Governmental and not for profit accounting

1. Governmental
and
Not-for-Profit Accounting
(ACFN 621)
MSc Accounting and Finance
Wubetu M. MBA,
Department of Accounting and Finance
Admas University

2. Chapter-1
Introduction
to
Governmental Not-for-Profit
Accounting
Govt and NFP Accounting 2

3. 1-3
What are Governmental
Organizations?
 General purpose governments
 Provide a wide variety of services
 Examples: Federal government, state governments,
cities, towns, townships, villages, counties, boroughs, and
parishes
 Special purpose governments
 Usually provide only a single or just a few services
 Examples: Independent school systems, public colleges
and universities, public hospitals, fire protection districts,
sewer districts, transportation authorities, and many
others

4. 1-4
What are Not-for-Profit
Organizations?
 Legally separate organizations
 Usually exempt from federal, state, and local
taxation
 Religious, community service, private educational
and health care, museums, and fraternal and
social organizations, among many other kinds of
organizations

5. 1-5
 Resource providers do not expect to
receive proportional benefits
 Lack of a profit motive
 Absence of transferable
ownership rights
How Do Governmental and
Not-For-Profit Organizations Differ
from Business Organizations?

6. 1-6
 Power ultimately rests in the hands of the people
 People delegate power to public officials through
the election process
 Empowered by and accountable to a higher level
government
 Taxation powers
How Do Governmental Entities
Differ From Not-For-Profit
Organizations?

7. 1-7
 Public corporations and bodies corporate and
politic
 Other organizations with one or more of the
following characteristics:
 Popular election of officers, or appointment of a
controlling majority of the governing body by
officials of another government
 Potential dissolution by a government with net
assets reverting to a government
 Power to enact and enforce a tax levy
Criteria for Determining Whether
an NPO is Governmental

8. Characteristics of G&NP
Organizations
 Absence of profit motive
 Owned by constituents – no stock
 Contributors of resources do not receive
proportional share of benefits
 Decisions made – directly or indirectly –
by voters
 Meetings where decisions are made
usually open to the public
Govt and NFP Accounting 8

9. Similarities to the Private Sector
 Operate in the same economy and compete
for same resources: financial, capital, and
human
 Acquire & convert scarce resources into
goods & services
 Provide goods and services, many of which
may be similar
 Use of accounting & other information
systems
 Need to operate economically, effectively, &
efficiently
Govt and NFP Accounting 9

10. Differences from the Private
Sector
 Organizational objectives
 Sources of financial resources
 Methods of evaluating performance and
operating results
Govt and NFP Accounting 10

11. Organizational Objectives
Businesses
 Operating Motive:
maximize income
from revenues
and other
resources
 Operational
Focus: report
quarterly but look
to the long-tem as
well
G&NPs
 Operating Motive:
maximize services
provided from
revenues and other
resources
 Operational Focus:
operate on annual
budget, so current
year is of primary
importance
Govt and NFP Accounting 11

12. Typical Activities of a SLG
 Governmental activities – unique to
SLGs
 Police and fire protection
 Education
 Social Services
 Courts
 Business-type activities – similar to
private sector operations
 Utilities
 Golf Courses
 Airports
Govt and NFP Accounting 12

13. Purpose of Governmental
Activities
 Provide goods and services that all constituents
need regardless of ability to pay for goods and
services
Govt and NFP Accounting 13

14. Sources of Financial Resources
(not found in private sector)
 Taxes: property taxes, sales taxes, and
income taxes
 Intergovernmental revenues: from other
governments
 Licenses & permits
 Fines & forfeitures
 Debt proceeds (typically not used for
operations)
Govt and NFP Accounting 14

15. Resource Allocation Mechanisms
 Restrictions placed by providers: typical of
grantors, taxes for specific purposes, &
debt proceeds
 Budget – allocates resources to functions
 Holding public officials accountable for
actions
Govt and NFP Accounting 15

16. 1-16
FASB
 Business organizations
 Nongovernmental not-for-profits
GASB
 Governmental organizations
 Governmental not-for-profits
FASAB
 Federal government and its agencies
 SOURSE OF FINANCIAL REPORTING STANDARDS page No 4
Sources of GAAP and
Financial Reporting Standards

17. 1-17
 Different financial report users with different
needs
 Governmental financial reporting focuses on
stewardship and accountability for how public
resources are raised and used to provide
services
Why Must Governmental Financial
Reporting Differ from Business
Financial Reporting?

