ACC 433 Copley Ch 01

8/3/2019 ACC 433 Copley Ch 01

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Essentials of Accounting for

Governmental and

Not-for-Profit Organizations

Chapter 1

Introduction to Accounting and Financial Reportingfor Governmental

and Not-for-Profit Organizations

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

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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 toperform their audits

As citizens and donors we wish to betterunderstand 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 thanwomen

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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 theorganizations 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 provideprograms and services that are of public

benefit

± Provide services that may not be provided bylocal, 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, andgoverned by those deriving their authority

from the state

Bodies corporate and politic state, county,city

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What are Governmental Entities? continued

General Purpose:

± Provide a wide variety of services such ashighways, 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 thepurpose of generating returns to owners.

± Effectiveness and Efficiency

± More detailed financial reporting

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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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Potential for Longevity: Governments veryrarely go out-of-business.

± Long term view of operations

± Sustainability of services and

± Ability to meet future demand.

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Relationship with Stakeholders:

± Accountability for public funds

± Use of Fund accounting: A fund is a separate

reporting entity within governmental accountingsystem used to demonstrate compliance withlegal 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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An annual budget should be adopted byevery governmental unit

Role of the Budget: Government budgetsoften carry the authority of law, preventingpublic officials from spending outside theirbudgetary authority.

Budgetary control is reflected ingovernment 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 contd

State and Local - GASB

formed in 1984 Covers basic governments and entities owned or

controlled by governments

Predecessor: NCGA - National Council onGovernmental Accounting

Not-for-profits - FASB formed in 1973

Covers not-for-profits not related to governmententities private nonprofit hospitals, colleges,museums, etc.

Predecessors: Accounting Principles Board (1959-1973) and

Committee on Accounting Procedures (1939-1959)

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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

CategoryGASB (STATEMENT 55)

State and Local Governments

A.y GASB Statements and

Interpretations

B.

y GASB T echnical Bulletins and,

y if cleared by the GASB, A ICP A

Industry Audit and Accounting

Guides and Statements of

Position

C.

y AICPA Practice Bulletins that

have been cleared by the GASB

D.

y Implementation guides (Q&As)

published by the GASB staff ,

and

y practices that are widely

recognized and prevalent in

state and local governments.

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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 evaluateservice, efforts, and accomplishments

Stewardship show the impact onoperations and investments

Systems and controls indicate whetherthey are adequate

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FASB Concepts Statement No. 6: Objectives of

NFP Financial reports

Main Objective of NFP Financial Statementsis

± To provide information useful to present and

potential resources providers and others inmaking decisions about allocating resources tothe NFP organization

Which emphasizes that

± Donors, government grantors and banks areprimary 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 Accountability: To justify the raising of public resources andthe purposes for which they are used

o 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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Service Efforts and AccomplishmentsReporting (covered in Chapter 13) andamended by Concepts Statement 5

Includes both Financial and Nonfinancialmeasures of performance

Nonfinancial performance measures: EconomicDevelopment Council

± # of business prospects interested in locating;

± # contracts made with firms interested in locating


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Communication Methods in General PurposeFinancial Reports that Contain Basic FinancialStatements

Established the framework for whatinformation is presented in:

± Basic Financial Statements

± Notes

± Required Supplementary Information

± Supplementary Information


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Financial reports are much more inclusive thanthose 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

± Statement of Activities Similar to business income statement

Fund Financial Statements ± Detailed reports of governmental, proprietary, and

fiduciary activities ± Illustrated in Chapter 2

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Fiduciary

Funds are not

included in

government-

wide

Ill. 1-3page 11

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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-likeactivities 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 governmentservices

every government body must have one general fund

± Capital Projects Funds: financial resources restricted for

capital outlays: building projects, infrastructureimprovement projects, etc.

± Debt Service Funds: financial resources restricted toexpenditure for principal and interest on government debtissues

± Special Revenue Funds: proceeds of specific revenuesources that are restricted for a specified purpose

± Permanent Funds: Earnings on resources, but not principal,may be used for purposes that support governmentprograms

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Proprietary FUNDS page 14

Enterprise Funds: Resources obtainedprimarily through the sale of goods andservices to parties external to thegovernment:

± Airports; City Pool; Water department

Internal Service Funds: Services provided byone government department to anothergovernment department.

± Motor pools; Print shops

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Fiduciary FUNDS page 15

Agency Funds: Government acts as acollecting/disbursing agent. ± County taxes to be disbursed to cities within the

county

Pension Funds: Pension and employee benefitfunds

Investment Trust Funds: External portion of investment pools

Private-purpose Trust Funds: all other trustarrangements under which principal and incomebenefit individuals, private organizations or othergovernments

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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? Dont 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 possiblycombine 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 FundBalance

Proprietary ± Statement of Net Assets (Balance Sheet)

± Statement of Revenues, Expenses, and Changes in Fund NetAssets

± 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 toemphasize individual funds (pools of money)

Government-wide reports are an attempt to

aggregate data into a format more familiar tousers business-type financial statements

Different perspectives require differentaccounting bases and measurement foci:

± Accounting basis defines when transactions andevents are recognized in the financial statements

± Measurement focus defines what items are to bereported in the financial statements.

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Accounting Methods pages 12 and 13

Accrual Basis/Economic Resources MeasurementFocus: ± General business concepts of revenue and expense

apply when recording exchange-like transactions

± Both current and long-term assets and liabilities arerecognized in the financial statements

Modified Accrual Basis/Current FinancialResources Measurement Focus:

± Revenues recognized when funds are measurable andavailable for expenditures of the current period;

± Expenditures are recognized when a liability isincurred

± 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 asexpenditures as soon as you are obligated to

pay when the goods arrive

± Long-term assets, such as equipment, are notlisted 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 generallyshow only short-term assets and liabilities

Proprietary fund balance sheets show both

short-term and long-term assets and liabilities

Government-wide statements must reportshort-term and long-term assets and liabilities inthe Statement of Net Assets

± Therefore, total assets and liabilities will differbetween the two types of statements

± Statements will include a reconciliation schedule

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Summary of Accounting by State and Local Governments

Fund

Basis of Accounting

/ Measurement

Focus

Financial Statements

Government-Wide Governmental and

Business-TypeAccrual/ Economic

Resources

Statement of Net Assets

Statement of Activities

Governmental

Funds

General

Special Revenue

Capital ProjectDebt Service

Permanent

Modified Accrual /

Current Resources

Balance Sheet

Statement of Revenues,Expenditures, and

Changes in Fund Balance

Proprietary Funds Enterprise

Internal ServiceAccrual / Economic

Resources

Statement of Net Assets

Statement of Revenues,

Expenses and Changes in

Net Assets

Statement of Cash Flows

Fiduciary Agency

Pension Trust

Investment Trust

Private Purpose

Trust

Accrual / Economic

Resources

Statement of Fiduciary

Net Assets

Statement of Changes in

Fiduciary Net Assets

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Chapter 1: Introduction to Accounting

and Financial Reporting

The End

Documents

ACC 433 Copley Ch 01