Chapter 1

The Government and Not-for-Profit Environment

Chapter 1 2

Learning Objectives

After studying Chapter 1, you should be able to:

Understand the characteristics that distinguish governments and not-for-profit organizations from businesses (for-profit entities).

Identify the features that distinguish governments from not-for-profits

Identify authoritative bodies responsible for setting GAAP and financial reporting standards for different governmental and not-for-profit entities.

Chapter 1 3

Learning Objectives (cont’d)

Contrast and compare the objectives of financial reporting for

(1) state and local governments (slide 1-7),

(2) the federal government (slide 1-11), and

(3) not-for-profit organizations.

Distinguish Management Discussion & Analysis (MD&A), basic financial statements, and Required Supplementary Information (RSI) of state and local governments from their comprehensive annual financial reports (CAFR).

Chapter 1 4

How Do Governmental and Not-For-Profit Organizations Differ From Business Organizations?

No direct and proportional relationship between resources provided and the benefits received

Absence or Lack of a profit motive

Absence of transferable ownership rights

Collective ownership by constituents

Policy-setting process

Chapter 1 5

How Do Governmental and Not-For-Profit Organizations Differ From Business Organizations?

For businesses, annual report is the most significant financial document. For governments and non-profits, budget is very important. Budget is the culmination of the political process.

Need to ensure inter-period equity for most governments and non-profits.

Revenues may not be linked to constituent demand or satisfaction.

No direct link between revenues and expenses. Many of the assets of government and non-profits are

restricted to particular activities and purposes. No distinguished ownership interests. Less distinction between internal and external accounting

and reporting.

Chapter 1 6

Power ultimately rests in the hands of the people

People vote and delegate that power to public officials

Created by and accountable to a higher level government – ex. State Governments are accountable to Federal Governments while City Governments are accountable to State Governments, etc.

Power to tax citizens for revenue

How Do Governmental and Not-For-Profit Organizations Differ From Business Organizations?

Chapter 1 7

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 of the government Assist in evaluating efficiency and effectiveness of

management, its resources and programs

DISCUSSION: A large majority of citizens never have the time to evaluate the financial reports of SLGs, but candidates seeking an elected position (those running for election) in government, use these reports to attack the incumbent.

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

Chapter 1 8

Objectives of Financial Reporting

“ACCOUNTABILITY is the cornerstone of all financial reporting in government,” (GASB Concepts Statement No. 1, par. 56).

Please see the summary of concepts Statement 1.

What do we mean by accountability? How does “interperiod equity” relate

to accountability?

These questions are very important!

Chapter 1 9

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(cont’d)

Chapter 1 10

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?

(In other words, the expenses have been incurred now and will be paid later from taxes collected in future years.)

It is important to understand this concept of “interperiod equity”!

Objectives of Financial Reporting: (cont’d)

Chapter 1 11

Objectives of Financial Reporting—Federal Government

Accountability is also the foundation of federal government financial reporting

Federal Accounting Standards Advisory Board (FASAB)’s standards are targeted at both:

internal users (management), and external users

Chapter 1 12

FASB – Financial Accounting Standards Board Business organizations: ex. Wal-Mart Nongovernmental not-for-profits: ex. Rice University, American Cancer Society

GASB – Governmental Accounting Standards Board Governmental organizations Governmental not-for-profits: ex. University of Houston

FASAB – Federal Accounting Standards Advisory Board Federal Government and its agencies Ex. Department of Agriculture, Department of Transportation, Department of Energy, Department of Education, Department of Defense and others.

Sources of GAAP And Financial Reporting Standards

Chapter 1 13

GASB and FASB

The objectives of both GASB and FASB: Endorse the notion that financial reporting

encompasses information on service efforts and accomplishments.

Emphasize that the ability to measure accomplishments is still undeveloped.

View this aspect of performance reporting as a long-term goal rather than an immediate imperative.

Chapter 1 14

General Purpose External Financial Reports

Management’s discussion and analysis

Government-wide Fund financial

financial statements statements

Notes to the financial statements

Required supplementary information

(other than MD&A)

Chapter 1 15

Comprehensive Annual Financial Report (CAFR) -- recommended, but not

mandatory -- Introductory section

Financial section

Statistical section

NOTE: A hard copy of the City of Houston’s CAFR is available in Dr. Khumawala’s office for you to review if you are interested.

Chapter 1 16

CAFR - Introductory Section Title page

Contents page

Letter of transmittal

Other (as desired by management)

You can view online at the City of Houston’s Annual Reports for the years 2004, 2003, and 2002 at the following link: http://www.ci.houston.tx.uh/mayoroffice/annualreport.html.

Chapter 1 17

Auditor’s report

MD&A

Basic Financial Statements

Required Supplementary InformationRSI (Other than MD&A)

Combining the individual fundstatements and schedules

Remember GASB Statement No. 34 is the NEW reporting model that SLGs have to follow.

This is the NEW GAAP!!!

CAFR—Financial Section (GASB Statement No. 34)

Chapter 1 18

Management’s Discussion and Analysis (MD&A)

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

This is basically “Tell It Like It is.”

Chapter 1 19

Basic Financial Statements

Government-wide Financial Statements

Statement of Net Assets

Statement of Activities

Fund Financial Statements (see next slide)

Notes to the Financial Statements

The Government-wide Financial Statements are required under GASB 34.

Chapter 1 20

Fund Financial Statements

Balance Sheet - Governmental Funds

Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds with reconciliation

Statement of Net Assets - Proprietary Funds

Statement of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Funds

Statement of Cash Flows - Proprietary Funds

Statement of Fiduciary Net Assets

Statement of Changes in Fiduciary Net Assets

Chapter 1 21

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

CAFR - Statistical Section

Chapter 1 22

Fund accounting reports financial information for separate self-balancing sets of accounts, segregated for separate purposes or to account for resources restricted as to use by donors or grantors

Funds are separate accounting and fiscal entities

Chapter 2 explains the concept of fund accounting.

Fund Accounting

Chapter 1 23

Summary

In this course you will become familiar with current GASB, FASB, and FASAB 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.

Chapter 1 24

“...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

FINAL NOTE

Chapter 1 25

Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.