Chapter

1

Financial Reporting for Governmental and Not-for-Profit Entities

What types of Governmental and Not-For Profit Organizations do you think of?

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Approximately: o 87,500 local governments exist in US o One million not-for-profit organizations

How do they get revenue?

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What do they spend money on?

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How Do Governmental and Not-For-Profit Organizations Differ From Business Organizations?

o Benefits are not proportional to resources provided o Lack of a profit motive o Absence of transferable ownership rights o Services better society

How Do Governmental Entities Differ From Not-For-Profit Organizations?

 Power ultimately rests in the hands of the people  People vote and delegate that power to public officials  Created by and accountable to a higher level government (states, county, township, city)  Power to tax citizens for revenue  Governed by budgets not markets

Sources of GAAP and Financial Reporting Standards

     1)

FASB

Business organizations Nongovernmental not-for-profits  (YMCA) 2)

GASB

Governmental organizations Governmental not-for-profit  (U of MI) 3)

FASAB

Federal Government and its agencies  ***Hospitals can fall into either group 1 of 2 above

Criteria for Determining Whether an NPO is Governmental

 Governmental organizations typically have 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 and impose charges  States can issue tax-exempt debt

Additional Governmental Characteristics

 Budgets not annual reports are the most significant financial document  Budgets drive financial reporting  Some can be legally binding  Some must be balanced  Governments can seize assets of other governments within their jurisdiction!!!!!!

Additional Government Characteristics

 Revenue does not indicate demand for services (Benton Harbor)  No direct link between revenues and expenses  Many capital assets neither produce revenues or save costs (roads) so projects are evaluated differently  Some resources are restricted (land, cash, art)  Equity does not exist and ownership cannot be bought or sold

Objectives of Financial Reporting

“

ACCOUNTABILITY

is the cornerstone of all financial reporting in government “ REMEMBER ELECTED OFFICALS ARE OFTEN SHORT TERM FOCUSED !!!!!!!!!

“

Interperiod Equity

the concept that constituents pay for the services that they receive and do not shift the burden to their children “

Objectives of Financial Reporting Q: What do we mean by accountability?

A:

Accountability arises from the 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 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 (Doesn’t mean governments shouldn’t borrow) – For example – Interstate Highway System

Users of Financial Reports

 Governing Boards  Investors & Creditors  Approx. $1.8 trillion bonds outstanding/bank loans  Citizens/Taxpayers  Donors/Grantors  United Way and Ford Foundation  Regulatory and oversight agencies  Employees

Objectives of Financial Reporting—State and Local Governments

Financial reports are used primarily to: (CAFR’s)  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

Comprehensive Annual Financial Report (CAFR)

Introductory section Financial section Statistical section

CAFR - Introductory Section

Title page Contents page Letter of transmittal * General information on organization structure Other (as desired by management) *From CEO or CFO about state of affairs

CAFR - Financial Section

 Auditor’s report  MD&A  Basic Financial Statements  Required Supplementary Information (RSI)  Combining and individual fund financial statements and schedules (if required)

Management’s Discussion and Analysis (MD&A)

Brief objective narrative providing management’s analysis of the government’s financial performance

Basic Financial Statements Government-wide Financial Statements*

 Statement of Net Assets (page 42)  Statement of Activities (page 43)

Fund Financial Statements

(see next slide)

Notes to the Financial Statements

*Sometimes called Governmental Activities

Fund Financial Statements

    Balance Sheet (Page 44) Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds with reconciliation (page 45-46) Statement of Net Assets - Proprietary Funds (Page 51) Statement of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Funds (Page 53)

Fund Financial Statements (Cont’d)

   Statement of Cash Flows - Proprietary Funds Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net Assets

CAFR - Statistical Section

Tables and charts showing multiple-year trends in financial and socioeconomic information What information would be important?