Government and Non-For-Profit Environment Chapter 1

Why are Governmental and NFP entities created? No profit motive Provide for the common good In situations where there is a market failure Provide charitable services where no profit can be made Protect society Advocate a cause

Common Characteristics-Gov’ts & NFPs Revenues don’t indicate demand No profit motive Assets may not have future benefits Restrictions on assets Cost/benefit hard to measure Leadership continuity No ownership interests, no residual claimants

Operations - Governments Usually outside marketplace Governed by budgets Expenditures may dictate revenue levels Non-exchange transactions Legal restrictions Matching not the same as in corporations Assets play different role Compare inputs to outputs

Concerns of Governments 1. Political constraints 2. Performance measures 3. Stay within budget 4. Interperiod equity (Table 1-1) 5. Equity (regressive vs. progressive)

Differences Government only: Command resources Issue tax exempt debt Popularly elected (no board) Legal control of process Costs of change are high Different basis of accounting Political process vs. efficiency Fiscal capacity and fiscal effort

Objectives of States and Cities 1. Budgetary and Fiscal compliance 2. Provide information on entity’s performance - Provide information on the sources and uses of cash - How financed is activities - Determine financial position 3. Report on the entity’s efficiency and effectiveness - Report on the financial condition of the entity - Assess service potential of assets - Report on legal restrictions on resources

Purposes of Reporting Sources and Uses of financial resources How government financed its activities If financial position improved or deteriorated Compare actual operations with budget Compliance Efficiency and effectiveness Accountability Service Efforts and Accomplishments

Users Governing Boards Investors and Creditors Taxpayers and citizens Donors and Grantors Regulatory and oversight agencies Employees

Role of Budget For Governments Establishes legal authority to spend Basis for tax levies Incorporated into accounts External, unlike private sector

GASB Objectives Interperiod Equity Don’t push current expenditures to future years Budgetary and Fiscal Compliance How resources obtained and used within the legally adopted budget Service efforts and accomplishments (SEA) How well the government delivered its services

Hierarchy of authority GASB GASB Technical Bulletins and Industry Guides AICPA Practice Bulletins, if cleared by GASB Implementation Guides Other accepted practices

Characteristics of NFPs Exchanges not between entity and clients but between entity and donors Legal restrictions Different reporting issues

Objectives For NFP Basis for rational decision making Ability to provide services Assess stewardship of resources Provide information on resources and obligations Analyze performance, SEA Assess liquidity Understanding of financial information

Users z Donors z Creditors z Vendors z Regulators

Hierarchy of GAAP  Accounting Standards Codification (ASC)  AICPA Accounting research bulletins  APB Opinions  GASB Technical Bulletins  AICPA industry audit guides, SOPs and Practice Bulletins, if accepted by FASB  EITF  AICPA accounting interpretations and implementation guidelines

Review zThe objectives of governments & NFPs zHow governments and NFPs differ from corporations zAuthoritative literature for governments and NFPs zKnow the difference between Interperiod equity and budgetary compliance