MODULE 1 Basics of Governmental


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  • NFP examples: charities, foundations, trade associations, labor unions, etc.; accounting categories: colleges & universities, NP hospitals, research & health service organizations, clubs, business associations
  • * Source: Statistical Abstract [1997:]
  • GASB Concept Statement # 1 Interperiod equity—maintain balance of spending to taxes & other revenues, generally on a year-to-year basis, with a focus on blanced budgets; a long-term focus is called intergenerational equity
  • Budgets are more important to governing boards & citizens; citizens likely to receive very abbreviated financial information, if any. Bond investors are the most serious users of CAFRs.
  • FASB-- 7 member board; GASB—5 member board; same due process: Agenda, Discussion Memorandum (DM), Exposure Draft (ED), & statement
  • MODULE 1 Basics of Governmental

    1. 1. MODULE 1 Basics of Governmental & Nonprofit Accounting: Chapters 1-5
    2. 2. Module 1 Content <ul><li>Government, NFP Basics </li></ul><ul><li>Fund Accounting </li></ul><ul><li>Budgeting </li></ul><ul><li>Modified Accrual vs. Full Accrual </li></ul><ul><li>Financial Reporting & GASB 34 </li></ul><ul><li>Revenues </li></ul><ul><li>Expenditures </li></ul>
    3. 3. Chapter 1 The Government and Not-for-Profit Environment
    4. 4. Basics <ul><li>Describing governments & nonprofits </li></ul><ul><li>Governmental characteristics </li></ul><ul><li>Nonprofit characteristics </li></ul><ul><li>Standard-setting: GASB & FASB </li></ul><ul><li>Financial Reporting </li></ul><ul><li>Users </li></ul>
    5. 5. Describing Governments & Nonprofits <ul><li>US governments: federal, state & local </li></ul><ul><li>Branches: legislative, executive & judicial </li></ul><ul><li>Constitution: federal vs. state jurisdiction </li></ul><ul><li>Nonprofits: over 1.5 million organizations, $1.3 trillion in assets </li></ul><ul><li>Nonprofits: colleges & universities, hospitals, voluntary health & welfare organizations, other </li></ul><ul><li>Nonprofits: importance of IRS & tax-exempt status </li></ul>
    6. 6. Characteristics of Governments & Nonprofits <ul><li>No profit motive </li></ul><ul><li>Ownership interests are nontransferable (& usually not defined) </li></ul><ul><li>Fund accounting recommended </li></ul><ul><li>Differential GAAP </li></ul><ul><li>Emphasis of accountability of resources & flow of these resources </li></ul><ul><li>Unique revenue sources </li></ul><ul><li>Often lack of direct cost/benefit relationships </li></ul><ul><li>Importance of budgeting </li></ul>
    7. 7. Government Characteristics <ul><li>Federal Government: Broad jurisdiction, 2000 receipts $1,958 billion; 2000 outlays $1,781 billion </li></ul><ul><li>50 states: jurisdiction defined in Constitution, establishes legal roles of local governments </li></ul><ul><li>87,453 local governments: 3,043 counties; 36,001 cities; 13,726 school districts; 34,683 special districts </li></ul>
    8. 8. Other Governmental Financial Characteristics <ul><li>Ability of governments to levy taxes </li></ul><ul><li>Use of modified accrual; revenues & expenditures; budget entries </li></ul><ul><li>Financial operations may be restricted—one reason for fund accounting </li></ul><ul><li>Power to issue tax-exempt debt (e.g, municipal bonds) </li></ul><ul><li>Intergovernmental financial relationships (importance of intergovernmental revenues) </li></ul><ul><li>Overlapping jurisdictions & overlapping debt </li></ul><ul><li>GASB 34: addition of government-wide statements (full accrual) & other reporting requirements </li></ul>
    9. 9. Nonprofit Characteristics <ul><li>Importance of IRS & tax-exempt status </li></ul><ul><li>Nonprofits must file for tax-exempt status: charities are recognized as 501(c)(3) organizations, based on filing Form 1023 </li></ul><ul><li>Annual report, Form 990, must be followed using IRS format </li></ul><ul><li>Other nonprofit categories also exist </li></ul><ul><li>See </li></ul>
