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7/17/2019 Chapter_01 - 17
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1-1
Accountin
g for
Governmental& Nonprofit
Entities
JACQUELINE L. RECK
U!ANNE L. L"#EN"$N
%'e
Copyright © 2016 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written
consent o# McGraw-Hill Education.
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Intro(uction to
Accounting an()inancial Reporting for
Governmental an( Not*
for*+rofit Entities
C
$
A
+
,E
R
%
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Learning "-ectives
1. Identify and explain the characteristics that
distinguish governmental and not-for-profit entities from
for-profit entities
2. Identify the authoritative bodies responsible forsetting GAAP and financial reporting standards for
all governmental and not-for-profit organizations
. !ontrast and compare the ob"ectives of
financial reporting for state and local governments#the federal government# and not-for-profit
organizations
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Learning "-ectives
$. %xplain the minimum re&uirements for general
purpose external financial reporting of state and local
governments and ho' they relate to comprehensive
annual financial reports
(. Identify and describe the re&uired financial
statements for the federal government# and not-for-
profit organizations
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Government & Not*for*+rofit Accounting
+ractices /iffer from 0usiness
)hey have different
purposes in society
)hey are financed byresource providers 'ho do
not expect benefitsproportional to the
resources they provide
*anagement has aspecial duty to beaccountable for
ho' resources areused in providing
services
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,1pes of Governments
• +ederal government# stategovernments# cities#to'ns# to'nships# villages#counties# boroughs# and
parishes
General purposegovernments
provide a broad
array of services.
• Independent schoolsystems# public colleges
and universities# publichospitals# fire protectiondistricts# and many others
,pecial purposegovernments
usually provideonly a single or
"ust a fe'services.
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Not*for*+rofit "rgani2ations
ot-for-profit organizations are legally separate
organizations 'hich are usually exempt from
federal# state# and local taxation.
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C3aracteristics of Government an(
Not*for*+rofit "rgani2ations
nli/e for-profit organizations# resourceproviders do not expect to receive repaymentor proportional benefits.
)he organization lac/s a profit motive.
)here is an absence of transferable o'nershiprights.
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C3aracteristics of Government"rgani2ations
Po'er ultimately rests in the hands of the people
People delegate po'er to public officials throughthe election process
%mpo'ered by and accountable to a higher levelgovernment
)he organization has the po'er to tax
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ources of GAA+ an()inancial Reporting tan(ar(s
• 0usiness organizations• ongovernmental not-for-profits+A,0
• ,tate and local governmentalorganizations
• Governmental not-for-profitsGA,0
• +ederal government and its agenciesand departments+A,A0
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Accountability is the cornerstone of all financial
reporting in government Accountability re&uiresgovernments to ans'er to the citizenry3to "ustifythe raising of public resources and the purposesfor 'hich they are used.4
-GA,0 !oncepts ,tatement o. 1
"-ectives of )inancial Reporting
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Interperiod equity is a government5s obligation to
disclose 'hether current-year revenues 'eresufficient to pay for current-year benefits3or 'illfuture taxpayers be re&uired to pay for theminstead6
"-ectives of )inancial Reporting
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"-ectives of )inancial Reporting for
tate an( Local Governments
Governmental financial reports areused primarily to
!ompareactual
financialresults 'ith
legallyadoptedbudget
Assessfinancial
conditions
and results ofoperations
Assist indeterminingcompliance'ith finance-
related la's#rules andregulations
Assist inevaluating
efficiency andeffectiveness
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"-ectives of )inancial Reporting fort3e )e(eral Government
+ederal government financial reportingshould assist report users in evaluating
0udgetaryintegrity
7peratingperformance
,te'ardship Ade&uacy ofsystems and
controls
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"-ectives of )inancial Reporting for Not*for*+rofit 4N)+5 "rgani2ations
+P financial reporting should provideinformation useful in
*a/ingresourceallocation
decisions
Assessingservices andthe ability to
provide
services
Assessingmanagementste'ardship
and
performance
Assessingeconomicresources#obligations#
net resources#
and changesin them
6i i R i f G l
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6inimum Re7uirements for General
+urpose E8ternal )inancial Reporting
6anagement9s (iscussion an( anal1sis
Government*:i(e )un( financial
financial statements statements
Notes to t3e financial statements
Re7uire( supplementar1 information4ot3er t3an 6/&A5
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Government )inancial tatements
)here are t'o categories of basic government
financial statements8
Government-wide financial statements# 'hichprovide an aggregated overvie' of a government5s
net position and change in net position and
Fund financial statements# 'hich provide more
detailed financial information about a government
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Government*:i(e )inancial
tatements
Assist in assessing operational accountability 3
'hether government has used its resources efficiently
and effectively in meeting service ob"ectives.
