Essentials of Accounting for Governmental and NotforProfit Organizations

1
Essentials of Accounting for Governmental and
Not-for-Profit Organizations

• Chapter 1 Introduction to
• GNP Organizations

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
• Major sections of the state and local government
  (SLG) financial statements
• Primary reporting principles for SLGs

3
Why Study GNP Accounting?

• Governments and NFP organizations hire
  accountants to manage funds
• CPA firms and states hire GNP auditors
• To better understand reports on how their taxes
  and charitable donations are used

4
Differences in the GNP Environment

• Absence of individuals with legal claim to the
  excess of revenues over expenses
• Generating net income is not the main goal
• Formal and restrictive budgets
• Resource providers (taxpayers or donors) may not
  receive equivalent value in return for the
  resources given
• Resources often have restrictions as to how or
  when they may be used

5
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
• Revenue recognition 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

6
U.S. STANDARD SETTERS

• Federal level
• FASAB - Federal Accounting Standards Advisory
  Board
• GAO - General Accounting Office
• U.S. Treasury Department
• OMB - Office of Management and Budget
• State and Local Government (SLG)
• GASB - Governmental Accounting Standards Board
• Not-for-profits
• FASB - Financial Accounting Standards Board

7
STANDARD SETTERS Contd

• 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 (1959-1973) and
  Committee on Accounting Procedures (1939-1959)

8
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 1-1) guides the
  auditor in the priority of importance for
  accounting guidance

9
Concepts Statements

• Concepts project began in the 1970s to guide the
  standard setters in establishing GAAP
• Not originally intended as authoritative GAAP.
  Concepts statements may be used for guidance only
  if no other literature addresses an issue
• Though not intended as GAAP, concepts statements
  drive the theory of GNP reporting and therefore
  may appear on certification exams

10
FASAB 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

11
FASB Concepts StatementNo. 6 for NFPs

• 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

12
GASB Concepts Statements

• 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

13
How Do GASB SLG 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 emphasizes outcomes
  may have to be measured by means other than
  dollars

14
Overview of 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 the Chapter 2

15
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
  sales of water
• Statement of Net Assets (Balance Sheet)
• Statement of Revenues, Expenses, and Changes in
  Fund Net Assets
• Statement of Cash Flows
• Fiduciary holding money in trust for others
• Statement of Fiduciary Net Assets (Balance Sheet)
• Statement of Changes in Fiduciary Net Assets

16
Reporting Perspectives

• The government-wide reports are a new phenomenon
  in SLG reporting
• Historically, SLG reports have emphasized only
  the fund activities
• 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

17
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 heavily financed by taxes and
  involuntary contributions

18
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 when the fund liability
  is incurred

19
Implications for Revenues Under Modified Accrual
Basis

• In the absence of an earning process, revenue
  recognition is more of a problem. GASB and FASB
  Statements specifically address recognition of
  non-exchange and contribution revenues

20
Implications for Expenditures under Modified
Accrual Basis

• Expenses under accrual basis recognize the
  resources used
• Supplies are treated as an expense when used
• Depreciation expense on fixed assets is
  recognized over the life of the asset
• Expenditures under modified accrual are recorded
  when the liability is incurred
• Supplies are treated as an expenditure when
  purchased
• Equipment purchases are treated as expenditures
  as soon as you are obligated to pay when the
  goods arrive
• Payments of principal on long-term debt are
  treated as an expenditure

21
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
• Long-term assets such as equipment not listed on
  the fund balance sheet

22
Fund vs. Government-Wide Statements

• Government-wide statements use accrual basis and
  list long-term assets and liabilities for all
  fund types
• Fund perspective statements use modified accrual
  for governmental type funds and omit long-term
  assets and long-term liabilities on government
  fund balance sheet

23
Fund and Government-Wide Reporting

• Two perspectives allow users to see
• Long run accrual basis effects
• Short run budget oriented current spending
  effects
• bond money treated as inflow
• bond repayments treated as outflows
• purchases of long-term assets treated as outflows

24
What Is a Fund as the Term Is Used for SLG
Accounting?

• A fund is
• Represents a part of the activities of some
  organization
• An accounting entity
• Self-balancing set of accounts, reflecting the
  assets, liabilities, net assets, and changes in
  those balances
• Segregated for specific activities
• In such a way as to ensure compliance with
  appropriate regulations or restrictions

25
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

26
Five Governmental-Type Funds

• PERMANENT FUND - report financial resources that
  are legally restricted so only earnings, not
  principal, may be expended, and for purposes to
  benefit the government and its citizenry.
• CAPITAL PROJECTS FUND - Is used to account for
  the financial resources available and used for
  acquisition or construction of GENERAL fixed
  assets (i.e. fixed assets other than that
  associated with enterprise or fiduciary funds).
• DEBT SERVICE FUND - Is used to account for the
  financial resources available and used for
  payment of interest and principle on GENERAL
  long-term debt (i.e. long term debt other than
  that associated with enterprise or fiduciary
  funds).

27
Five Governmental-Type Funds - continued

• SPECIAL REVENUE FUND - Is used to account for the
  financial resources provided by revenue sources
  which are legally restricted to specified
  purposes (other than capital projects or debt
  service)
• GENERAL FUND - used to account for financial
  resources other than those which are required to
  be accounted for in another fund. There can be
  only one general fund and it accounts for most of
  the ongoing activities of the government

28
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.

29
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.

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How Many Total 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? Might use four capital
  projects funds could possibly combine some.
• Exact number depends on judgment.
• Use the minimum number that will allow compliance
  with legal and other restrictions

31
Importance of the Budget in SLG 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

32
Capital Assets in Government-Wide Statements

• Capital assets are generally recorded at
  historical cost and depreciated similar to
  business accounting
• cost includes installation, freight, etc.
• Depreciation exception for infrastructure assets
  such as bridges, tunnels, drainage systems, etc.
• If government can document these are adequately
  maintained, maintenance costs are expensed and
  depreciation expense is not recorded

33
Capital Asset Exceptions

• Collections artwork or historical treasures
• Have option to not capitalize if
• (1) held for exhibition, (2) protected for future
  use, and (3) can be sold only to acquire other
  collection pieces
• Infrastructure assets must be capitalized
• but option to not depreciate requires
• complete assessment every three years showing
  condition level is being maintained

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 generally show
  short-term and long-term assets and liabilities
• Government-wide statements must report short-term
  and long-term assets and liabilities in Statement
  of Net Assets
• Therefore, total assets and liabilities will
  differ between the two types of statements
• Statements will include a reconciliation schedule