18. 1-18
Governmental financial reports are used primarily
to:
 Compare actual financial results with legally
adopted budget
 Assess financial condition and results of
operations
 Assist in determining compliance with finance-
related laws, rules, and regulations
 Assist in evaluating efficiency and effectiveness
Objectives of Financial Reporting—
State and Local Governments (SLG)

19. 1-19
“ACCOUNTABILITY is the cornerstone of all
financial reporting in government “ (GASB
Concepts Statement No. 1, par. 56)
Objectives of Financial Reporting
SLG (Cont’d)

20. 1-20
Q: What do we mean by
accountability?
A: Accountability arises from 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
Objectives of Financial
Reporting— SLG (Cont’d)

21. 1-21
Q: How does “interperiod equity” relate
to accountability?
A: 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?
Objectives of Financial
Reporting—SLG (Cont’d)

22. 1-22
 Accountability is also the foundation of federal
government financial reporting
 Federal Accounting Standards Advisory Board
(FASAB) standards are targeted at both
internal users (management) and external
users
Objectives of Financial
Reporting— Federal Government

23. 1-23
Objectives of Financial
Reporting— Federal Government
(Cont’d)
Federal government financial reporting should assist
report users in evaluating:
Budgetary integrity
Operating performance
Stewardship
Adequacy of systems and controls

24. 1-24
Objectives of Financial
Reporting— Not-for-Profit (NFP)
Organizations
NFP financial reporting should provide information
useful in:
 Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and
performance
 Assessing economic resources, obligations, net
resources, and changes in them

25. 1-25
Minimum Requirement for General
Purpose External Financial Reporting
Management’s discussion and analysis
Government-wide Fund financial
financial statements statements
Notes to the financial statements
Required supplementary information
(other than MD&A)

26. 1-26
 Funds have separate self-balancing sets of
accounts used to account for resources
segregated for specific purposes or restricted
as to use by donors or grantors
 Funds are separate accounting and fiscal
entities (Chapters 3 provide detail information)
Fund Accounting

27. 1-27
Fund categories:
 Governmental
 Proprietary
 Fiduciary
Fund Accounting

28. 1-28
Governmental Funds
Characteristics:
 Focus on short-term flow of financial resources
 Only account for current assets and current
liabilities
 Use modified accrual basis of accounting
(revenues recognized when measurable and
available for spending and expenditures when
incurred)
 Closely tied to budgetary accounting

29. 1-29
Proprietary and Fiduciary Funds
Characteristics:
 Focus on flow of economic resources
 Accrual basis of accounting (revenues recognized
when earned and expenses when incurred)
 Account for both current and noncurrent assets
and current and noncurrent liabilities—similar to
business accounting

30. Reporting Issues & Problems
 Demonstrate compliance with restrictions on
use of financial resources
 Budgetary reporting
 Impact of restrictions on revenue recognition
 Difficulty in measuring effectiveness and
efficiency of operations
 Opportunity to hide or disguise availability of
resources
 Tax and debt limits
 Impact of materiality of reporting certain
actions
Govt and NFP Accounting 30

31. Financial Report Uses
 Comparing results with legally adopted
budgets
 Assessing financial condition and results
of operations
 Assisting in determining compliance with
finance-related laws, rules & regulations
 Assisting in evaluating efficiency &
effectiveness
Govt and NFP Accounting 31

32. 1-32
Comprehensive Annual Financial
Report (CAFR)
Introductory section
Financial section
Statistical section

33. 1-33
 Title page
 Contents page
 Letter of transmittal
 Other (as desired by
management)
CAFR - Introductory Section

34. 1-34
 Auditor’s report
 Basic financial statements
 Required supplementary information
(RSI)(other than MD&A)
 Combining and individual fund
statements and schedules
CAFR - Financial Section

35. 1-35
Tables and charts showing multiple-year
trends in financial and socio-economic
information
CAFR - Statistical Section