+ocus on flow of economic resources
se the accrual basis of accounting # li/e businessorganizations
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+or no'# thin/ of a fund as a separate set ofaccounts used to /eep trac/ of resourcessegregated for a particular purpose 9 moredetail on funds is in !hapter 2
)un( )inancial tatements
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Assist in assessing fiscal accountability 3'hetherthe government raised and spent financial resourcesin accordance 'ith budgetary# legal# and regulatoryconstraints
+ocus on short-term flow of current financial
resources
se the modified accrual basis3revenues
recognized 'hen measurable and available forspending: expenditures recognized 'hen an
obligation is incurred that 'ill be paid from currently
available financial resources
)un( )inancial tatements
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7ther fund categories ;see !hapter 2<8
• Proprietary funds report on business-li/e
activities of the government• Fiduciary funds report on fiduciary ;trust and
agency< activities of the government
•
0oth categories follo' accounting principlessimilar to businesses
)un( )inancial tatements
Compre3ensive Annual )inancial Report
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Compre3ensive Annual )inancial Report4CA)R5
A Comprehensive Annual Financial Report
CAFR! provides more detail than the minimum
re&uirements for general purpose financial reporting
=hile not re&uired to prepare a !A+># most
governments do so
!A+> is prepared in conformity 'ith GA,0 standards
Compre3ensive Annual )inancial Report
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Compre3ensive Annual )inancial Report4CA)R5
A !A+> prepared according to GA,0
standards should contain three sections.
,tatistical ,ection
+inancial ,ection
Introductory ,ection
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CA)R * Intro(uctor1 ection
7ther ;as desired by management<
?etter of transmittal
!ontents page
)itle page
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)he financial section should contain sufficient
information to disclose fully and present fairly the
financial position and results of financial operations
during the fiscal year. Items included in the financialsection are8
Auditor5s report
*anagement5s discussion and analysis ;*@A<
0asic financial statements ;and notes thereto<
>e&uired supplementary information ;>,I<;other than*@A<
!ombining and individual fund statements and schedules
CA)R * )inancial ection
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)he statistical section typically presents tables and
charts sho'ing demographic and economic data#
financial trends# fiscal capacity# and operatinginformation of the government in the detail needed by
readers 'ho are more than casually interested in the
activities of the government.
CA)R * tatistical ection
"vervie: of )e(eral Government
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"vervie: of )e(eral Government
)inancial Reporting
+ederal financial reporting occurs at t'o
levels8
.,. government-'ide 9 prepared by .,. )reasury
*a"or agencies and departments 9 prepared by
ma"or agencies and departments follo'ingre&uirements established in 7ffice of *anagementand 0udget ;7*0< !ircular A-1B
U Government :i(e )inancial
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U.. Government*:i(e )inancial
Reporting
@espite the enormous dollar amounts involved# the
.,. !omptroller General has never been able to
issue an audit opinion on the federal government5s
consolidated financial statements.
In general# serious financial management and data
deficiencies are cited for the !omptroller General5s
continuing disclaimer of opinion.