    10. 10. Purpose of Financial Reporting <ul><li>Assess financial condition (operating results & financial resources) </li></ul><ul><li>Compare actual results with the budget </li></ul><ul><li>Legal compliance </li></ul><ul><li>Evaluate performance (especially efficiency and effectiveness; service effort & accomplishment) </li></ul>
    11. 11. Governmental Financial Reports <ul><li>Comprehensive Annual Financial Report (CAFR)--two levels of reporting: (1) government-wide (full accrual), (2) fund accounting (modified accrual for governmental funds) </li></ul><ul><li>Annual Operating Budget(s) </li></ul><ul><li>Other documents: for citizens or media; specialized reports, etc. </li></ul><ul><li>Most governments have well-developed web pages </li></ul><ul><li>Note importance of interperiod equity </li></ul>
    12. 12. Users of Governmental Financial Reports <ul><li>Executives & employees </li></ul><ul><li>Governing Boards (legislative function) </li></ul><ul><li>Investors & Creditors (importance of municipal bonds; credit-rating agencies) </li></ul><ul><li>Taxpayers & voters </li></ul><ul><li>Regulatory agencies (e.g., Texas Education Agency for Texas ISDs) </li></ul>
    13. 13. Standard Setting Financial Accounting Foundation Financial Accounting Standards Board (1973) [Non-profits] Governmental Accounting Standards Board (1984) [Governments]
    14. 14. Standard Setting History <ul><li>Government GAAP initially established by National Council of Governmental Accounting (NCGA); GASB established in 1984 </li></ul><ul><li>Nonprofit GAAP initially established by “industry”: (1) colleges & universities, (2) NP hospitals, (3) other—AICPA would write two audit guides (voluntary health & welfare organizations & “other”); FASB took over jurisdiction in the 1980s. </li></ul><ul><li>Federal government establishes its own standards, through the Federal Accounting Standards Advisory Board (FASAB) </li></ul>
    15. 15. Chapter 2 Fund Accounting
    16. 16. Fund Accounting <ul><li>What is a Fund? The government or nonprofit is the economic entity. The fund is the fiscal & accounting entity. Each organization usually has several funds. Each fund is a separate self-balancing set of accounts. A major reason for funds is control purposes, both legal & fiscal </li></ul>
    17. 17. Funds Used by State & Local Governments <ul><li>Governmental Funds: also called source & disposition funds or expendable funds. Most governmental activities are financed through these funds. </li></ul><ul><li>Proprietary Funds: also called business-type funds, which handle most activities financed through user charges. </li></ul><ul><li>Fiduciary Funds or trust & agency funds, where government acts as trustee or agent </li></ul>
    18. 18. Governmental Funds <ul><li>General Fund: primary operating fund; by definition it accounts for all activities not required for another fund. The General Fund is used for unrestricted operations. </li></ul><ul><li>Special Revenue Fund: specific revenue source used for a specific purpose. This is an operating fund. </li></ul><ul><li>Capital Projects Fund: Used specifically for the acquisition & construction of capital assets. </li></ul><ul><li>Debt Service Fund: Used for funding & payment of interest & principal on long-term debt. </li></ul><ul><li>Permanent Fund: New-required by GASB 34—Trust Funds to support government programs. </li></ul>
    19. 19. Proprietary Funds <ul><li>Enterprise Funds: provide services to the public on a user-fee basis. The most common category is government-owned utilities; also, mass transit, airport, housing authorities, government-owned hospitals, etc. </li></ul><ul><li>Internal Service Fund: provide services to other departments in the same government, such as motor pool, data processing, or supplies purchasing. </li></ul>