36. 1-36
Management’s Discussion and
Analysis (MD&A)
Brief objective narrative
providing management’s
analysis of the government’s
financial performance

37. 1-37
Basic Financial Statements
Government-wide financial statements
 Statement of net assets (Illustration A1-1)
 Statement of activities (Illustration A1-2)

38. 1-38
Basic Financial Statements
Government-wide Financial
Statements (Cont’d)
Points of interest (Ill. A1-1 and A1-2)
 Information is reported separately for the
primary government and discretely presented
component units
 Within the primary government, information is
reported separately for governmental and
business-type activities

39. 1-39
Basic Financial Statement—
Government-wide Financial
Statements (Cont’d)
Points of interest (Cont’d)
 All financial information in the government-
wide financial statements is reported on the
accrual basis with an economic resources
focus
—similar to business financial reporting
 Assists in assessing operational accountability
—how efficiently resources are being used

40. 1-40
Basic Financial Statements—Fund
Financial Statements
Governmental funds
 Balance sheet—governmental funds (Ill. A1-3)
with reconciliation (Ill. A1-4)
 Statement of revenues, expenditures, and
changes in fund balances—governmental funds
(Ill. A1-5) with reconciliation (Ill. A1-6)
 These statements report information separately for
the General Fund and other major funds (Chapter
2 defines major funds)

41. 1-41
Basic Financial Statements—Fund
Financial Statements (Cont’d)
Governmental funds—points of interest
 Focus on flow of current (i.e., short-term)
financial resources recognized on the
modified accrual basis of accounting
 Assist in assessing fiscal accountability—
whether financial resources were raised and
expended in compliance with budgetary and
other legal provisions

42. 1-42
Basic Financial Statements—Fund
Financial Statements (Cont’d)
Governmental funds—points of interest
(Cont’d)
 Reporting the same information about
governmental activities in two different ways
creates a need to reconcile the information
reported in the governmental fund financial
statements to that in the Governmental
Activities Column of the government-wide
statements (see Illustrations A1-4 and A1-6)

43. 1-43
Basic Financial Statements—Fund
Financial Statements (Cont’d)
Proprietary funds
 Statement of net assets—proprietary funds
(Ill. A1-7)
 Statement of revenues, expenses, and
changes in fund net assets—proprietary
funds (Ill. A1-8)
 Statement of cash flows—proprietary funds
(Ill. A1-9)

44. 1-44
Basic Financial Statements—Fund
Financial Statements
Proprietary funds—points of interest
 Reports information for enterprise funds and
internal service funds using an economic
resources focus and accrual basis of
accounting
 Information is reported in separate columns for
major enterprise funds. All internal service
fund information reported is combined in a
single column

45. 1-45
Basic Financial Statements—Fund
Financial Statements (Cont’d)
Fiduciary funds
 Statement of fiduciary net assets (Ill. A1-10)
 Statement of changes in fiduciary net assets
(Ill. A1-11)

46. 1-46
Basic Financial Statements—Fund
Financial Statements (Cont’d)
Fiduciary funds—points of interest
 Fiduciary activities relate to the government’s
responsibility as an agent or trustee to hold
and/or manage resources for the benefit of
private parties
 Since fiduciary resources cannot be used by
the government, they are reported only in the
fiduciary fund financial statements—not in the
government-wide statements

47. Annual Financial Reporting
Comprehensive Annual Financial Report (CAFR)
 Should be prepared for all governmental
entities
 Sections include:
 Introductory – little GAAP for this section
 Financial – most GASB standards apply to
this section
 Statistical – see recently issued GASBS 44
Govt and NFP Accounting 47

48. Annual Financial Reporting
Minimum reporting requirements
 Management’s Discussion & Analysis
 Basic Financial Statements
 Government-wide financial statements
 Fund financial statements
 Notes to the financial statements
 Required supplementary information
other than MD&A
Govt and NFP Accounting 48

49. 1-49
Concluding Comments
 Accounting and reporting for governmental and
not-for-profit entities differ from those of for-profit
entities because each type of entity has different
purposes and reporting objectives
 Familiar with current GASB, FASB, and FASAB
standards relative to governmental and not-for-
profit organizations

50. Thank you
50
Govt and NFP Accounting