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8/3/2019 ACC 433 Copley Ch 01
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1-1
Essentials of Accounting for
Governmental and
Not-for-Profit Organizations
Chapter 1
Introduction to Accounting and Financial Reportingfor Governmental
and Not-for-Profit Organizations
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
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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
Fund Types
Overview of financial statements
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Why Study GNP Accounting?
Governments and NFP organizations hire
accountants
CPA firms and states engage accountants toperform their audits
As citizens and donors we wish to betterunderstand how taxes and charitable
donations are used
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The truth is that all men having
power ought to be mistrusted.James Madison
www.Seethespending.org
US Attorney, Southern District
Women embezzle more than men;
Men falsify financial statements more thanwomen
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Types of Organization page 2
Public owned or controlled by governments
Private NOT owned or controlled by
governments
± Businesses owned by individuals and exist to
generate a profit for those owners
± Not-for-Profit no owners and theorganizations purpose is something other than to
provide goods or services for a profit.
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What are Not-for-Profit Entities?
Entities which exist solely to provideprograms and services that are of public
benefit
± Provide services that may not be provided bylocal, state or federal government
± Incorporated in the state in which they do
business
± Do not distribute surplus funds to owners or
shareholders
± Tax exempt
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What are Government Entities?
Public corporations an instrumentality of
the state, founded and owned in the public
interest, supported by public funds, andgoverned by those deriving their authority
from the state
Bodies corporate and politic state, county,city
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What are Governmental Entities? continued
General Purpose:
± Provide a wide variety of services such ashighways, police & fire protection, etc.
± Federal government, State, City, County, etc.
Special Purpose:
± Provide a single or limited number of services
± Public colleges & universities, school systems,water & sewer, hospitals, etc.
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Differences in the GNP Environment
Organizational Purposes: Governments
exist for the well being of citizens by
providing public services, not for thepurpose of generating returns to owners.
± Effectiveness and Efficiency
± More detailed financial reporting
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Differences in the GNP Environment
Sources of Revenues: Governments derive
many of their resources from taxes and
other non-exchange transactions. ± Involuntary contributions
± No expectation of proportional share of
benefits
± Timing of revenue recognition may be a
problem
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Differences in the GNP Environment
Potential for Longevity: Governments veryrarely go out-of-business.
± Long term view of operations
± Sustainability of services and
± Ability to meet future demand.
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Differences in the GNP Environment
Relationship with Stakeholders:
± Accountability for public funds
± Use of Fund accounting: A fund is a separate
reporting entity within governmental accountingsystem used to demonstrate compliance withlegal restrictions
Financial reporting, guided by a set of generally accepted standards, is an
effective means to control the actions of
those entrusted with public resources.
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Differences in the GNP Environment
An annual budget should be adopted byevery governmental unit
Role of the Budget: Government budgetsoften carry the authority of law, preventingpublic officials from spending outside theirbudgetary authority.
Budgetary control is reflected ingovernment financial reports through a
required comparison of actual amounts
with budgeted amounts.
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U.S. STANDARD SETTERS page 5
Federal level FASAB - Federal Accounting Standards Advisory Board GAO Governmental Accountability Office U.S. Treasury Department
OMB - Office of Management and Budget
State and Local Government (SLG) GASB - Governmental Accounting Standards Board
Private (non-governmental) Not-for-profits FASB - Financial Accounting Standards Board
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STANDARD SETTERS contd
State and Local - GASB
formed in 1984 Covers basic governments and entities owned or
controlled by governments
Predecessor: NCGA - National Council onGovernmental Accounting
Not-for-profits - FASB formed in 1973
Covers not-for-profits not related to governmententities private nonprofit hospitals, colleges,museums, etc.
Predecessors: Accounting Principles Board (1959-1973) and
Committee on Accounting Procedures (1939-1959)
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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 1-2) guides the auditor in
the priority of importance for accounting guidance
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State and Local Government: GAAP hierarchy
CategoryGASB (STATEMENT 55)
State and Local Governments
A.y GASB Statements and
Interpretations
B.
y GASB T echnical Bulletins and,
y if cleared by the GASB, A ICP A
Industry Audit and Accounting
Guides and Statements of
Position
C.
y AICPA Practice Bulletins that
have been cleared by the GASB
D.
y Implementation guides (Q&As)
published by the GASB staff ,
and
y practices that are widely
recognized and prevalent in
state and local governments.
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Concepts Statements
Concepts project began in the 1970s to
guide the standard setters in establishing
GAAP
Concepts statements guide the development
of new standards
± These are not intended as authoritative GAAP,concepts statements but are used for guidance
only if no other literature addresses an issue
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Concepts Statements
All three standard setting bodies have a
series of Concepts Statements:
± FASAB federal government
± FASB private entities
± GASB state and local governments
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FASAB Concepts: Objectives for Federal
Financial Reports Budgetary Integrity demonstrate budget
regulations were adhered to
Operating performance help evaluateservice, efforts, and accomplishments
Stewardship show the impact onoperations and investments
Systems and controls indicate whetherthey are adequate
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FASB Concepts Statement No. 6: Objectives of
NFP Financial reports
Main Objective of NFP Financial Statementsis
± To provide information useful to present and
potential resources providers and others inmaking decisions about allocating resources tothe NFP organization
Which emphasizes that
± Donors, government grantors and banks areprimary users
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GASB Concepts Statements: Statement #1
Objectives
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 Accountability: To justify the raising of public resources andthe purposes for which they are used
o Users:
o Citizens
o Legislature and oversight officials
o Investors
o Creditors
o Show compliance with laws, rules and regulations
o Assist in evaluating efficiency and effectiveness
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Service Efforts and AccomplishmentsReporting (covered in Chapter 13) andamended by Concepts Statement 5
Includes both Financial and Nonfinancialmeasures of performance
Nonfinancial performance measures: EconomicDevelopment Council
± # of business prospects interested in locating;
± # contracts made with firms interested in locating
GASB Concepts Statements: Statement #2
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Communication Methods in General PurposeFinancial Reports that Contain Basic FinancialStatements
Established the framework for whatinformation is presented in:
± Basic Financial Statements
± Notes
± Required Supplementary Information
± Supplementary Information
GASB Concepts Statements: Statement #3
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Financial reports are much more inclusive thanthose prepared under FASB standards
Comprehensive Annual Financial Report (CAFR)
± Introductory section: title page, contents, letter of transmittal, description of government, etc.