    20. 20. Fiduciary Funds <ul><li>Pension Trust Funds: provide retirement benefits to governmental employees </li></ul><ul><li>Permanent private-purpose trust funds: endowments to benefit the government (accounted for as Permanent Funds), other organizations or individuals </li></ul><ul><li>Agency Funds: temporary accounting for assets held for other governments or organizations. </li></ul>
    21. 21. Financial Reports <ul><li>The complete annual report is the Comprehensive Annual Financial Report (CAFR). </li></ul><ul><li>The three sections are: Introductory Section, Financial Section, & Statistical Section. </li></ul><ul><li>Governments also prepare annual operating budgets & may have capital budgets & other statements. </li></ul>
    22. 22. CAFR (“Old Format”) <ul><li>Introductory Section: includes transmittal letter & may include Certificate of Achievement, organization chart, table of contents, etc. </li></ul><ul><li>Financial Section: includes Auditors’ Report; Combined Financial Statements, Notes; & statements by fund category. </li></ul><ul><li>Statistical Section: various tables & other information on economic, demographic & supplementary fiscal data. </li></ul>
    23. 23. CAFR (GASB 34 Format) <ul><li>Same basic format with the following additions: </li></ul><ul><li>Management Discussion & Analysis (MD&A) added to Introductory Section. </li></ul><ul><li>Government-wide Financial Statements added, based on full accrual accounting—(1) statement of net assets & (2) statement of activities. </li></ul>
    24. 24. Chapter 3 Issues of Budgeting & Control
    25. 25. Budgeting <ul><li>The Current Operating Budget (also called an appropriation budget): a plan of financial operations for the period. The annual budget authorizes, and provides the basis for control of, financial operations during the year (NCGA Statement #1). </li></ul><ul><li>The Budget is a formal expression of public policy on objectives & priorities & how the resources will be provided to meet them (NCGA Statement #1). </li></ul>
    26. 26. Functions of Budgets <ul><li>Planning: type, quantity & quality of services to be provided & how to pay for these services. </li></ul><ul><li>Control: budgets insure that resources are available & are used to monitor compliance with legislative spending authority. </li></ul><ul><li>Review: budgets can be compared to actual results to evaluate whether legislative & other legal mandates were carried out, as well as effectiveness & efficiency. </li></ul>
    27. 27. Types of Annual Operating Budgets <ul><li>Traditional Budget: classifies spending by line item (object classification), which focuses on control. Appropriations specifically limits spending on each line item. </li></ul><ul><li>Performance Budget: use measurable units of SEA. </li></ul><ul><li>Program Budgets: budgets are defined by programs, based on specific objectives for each identified program. </li></ul>
    28. 28. The Budget Cycle <ul><li>Budget Preparation (several months before the start of the fiscal year) </li></ul><ul><li>Legislative Approval (before the start of the fiscal year) </li></ul><ul><li>Fiscal Year Operations (Budget Execution) </li></ul><ul><li>Feedback & Review (after the end of the fiscal year) </li></ul>
    29. 29. Budget Preparation <ul><li>Chief financial officer (CFO) accumulates budget requests based on chief executive officer (CEO) & City Council objectives, along with revenue forecasts to develop a proposed budget. </li></ul><ul><li>Inputs: revenue forecasts, expenditure requests & priorities </li></ul><ul><li>Outcome: proposed (executive) budget </li></ul>
    30. 30. Legislative Approval <ul><li>Legislature must approve the budget before taxes can be levied & appropriations spent. </li></ul><ul><li>Considerations: tax levy(ies), bond (& other borrowing) initiatives, budget authorization & mandate </li></ul><ul><li>Outcome: annual operating budget (this process & the budget is publicly available) </li></ul>
