1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 1 Introduction to Governmental and Not-for-Profit Organizations Copyright © 2015 McGraw-Hill Education. All rights reserved.

2. 1-2 Chapter 1 – Learning Objectives Obtain an overview of financial reporting for nonbusiness entities Distinguish between private and public sector organizations Identify the sources of authoritative accounting standards for various public and private sector organizations Define the 11 fund types used by state and local governments

3. 1-3 Why Study GNP Accounting? Governments and NFP organizations hire accountants Governments and NFPs engage accountants to perform their audits As citizens and donors we wish to better understand how taxes and charitable donations are used

4. 1-4 Differences in the GNP Environment Organizational Purposes: Governments exist for the well being of citizens by providing public services, not for the purpose of generating returns to owners. Sources of Revenues: Governments derive many of their resources from taxes and other non-exchange transactions.

5. 1-5 Differences in the GNP Environment Potential for Longevity: Governments very rarely go out- of-business. This long term view of operations changes the focus of accounting to a longer-term focus on the sustainability of services and the ability to meet future demand. Relationship with Stakeholders: Governments have an obligation to demonstrate accountability for public funds. Role of the Budget: Government budgets often carry the authority of law, preventing public officials from spending outside their budgetary authority.

6. 1-6 How Accounting Must Adapt to GNP Environmental Differences Traditional view of the equity accounts must be modified Budget compliance may be as important as income measurement When do we recognize revenue in the absence of an exchange transaction? Reports must reflect the existence of restrictions on the use of certain resources Non-financial performance measures are relatively more important for measuring effectiveness

7. 1-7 U.S. STANDARD SETTERS Federal government and its agencies  FASAB - Federal Accounting Standards Advisory Board  GAO – Governmental Accountability Office  U.S. Treasury Department  OMB - Office of Management and Budget

8. 1-8 STANDARD SETTERS cont’d State and Local Governments - Covers basic governments and entities owned or controlled by governments  Predecessor: NCGA - National Council on Governmental Accounting Private Not-for-profits - Covers not-for-profits not related to government entities — private nonprofit hospitals, colleges, museums, etc.

9. 1-9 Authoritative Literature Statements, Interpretations, and Technical Bulletins are primary literature that specifies GAAP (generally accepted accounting principles) However, in absence of adequate guidance, preparers may look at other documents GAAP hierarchy (Illustration 1-2) guides the preparer in the priority of importance for accounting guidance

10. 1-10 State and Local Government: GAAP hierarchy Category GASB (S TATEMENT 55) State and Local Governments A.  GASB Statements and Interpretations B.  GASB Technical Bulletins and,  if cleared by the GASB, AICPA Industry Audit and Accounting Guides and Statements of Position C.  AICPA Practice Bulletins that have been cleared by the GASB D.  Implementation guides (Q&As) published by the GASB staff, and  practices that are widely recognized and prevalent in state and local governments.

11. 1-11 Concepts Statements Concepts project began in the 1970s to guide the standard setters in establishing GAAP Concepts statements guide the development of new standards Concepts statements are not intended as authoritative GAAP, but are used for guidance only if no other literature addresses an issue

12. 1-12 Concepts Statements All three standard setting bodies have a series of Concepts Statements: FASAB – federal government FASB – private entities GASB – state and local governments

13. 1-13 FASAB Concepts: Six Concept Statements Concepts 1: Objectives of Federal Financial Reporting Concepts 2: Entity and Display Concepts 3: Management’s Discussion and Analysis Concepts 4: Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government Concepts 5: Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial Statements Concepts 6: Distinguishing Basic Information, Required Supplementary Information, and Other Accompanying Information

14. 1-14 FASB Concepts Statement No. 6: Objectives of NFP Financial reports 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

15. 1-15 GASB Concepts Statements: Statement #1 – Objectives Citizens have a right to know why resources are being raised and how they will be used GASB #1 Objectives of Financial Statements: o Allow comparison of actual with budgeted results o Help users assess financial condition and results of operations o Show compliance with laws, rules and regulations o Assist in evaluating efficiency and effectiveness

16. 1-16 Concept Statement #2 Service Efforts and Accomplishments Reporting (covered in Chapter 13) and amended by Concepts Statement 5 Includes both Financial and Nonfinancial measures of performance

