Government and Not-for-Profit Accounting: Concepts and Practices, 6e

Michael H. Granof Saleha B. Khumawala

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CHAPTER 1The Government and Not-for-Profit Environment

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Thoughts to Ponder: Chapter 1

“We make a living by what we get. We make a life by what we give.”

Winston Churchill

“Service to others is the rent you pay for your room here on earth.”

Mohammed Ali

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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.

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Learning Objectives, continued

• Compare and contrast the objectives of financial reporting for:

(1) State and local governments (2) Not-for-profit organizations(3) The federal government

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

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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 of a profit motive.• Absence of transferable ownership rights.• Collective ownership by constituents.• Policy-setting process.

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How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? – Cont’d

• For GNP entities, budget is very important.o Budget is the culmination of the political process. o The budget is the key fiscal document.

• Ensure inter-period equity for most GNPs.• Revenues may not be linked to constituent demand or

satisfaction. • No direct link between revenues and expenses. • The matching concept has different meaning for

governments and not-for-profits.

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How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? –Cont’d

• Restriction on assets for particular activities and purposes. o Example: Federal government grants for low-income

housing; a state’s gasoline tax may be targeted by law at highway construction and maintenance.

• No distinguished ownership interests. • Less distinction between internal and external accounting

and reporting.

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How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? –Cont’d• Power ultimately rests in the hands of the people. • Citizens vote and delegate that power to elected officials.• Different mission.• Exercise their sovereign power to collect taxes.• Created by and accountable to a higher level

government.• Different reporting objectives.

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Objectives of Financial Reporting State and Local Governments (SLGs)• Financial reports are used primarily to:o Compare actual results with the budget.o Assist in determining compliance.o Assist in evaluating efficiency & effectiveness.o Assess financial condition and results of operations .

• Remember:o Financial statements are a report of the past; your focus

must be on the future. o One main objective of financial analysis is to derive the

economic substance of a transaction from the data provided in the financial statements. Then, it is up to you to recast the data in a form that best facilitates the decisions that you must make.

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Objectives of Financial Reporting State and Local Governments (SLGs)• “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.o What do we mean by accountability?o How does “interperiod equity” relate

to accountability?These questions are very important!

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Objectives of Financial Reporting State and Local Governments (SLGs)What is accountability?

• 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.

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Objectives of Financial Reporting State and Local Governments (SLGs)

• How does “interperiod equity” relate to accountability?o 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?

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

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Objectives of Financial Reporting State and Local Governments (SLGs)• Accountability is also the foundation of Federal

government financial reporting

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

o Internal users (management), and o External users

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Composition of the Local U.S. Government Entities

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Based on 2012 CensusCounties; 3,031

Municipalities; 19,522

Towns/ townships; 16,364

School districts; 12,884

Special districts; 37,203

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Importance of the NFP Sector

Size and Scope 2009-2011:Number of not-for-profit organizations 2.2 millionTotal nonprofit sector revenues (2009) $1.87 trillion Annual contributions from private sources (2011) $347 billionPercentage of wages and salaries paid in the US(2010) 9% Giving 2011:Individuals contribution (73%) 211.77 billionCharitable bequests (8%) 22.83 billionFoundations (14%) 41 billionCorporate (5%) 15.29 billion

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Sources of GAAP and Authoritative Bodies

Authoritative Bodies:• FASB – Financial Accounting Standards Board

o Business organizations: ex. Wal-Mart, Exxono Nongovernmental not-for-profits: ex. Rice University, o American Cancer Society

• GASB – Governmental Accounting Standards Boardo Governmental entities: ex. New York City, Atlanta, Harris

Countyo Governmental not-for-profits: ex. University of Houston

• FASAB – Federal Accounting Standards Advisory Boardo Federal Government and its agencies: o Ex. Department of Defense, Department of Transportation,

Department of Energy, Department of Education, Department of Agriculture, HUD, HHS and others.

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Who are the users of financial reports?• Governing Boards o The prime recipients of the report, because they approve

budgets, major purchases, contracts and significant operating policies.

• Investors and creditors• Citizens and organizational members• Donors and Grantors• Regulatory Agencies• Employees and other constituents

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Several forms of Financial Reporting

• Paper generated text financial statements• PDF• Internet- HTML or PDF• XBRL (eXtensible Business Reporting Language) C

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General Purpose External Financial Reports (SLGs)

Source: GASB Statement 34

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Management's discussion and analysis

Required supplementary information (other than MD&A)

Notes to the financial statements

Government-wide financial statements

Fund financial statements

Summary <------------------------------> Detail

Components of the Annual Financial Report

Management’s Discussion and

Analysis

Government-wide

Financial Statements

Fund Financial

Statements

Basic Financial Statements

Notes to the

Financial Statements

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Comprehensive Annual Financial Report

(CAFR)• Three Sections:

• Introductory section• Financial section • Statistical section

• Recommended, but not mandatory

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CAFR - Introductory Section

• Title page• Contents page • Letter of transmittal• Other (as desired by management)

• You can view online the City of Houston’s Annual Reports for the years 2012, 2011, and other years at the following link: http://www.houstontx.gov/controller/cafr.html

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Award from the GFOA• The Government Finance Officers Association (GFOA) of

the United States and Canada awarded a Certificate of Achievement for Excellence in Financial Reporting Program (CAFR Program) to the City of Houston for its CAFR for the fiscal year ended June 30, 2011.

• The Certificate of Achievement is a prestigious national award-recognizing conformance with the highest standards for preparation of state and local government financial reports.

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CAFR—Financial Section (GASB Statement No. 34)• Auditor’s report • MD&A• Basic Financial Statements• Required Supplementary Information

RSI (Other than MD&A)• Combining the individual fund

statements and schedules• Remember GASB Statement No. 34 is the Reporting

Model that SLGs have to follow.

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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.”

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Basic Financial Statements

• Government-wide Financial StatementsoStatement of Net Position oStatement of Activities

• Fund Financial Statements (see next slide)• Notes to the Financial Statements • The Government-wide Financial Statements are the TWO additional F/S required under GASB 34.

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Fund Financial Statements• Governmental-type Fundso Balance Sheeto Statement of Revenues, Expenditures, and Changes in Fund

Balances - Governmental Funds and a schedule of reconciliation

• Proprietary-type Fundso Statement of Net Position o Statement of Revenues, Expenses, and Changes in Fund Net

Position o Statement of Cash Flows

• Fiduciary-type Fundso Statement of Fiduciary Net Position o Statement of Changes in Fiduciary Net Position

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CAFR – Statistical Section

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

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Fund Accounting

• 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.

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Summary

• In this course you will become familiar with current GASB, FASB, and FASAB standards related 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 a different mission and reporting objectives.

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