    31. 31. Fiscal Year Operations (Execution) <ul><li>Budget journal entries begin the new fiscal year accounting & operations depend on these budget entries. </li></ul><ul><li>Actual revenues & expenditures </li></ul><ul><li>Budget revisions & transfers </li></ul><ul><li>Adjusting & closing process </li></ul>
    32. 32. Feedback & Review <ul><li>Reporting & auditing: financial reports are prepared & audited </li></ul><ul><li>CAFR is issued </li></ul><ul><li>Other analysis conducted: budget to actual comparisons, service effort & accomplishment, etc. </li></ul>
    33. 33. Budget Entries <ul><li>Revenue-related: Debit estimated revenues & Credit fund balance. </li></ul><ul><li>Expenditure-related: Debit fund balance & credit Appropriations. </li></ul><ul><li>Operations: revenues are credited when “measurable & available” & expenditure debited when corresponding liability is recorded. </li></ul><ul><li>Both budget & actual entries are closed out at year-end. </li></ul>
    34. 34. Encumbrances <ul><li>Encumbrances are journal entries used to recognize future commitments (such as purchase orders) & “earmark” these funds for control purposes. </li></ul><ul><li>When commitments are recognized (e.g., for approved purchase orders) debit encumbrances & credit fund balance reserved for encumbrances. </li></ul><ul><li>Encumbrances are reversed when expenditures are recognized for the commitments. </li></ul>
    35. 35. Chapter 4 Recognizing Revenues in Governmental Funds
    36. 36. Revenues <ul><li>Basis of Accounting [when transactions/events are recognized]: Modified Accrual Accounting in the Governmental Funds. </li></ul><ul><li>Measurement Focus [what is being measured]: Current (expendable) financial resources. </li></ul><ul><li>Revenues are recognized when measurable & available. </li></ul>
    37. 37. Revenue Recognition <ul><li>Revenue must be measurable & available. </li></ul><ul><li>Measurable: amount is known or can be reasonably estimated. </li></ul><ul><li>Available: “physically available”: collected in cash during the fiscal year or shortly thereafter (“60 day rule” for property tax); legally available (e.g., levied or can can be spent based on contract or regulation). </li></ul><ul><li>Note: importance of nonexchange revenues (pp. 123-4). </li></ul>
    38. 38. Resource Inflows <ul><li>Revenues are recorded by source: Property Taxes Sales Taxes Licenses & permits Fines & Forfeitures Intergovernmental Grants Other </li></ul><ul><li>Other Financing Sources are resource inflows that include transfers in, bond proceeds, etc. </li></ul>
    39. 39. Nonexchange Revenues <ul><li>Imposed nonexchange revenues: assessment on individuals or businesses; e.g., property taxes & fines. </li></ul><ul><li>Derived tax revenues: taxes derived from exchange transactions, such as sales & income taxes. </li></ul><ul><li>Government-mandated, such as a state requiring a city to use resources for specific purposes. </li></ul><ul><li>Voluntary: contractual agreements such as contributions from donors. </li></ul><ul><li>Note time & purpose limitations (these usually must be met before revenues are recognized). </li></ul>
    40. 40. Simplified Budgeting Strategy (Local Governments) <ul><li>Estimate spending needs. </li></ul><ul><li>Forecast all revenues except property tax. </li></ul><ul><li>The difference is the amount that has to be collected from property taxes. </li></ul><ul><li>Calculate property tax rates (based on net assessed value & collection estimates) & total tax levy. </li></ul>
    41. 41. Budget Strategy Example (1)—Property Tax <ul><li>Anticipated spending needs = $800,000; forecasted revenue, all sources except property tax = $200,000; then revenue collected from property tax = $600,000. </li></ul><ul><li>Assuming that 92% of property tax is collected (assume no delinquent tax collection) then tax levy = 600,000/.92 = $652,174 for a balanced budget. </li></ul>
