASB) Statements specifically address recognition of non-exchange and contribution revenues

29. Expenses vs Expenditures
Under accrual accounting, expenses are recognized when the related resource or service is used
Depreciation expense on fixed assets is recognized over the service life of the asset

30. 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

31. 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

32. Fund vs. Government-Wide Statements
Government-wide statements use the accrual basis and report long-term assets and liabilities for both governmental and business activities
Fund perspective statements use the modified accrual basis for governmental type funds which do not recognize long-term assets and long-term liabilities on government fund balance sheet

33. Fund and Government-Wide Reporting
Two perspectives allow users to see
Long run — accrual basis effects
Short run — budget oriented “current spending” effects

34. Long-Term Assets and Debt in Government-Wide vs. Fund Statements
Governmental-type balance sheets generally show only short-term assets and liabilities
Proprietary-type 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/Position
Therefore, total assets and liabilities will differ between the two types of statements
Statements will include a reconciliation schedule

35. 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

36. State and Local Government Fund Types
Governmental type
Used for activities that are largely unique to the government environment
Proprietary type
Business-type activities
Fiduciary type
Acting as an agent or trustee of moneys that generally belong to other parties

37. Five Governmental-Type Funds
PERMANENT FUNDS - account for and report resources that are restricted to the extent that only earning, and not principal, may be used for purposes that support the reporting government’s programs
CAPITAL PROJECTS FUNDS - account for and report financial resources that are restricted, committed or assigned to expenditure for capital outlays. As such, it accounts for the purchase or construction of major capital improvements, except those purchased or constructed by a proprietary (and less commonly, fiduciary) fund

38. Five Governmental-Type Funds
DEBT SERVICE FUNDS - account for and report financial resources that are restricted, committed or assigned to expenditure for principal and interest, other than interest or principal on proprietary or fiduciary activities.

39. Five Governmental-Type Funds, con’t
SPECIAL REVENUE FUNDS - account for and report the proceeds of specific revenue sources that are restricted or committed (not merely assigned) to expenditure for specified purpose other than debt service or capital projects. These include activities funded by federal or state grants or by taxes specifically restricted to certain activities.
GENERAL FUND ‑ accounts for most of the basic services provided by the government. Technically, it accounts for and reports all financial resources not accounted for and reported in another fund.

40. Two Proprietary Funds Types
ENTERPRISE FUND - An enterprise fund is a fund established for the purpose of measuring net income for a governmental department providing goods or services primarily to outside consumers, in which it is the intent of the government that the department operate on a cost-recovery or profitable basis.
INTERNAL SERVICE FUND - An internal service fund is a fund established for the purpose of measuring net income for a governmental department providing services primarily to other departments or agencies within the government, in which it is the intent of the government that the department operate on a cost reimbursement basis.

41. Four Fiduciary Fund Types
AGENCY FUND - An agency fund is used to account for resources held by a governmental entity which are not owned by the entity, but which are payable to some outside party such as another governmental unit. Assets = Liabilities
INVESTMENT TRUST FUND - Accounts for the external portion of investment pools reported by the sponsoring government.
PENSION FUND - Pension funds are used to account for assets provided to pension trusts. The earnings of these assets are used to pay the pensions of public (government) employees.
PRIVATE-PURPOSE TRUST FUNDS - report all other trust arrangements under which principal and income benefit individuals, private organizations, or other governments.

42. 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 choose to combine some.
Exact number depends on judgment.
Use the minimum number that will allow compliance with legal and other restrictions

43. Importance of the Budget in Governmental Accounting
Every government should adopt an annual budget
Accounting system should make it possible to compare actual and budgeted results
Budget vs. actual comparisons are included in the required supplemental information for the general fund and special revenue funds for which an annual budget is adopted