17. 1-17 Concept Statement #3 Communication Methods in General Purpose Financial Reports that Contain Basic Financial Statements Established the framework for what information is presented in: Basic Financial Statements Notes Required Supplementary Information Supplementary Information

18. 1-18 How Do GASB’s 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 explains that nonfinancial measures (i.e. measures other than dollars) are required to assess effectiveness

19. 1-19 Codifications The GASB, FASB and FASAB publish codifications (organized versions) of accounting standards. As you would expect, the GASB Codification includes statements, interpretations and technical bulletins issued by the GASB. However the Codification also includes level-B standards issued through AICPA Audit and Accounting Guides and Statements of Position.

20. 1-20 Using the GASB codification Codification references are presented in two parts: the first (section) identifies a topic and the second identifies a paragraph within the codification.

21. 1-21 Section #sTopics 1000 - 1900General Principles 2000 - 2900Broad Financial Reporting Requirements Letters (A – Z) Specific Balance Sheet or Operating Accounts Double lettersSpecialized Industries or Reporting Units Paragraph #sLevel of Authority 100 - 499GASB Standards (Level A GAAP) 500 - 599Definitions 600 - 699GASB Technical Bulletins and AICPA Audit and Accounting Guides and Statements of Position (Level B GAAP) 700 - 799AICPA Practice Bulletins (Level C GAAP) 900 - 999Non-authoritative discussions Format of Codification References

22. 1-22 Required Content of State and Local Government Financial Reports

23. 1-23 Overview of Basic Financial Statements Government-wide Statements Statement of Net Position 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 Chapter 2

24. 1-24 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 water utility Statement of Net Position Statement of Revenues, Expenses, and Changes in Fund Net Position Statement of Cash Flows Fiduciary — holding money in trust for others Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position

25. 1-25 Reporting Perspectives 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

26. 1-26 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 financed by taxes and other involuntary contributions

27. 1-27 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 in the fund when a liability is incurred

28. 1-28 What is a “fund” - as the term is used for state and local government accounting? A fund Represents a part of the activities of some organization Is an accounting entity Self-balancing set of accounts, reflecting the assets, liabilities, net assets, and changes in those balances Segregates resources for specific activities In such a way as to ensure compliance with appropriate regulations or restrictions

29. 1-29 State and Local Government Fund Types Governmental type Used for activities that are largely unique to the government environment and do not fall into either the proprietary or fiduciary categories Proprietary type Business-type activities Fiduciary type Acting as an agent or trustee of moneys that generally belong to other parties

30. 1-30 Five Governmental-Type Funds PERMANENT FUNDS - account for and report resources that are restricted to the extent that only earning, and not principal, may be used for purposes that support the reporting government’s programs CAPITAL PROJECTS FUNDS - account for and report financial resources that are restricted, committed or assigned to expenditure for capital outlays. As such, it accounts for the purchase or construction of major capital improvements, except those purchased or constructed by a proprietary (and less commonly, fiduciary) fund

31. 1-31 Five Governmental-Type Funds DEBT SERVICE FUNDS - account for and report financial resources that are restricted, committed or assigned to expenditure for principal and interest, other than interest or principal on proprietary or fiduciary activities.

32. 1-32 Five Governmental-Type Funds, con’t SPECIAL REVENUE FUNDS - account for and report the proceeds of specific revenue sources that are restricted or committed (not merely assigned) to expenditure for specified purpose other than debt service or capital projects. These include activities funded by federal or state grants or by taxes specifically restricted to certain activities. GENERAL FUND ‑ accounts for most of the basic services provided by the government. Technically, it accounts for and reports all financial resources not accounted for and reported in another fund.

33. 1-33 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.

34. 1-34 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.

35. 1-35 How Many Funds Are Needed? Must have one and only one General fund May not need one of every fund type No outstanding long-term debt? Don’t need a debt service fund. More than one of some types of funds Four building projects? A government might use four capital projects funds; or could choose to combine some. Exact number depends on judgment. Use the minimum number that will allow compliance with legal and other restrictions

36. 1-36 Importance of the Budget in Governmental 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

37. 1-37 Comprehensive Annual Financial Report The CAFR contains the financial report of the governments. The components of a CAFR will be illustrated in Chapter 2