    42. 42. Budget Strategy Example (2)—Property Tax <ul><li>Net assessed value: assume total assessed value of property is $2.3 billion less property exemptions of $300 million—net assessed value = $2 billion. </li></ul><ul><li>Tax rate: property tax required / (collection rate x net assessed value/100) = 600,000 / (.92 x 2 billion) = $0.3261 per $100 NAV. </li></ul><ul><li>Tax levy = $2 billion/100 x 0.326087 = $652,174. </li></ul>
    43. 43. Budget Strategy Example (3)—Journal Entries <ul><li>Budget entry (balanced budget): Estimated Revenues 800,000 Fund Balance 800,000 </li></ul><ul><li>Tax Levy: Taxes Receivable [Current] 652,174 Revenues-Property Tax 600,000 Allowance for Uncoll. Tax 52,174 </li></ul>
    44. 44. Budget Strategy Example (4)—Closing Entries <ul><li>Fund Balance 800,000 Estimated Revenues 800,000 Revenue-Property Tax 600,000 Fund Balance 600,000 </li></ul>
    45. 45. Other Revenues <ul><li>Fines (pp. 129-130) </li></ul><ul><li>Sales Taxes (pp. 130-3) </li></ul><ul><li>Income Taxes (pp. 133-5) </li></ul><ul><li>Grants (pp. 135-142) Unrestricted Grants Restricted Grants (designated purposes) Contingent Grants (based on specific actions or occurrences) Entitlements (entitled by formula) Shared Revenues (on a predetermined basis) Payments in Lieu of Taxes (replaces property taxes) </li></ul><ul><li>Sale of capital assets (pp. 142-3) </li></ul><ul><li>Investment Income: investments recorded at fair value & investment income includes changes in fair value (pp. 143-7). </li></ul>
    46. 46. Other Financing Sources <ul><li>Resource inflows that include transfers in & bond proceeds. </li></ul><ul><li>They are operating inflows, but not considered revenues. </li></ul><ul><li>Monies are often transferred from one fund to another; e.g., the General Fund transfers $10,000 to the Debt Service Fund for an interest payment: this is an other financing sources to the DSF. </li></ul><ul><li>Bond proceeds (usually to a Capital Project Fund) also are other financing sources (the money has to be paid back). </li></ul>
    47. 47. Government-wide Statements <ul><li>In addition to fund accounting, state & local governments prepare government-wide statements based on full accrual accounting. </li></ul><ul><li>Generally, the government keeps its books using fund accounting, then makes an additional set of adjusting entries to arrive at the information to prepare government-wide statements. </li></ul><ul><li>Therefore, revenues are recognized on a different basis, similar to commercial accounting. </li></ul><ul><li>Generally, the major difference is that “available” is not a criteria for revenue recognition. </li></ul>
    48. 48. Chapter 5 Recognizing Expenditures in Governmental Funds
    49. 49. Expenditures <ul><li>Expenditures are associated with the acquisition of goods & services (usually recognized when the liability is recorded). Expenditures are decreases in net financial resources. </li></ul><ul><li>Expenses are associated with the consumption of goods & services. Expenses are decreases in net economic resources. </li></ul><ul><li>Expenditures are used instead of expenses in the governmental funds. [Expenses are used for government-wide statements.] </li></ul><ul><li>The acquisition of equipment for $10,000 cash in a general fund would be: </li></ul><ul><li>Expenditures-Capital Asset 10,000 Cash 10,000 </li></ul>
    50. 50. Resource Outflows <ul><li>Expenditures are usually cross-classified by (1) department or program (e.g., public works, public safety, parks & recreation) & (2) object of expenditures (e.g., salaries, supplies, maintenance, etc.). </li></ul><ul><li>Other financing uses are resource outflows, with transfers out being the most common. </li></ul>