U Government :i(e )inancial
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U.. Government*:i(e )inancial
Reporting
)he consolidated report includes8
A plain language4 !itizen5s Guide
*anagement5s @iscussion and Analysis ;*@A<
,everal financial statements ;see !hapter 1C<
,upplemental information reporting on both budgetaryand proprietary ;operating< financial activities# as 'ell asreconciliation of the t'o activities
)e(eral Agenc1 an( /epartment
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)e(eral Agenc1 an( /epartment
)inancial Reporting
*a"or federal agencies and departments must
prepare a performance and accountability report
4PAR 5 that includes an annual performance reportAPR!# annual financial statements# and a variety of
management reports on internal control and other
accountability issues.
)e(eral Agenc1 an( /epartment
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)e(eral Agenc1 an( /epartment
)inancial Reporting
)he PA> should include four sections8
1. An *@A# providing an overvie' of PA> and
a clear description of the department or
agency5s mission
2. Performance section containing the AP>#
'hich provides information about agency5s
performance and progress in achieving its
performance goals
)e(eral Agenc1 an( /epartment
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)e(eral Agenc1 an( /epartment
)inancial Reporting
. 0asic financial statements8 balance sheet#statement of net cost# statement of changes innet position# statement of budgetary resources#
statement of custodial activity and statement ofsocial insurance
$. 7ther accompanying information such as
information about tax burden# tax gap#challenges facing management# and revenue
forgone
Not*for*+rofit 4N)+5 "rgani2ations
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Not for +rofit 4N)+5 "rgani2ations
)inancial Reporting
)he primary purpose of +P financial statements is to
provide decision-useful financial information to
resource providers# such as donors# members# and
creditors.
)hese resource providers need information to assess
the services provided by an +P and the ability of the
+P to continue to provide those services# as 'ell as
management5s performance and ste'ardship of
resources.
Not*for*+rofit 4N)+5 "rgani2ations
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Not for +rofit 4N)+5 "rgani2ations
)inancial Reporting
)hose +P organizations that arenongovernmental in nature are re&uired to
follo' +A,0 accounting and financialreporting standards. )hese standards re&uirepresentation of a
,tatement offinancial position;balance sheet<
,tatement ofactivities ;income
statement<,tatement ofcash flo's
Not*for*+rofit 4N)+5 "rgani2ations
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Not for +rofit 4N)+5 "rgani2ations
)inancial Reporting
In addition to these statements# voluntary health and
'elfare organizations# such as the D*!A# nited
=ay# and the American @iabetes Association# are
re&uired to present a statement of functionalexpenses.
)his statement classifies expenses into program and
supporting services categories# in addition to
traditional line item classifications.
Reporting Re7uirements Uni7ue to
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Reporting Re7uirements Uni7ue to
Not for +rofit "rgani2ations
@emonstrating 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 ;< unrestricted
>eporting program service expenses separately
from supporting service expenses. )he latter
include overhead ;such as# non-programmanagement and general expenses< and fund-
raising expenses
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"t3er Accounta-ilit1 Reporting
Popular >eports 9 highly condensed and
unaudited
,ervice %fforts and Accomplishments ;,%A< 9 include both financial and nonfinancial
measures of service efforts and service
accomplishments
L ;i A3 (
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Loo;ing A3ea(
• @iscuss in detail GA,0 principles#standards and financial reporting#focusing on state and localgovernments.
!hapters
2 9 E
• @escribe 'ays that public financialmanagers provide accountabilityover funds entrusted to them.
!hapters 1F#11 and 12
•
+ocus on not-for-profit organizationsand federal government accountingand reporting.
!hapters1 - 1C
A Q t f t3 " i i l A t3
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A Quote from t3e "riginal Aut3or
...%ven 'hen developed to the ultimate
stage of perfection# governmental
accounting cannot become a guaranty ofgood government. At best# it can never
be more than a valuable tool for
promotion of sound financial
management...4
Professor R. M. Mikesell, 1951