± Financial section:
Auditors report,
MD&A,
Basic financial statements,
Required supplementary information
± Statistical section: demographic and economic data,financial trends, fiscal capacity, etc.
GASB Concepts Statements: Statement #3
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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 Chapter 2
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Fiduciary
Funds are not
included in
government-
wide
Ill. 1-3page 11
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What is a fund - as the term is used for state
and local government accounting?
± 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
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Types of FUNDS pages 14-16
Governmental: Used to account for provision
of general citizen services
Proprietary: Used to account for business-likeactivities of the governmental body.
Fiduciary: Used to account for resources for
which the government is acting as an agent or
a trustee
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Governmental FUNDS page 14
± General Fund: financial resources for basic governmentservices
every government body must have one general fund
± Capital Projects Funds: financial resources restricted for
capital outlays: building projects, infrastructureimprovement projects, etc.
± Debt Service Funds: financial resources restricted toexpenditure for principal and interest on government debtissues
± Special Revenue Funds: proceeds of specific revenuesources that are restricted for a specified purpose
± Permanent Funds: Earnings on resources, but not principal,may be used for purposes that support governmentprograms
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Proprietary FUNDS page 14
Enterprise Funds: Resources obtainedprimarily through the sale of goods andservices to parties external to thegovernment:
± Airports; City Pool; Water department
Internal Service Funds: Services provided byone government department to anothergovernment department.
± Motor pools; Print shops
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Fiduciary FUNDS page 15
Agency Funds: Government acts as acollecting/disbursing agent. ± County taxes to be disbursed to cities within the
county
Pension Funds: Pension and employee benefitfunds
Investment Trust Funds: External portion of investment pools
Private-purpose Trust Funds: all other trustarrangements under which principal and incomebenefit individuals, private organizations or othergovernments
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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? Dont 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 possiblycombine some.
Exact number depends on judgment. ± Use the minimum number that will allow
compliance with legal and other restrictions
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Overview of Fund Financial Statements
Governmental ± Balance Sheet
± Statement of Revenues, Expenditures, and Changes in FundBalance
Proprietary ± Statement of Net Assets (Balance Sheet)
± Statement of Revenues, Expenses, and Changes in Fund NetAssets
± Statement of Cash Flows
Fiduciary ± Statement of Fiduciary Net Assets (Balance Sheet)
± Statement of Changes in Fiduciary Net Assets
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Reporting Perspectives
Internal government accounting still tends toemphasize individual funds (pools of money)
Government-wide reports are an attempt to
aggregate data into a format more familiar tousers business-type financial statements
Different perspectives require differentaccounting bases and measurement foci:
± Accounting basis defines when transactions andevents are recognized in the financial statements
± Measurement focus defines what items are to bereported in the financial statements.
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Accounting Methods pages 12 and 13
Accrual Basis/Economic Resources MeasurementFocus: ± General business concepts of revenue and expense
apply when recording exchange-like transactions
± Both current and long-term assets and liabilities arerecognized in the financial statements
Modified Accrual Basis/Current FinancialResources Measurement Focus:
± Revenues recognized when funds are measurable andavailable for expenditures of the current period;
± Expenditures are recognized when a liability isincurred
± Does not report long-term assets
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Expenses vs Expenditures
Under accrual accounting, expenses are
recognized when the related resource or
service is used
± Purchase of Building is recorded as an asset
± Depreciation expense on fixed assets is
recognized over the service life of the asset
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Expenses vs Expenditures
Expenditures under modified accrual are
recorded when the liability is incurred
± Equipment purchases are treated asexpenditures as soon as you are obligated to
pay when the goods arrive
± Long-term assets, such as equipment, are notlisted on the fund balance sheet
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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
± Payments of principal on long-term debt are
treated as an expenditure
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Long-Term Assets and Debt in
Government-Wide vs. Fund Statements
Governmental fund balance sheets generallyshow only short-term assets and liabilities
Proprietary fund balance sheets show both
short-term and long-term assets and liabilities
Government-wide statements must reportshort-term and long-term assets and liabilities inthe Statement of Net Assets
± Therefore, total assets and liabilities will differbetween the two types of statements
± Statements will include a reconciliation schedule
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Summary of Accounting by State and Local Governments
Fund
Basis of Accounting
/ Measurement
Focus
Financial Statements
Government-Wide Governmental and
Business-TypeAccrual/ Economic
Resources
Statement of Net Assets
Statement of Activities
Governmental
Funds
General
Special Revenue
Capital ProjectDebt Service
Permanent
Modified Accrual /
Current Resources
Balance Sheet
Statement of Revenues,Expenditures, and
Changes in Fund Balance
Proprietary Funds Enterprise
Internal ServiceAccrual / Economic
Resources
Statement of Net Assets
Statement of Revenues,
Expenses and Changes in
Net Assets
Statement of Cash Flows
Fiduciary Agency
Pension Trust
Investment Trust
Private Purpose
Trust
Accrual / Economic
Resources
Statement of Fiduciary
Net Assets
Statement of Changes in
Fiduciary Net Assets