    51. 51. Expenditure Characteristics <ul><li>Mainly associated with exchange transactions; e.g., employee compensation, acquisition (or use) of supplies. </li></ul><ul><li>Examples: Wages & Salaries (pp. 164-171) Supplies (pp. 173-5): purchase or consumption methods allowed Capital assets (pp. 176-180) Non-exchange transactions (pp. 183-4) </li></ul>
    52. 52. Spending Entries (1): Budget <ul><li>Spending needs: salaries, $650,000; supplies, $150,000. </li></ul><ul><li>Budget entry: Fund Balance 800,000 Appropriations 800,000 </li></ul>
    53. 53. Spending Journal Entries--Salaries <ul><li>Salaries: Expenditures-Salaries 642,000 Salaries Payable 642,000 </li></ul><ul><li>Year-end accruals: at year-end, expenditures are recognized for the days works for which they haven’t been paid. Expenditures-Salaries 8,000 Accrued Salaries 8,000 </li></ul>
    54. 54. Spending Journal Entries--Supplies <ul><ul><li>Supplies (Purchase method) Encumbrances 150,000 Reserve for Encumbrances 150,000 </li></ul></ul><ul><ul><li>Reserve for Encumbrances 150,000 Encumbrances 150,000 </li></ul></ul><ul><ul><li>Expenditures-Supplies 150,000 Vouchers Payable 150,000 [Note: supplies on hand at year-end total $10,000.] </li></ul></ul>
    55. 55. Spending Closing Entries <ul><li>Appropriations 800,000 Fund Balance 800,000 </li></ul><ul><li>Fund Balance 800,000 Expenditures-Salaries 650,000 Expenditures-Supplies 150,000 </li></ul><ul><li>Inventory-Supplies 10,000 Fund Balance Reserved for Supplies 10,000 </li></ul>
    56. 56. Other Salary Considerations <ul><li>Vacation Pay: recorded in year vacation actually taken [accrued for government-wide reporting]. </li></ul><ul><li>Sick Leave: recorded in year sick leave taken [accrued for government-wide reporting.] </li></ul><ul><li>Pension contributions: generally recorded when cash payment made to a pension trust fund [recorded as expenses based on calculated amount for government-wide reporting]. </li></ul>
    57. 57. Supplies-Consumption Method <ul><li>[Encumbrances, same as above.] </li></ul><ul><li>Supplies Inventory 150,000 Vouchers Payable 150,000 </li></ul><ul><li>Expenditures-Supplies 140,000 Supplies Inventory 140,000 </li></ul><ul><li>Fund Balance 10,000 Fund Balance Reserved for Supplies 10,000 </li></ul>
    58. 58. Prepayments <ul><li>Prepayments are common for insurance & certain other spending items; General Fund (& other governmental funds) can use the purchase or consumption method. </li></ul><ul><li>Purchase method: Expenditures-Insurance 10,000 Vouchers Payable 10,000 </li></ul>
    59. 59. Prepayments-Consumption Method <ul><ul><li>Prepaid Insurance 10,000 Vouchers Payable 10,000 </li></ul></ul><ul><ul><li>Usage (usually by month): </li></ul></ul><ul><ul><li>Expenditures-Insurance 3,000 Prepaid Insurance 3,000 </li></ul></ul>
    60. 60. Capital Assets <ul><li>Expenditures-Capital Assets 20,000 Contracts Payable 20,000 </li></ul><ul><li>If the money is on a long-term note: Cash 20,000 Other Financing Sources- Note proceeds 20,000 Expenditures-Capital Assets 20,000 Contracts Payable 20,000 </li></ul><ul><li>Capital Lease: Expenditures-Capital Assets 20,000 Other Financing Sources- Capital Lease 20,000 </li></ul><ul><li>[Note: long-term liabilities are serviced in a debt service fund.] </li></ul>
    61. 61. Multiple-fund Transactions <ul><li>Many transactions involve more than one fund; therefore, journal entries are required in two or more funds. </li></ul><ul><li>A common example in interfund transfers (classified as other financing sources & uses). Other examples of financing sources & uses include proceeds from long-term debt & proceeds from the sales of capital assets. </li></ul><ul><li>Note that charges for services would be recorded as revenue & expenditures (or expenses). </li></ul>
    62. 62. Interfund Transfer <ul><li>The General Funds sends $20,000 in cash to the Debt Service Fund for a future interest payment on long-term notes: General Fund Transfers Out 20,000 Cash 20,000 Debt Service Fund Cash 20,000 Transfers In 20,000 </li></ul>