Transcript Essentials of Accounting for Governmental and Not
Essentials of Accounting for Governmental and Not-for-Profit Organizations
McGraw-Hill/Irwin
Chapter 1 Introduction to Governmental and Not-for-Profit Organizations
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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 Major sections of the state and local government (SLG) financial statements Fund Types 1-2
Why Study GNP Accounting?
Governments and NFP organizations hire accountants CPA firms and states engage accountants to perform their audits As citizens and donors we wish to better understand how taxes and charitable donations are used 1-3
Differences in the GNP Environment
Organizational Purposes:
Governments exist for the well being of citizens by providing public services – whether or not the services are profitable undertakings.
Sources of Revenues:
Governments derive many of their resources from taxes. 1-4
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 these public funds.
Role of the Budget:
Government budgets often carry the authority of law, preventing public officials from spending outside their budgetary authority. 1-5
How Accounting Must Adapt to GNP Environmental Differences
Traditional view of the equity accounts must be modified Budget compliance may be more important than income measurement When do we recognize revenue for non exchange transactions Reports must reflect the existence of restrictions on the use of certain resources Non-financial performance measures are relatively more important 1-6
U.S. STANDARD SETTERS
Federal level
FASAB
Board - Federal Accounting Standards Advisory GAO – Governmental Accountability Office U.S. Treasury Department OMB - Office of Management and Budget
State and Local Government (SLG)
GASB -
Governmental Accounting Standards Board
Not-for-profits
FASB -
Financial Accounting Standards Board 1-7
STANDARD SETTERS
cont’d
State and Local - GASB formed in 1984
Covers basic governments and entities owned or controlled by governments Predecessor: NCGA - National Council on Governmental Accounting
Not-for-profits - FASB formed in 1973
Covers not-for-profits not related to government entities — private nonprofit hospitals, colleges, museums, etc.
Predecessors: Accounting Principles Board (1959-1973) and Committee on Accounting Procedures (1939-1959) 1-8
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 1-9
Concepts Statements
Concepts project began in the 1970s to guide the standard setters in establishing GAAP Not originally intended as authoritative GAAP. Concepts statements may be used for guidance only if no other literature addresses an issue Though not intended as GAAP, concepts statements drive the theory of GNP reporting and therefore may appear on certification exams 1-10
FASAB Objectives for Federal Financial Reports
Budgetary Integrity — demonstrate budget regulations were adhered to Operating performance — help evaluate service, efforts, and accomplishments Stewardship — show the impact on operations and investments Systems and controls — indicate whether they are adequate 1-11
FASB Concepts Statement No. 6 for NFPs
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 1-12
GASB Concepts Statements GASB Concept Statement #1
Citizens have a right to know why resources are being raised and how they will be used o o o o GASB #1 Objectives of Financial Statements: Allow comparison of
actual with budgeted results
Help users assess
financial condition and results of operations
Show
compliance
with laws, rules and regulations Assist in evaluating
efficiency and effectiveness
1-13
Concept Statement #2
Service Efforts and Accomplishments Reporting (covered in Chapter 13) Includes both Financial and Nonfinancial measures of performance 1-14
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 1-15
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. 1-16
Overview of 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 the Chapter 2 1-17
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 Assets (Balance Sheet) Statement of Revenues, Expenses, and Changes in Fund Net Assets Statement of Cash Flows Fiduciary — holding money in trust for others Statement of Fiduciary Net Assets (Balance Sheet) Statement of Changes in Fiduciary Net Assets 1-18
Reporting Perspectives
The government-wide reports are a relatively new phenomenon in state and local government reporting Historically, state and local government reports have emphasized only the fund activities 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 1-19
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 1-20
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 when the fund liability is incurred 1-21
Implications for Revenues Under Modified Accrual Basis
In the absence of an earning process, revenue recognition is more of a problem. GASB and FASB Statements specifically address recognition of non exchange and contribution revenues 1-22
Expenses vs Expenditures
Expenses under accrual basis recognize the resources used Supplies are treated as an expense when used Depreciation expense on fixed assets is recognized over the life of the asset 1-23
Expenses vs Expenditures
Expenditures under modified accrual are recorded when the liability is incurred Supplies are treated as an expenditure when purchased Equipment purchases are treated as expenditures as soon as you are obligated to pay — when the goods arrive Payments of principal on long-term debt are treated as an expenditure 1-24
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 Long-term assets, such as equipment, are not listed on the fund balance sheet 1-25
Fund vs. Government-Wide Statements
Government-wide statements use accrual basis and report long-term assets and liabilities for both governmental and business activities Fund perspective statements use modified accrual for governmental type funds and omit long-term assets and long-term liabilities on government fund balance sheet 1-26
Fund and Government-Wide Reporting
Two perspectives allow users to see Long run — accrual basis effects Short run — budget oriented “current spending” effects: 1-27
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 1-28
Government Fund Types
Governmental type Used for activities that are largely unique to the government environment Proprietary type Business-type activities Fiduciary type Acting as an agent or trustee of moneys that generally belong to other parties 1-29
Five Governmental-Type Funds
PERMANENT FUND
- report financial resources that are legally restricted so only earnings, not principal, may be expended, for purposes to benefit the government and its citizenry.
CAPITAL PROJECTS FUND
- Is used to account for the financial resources available and used for acquisition or construction of fixed assets other than that associated with enterprise or fiduciary funds.
DEBT SERVICE FUND
- Is used to account for the financial resources available and used for payment of interest and principle. long term debt other than that associated with enterprise or fiduciary funds.
1-30
Five Governmental-Type Funds,
con’t
SPECIAL REVENUE FUND
- Is used to account for the financial resources provided by revenue sources which are legally restricted to specified purposes (other than capital projects or debt service)
GENERAL FUND
- used to account for financial resources other than those which are required to be accounted for in another fund. There can be only one general fund and it accounts for most of the ongoing activities of the government 1-31
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.
1-32
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
external portion of investment pools reported by the sponsoring government. - Accounts for the
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
governments.
- report all other trust arrangements under which principal and income benefit individuals, private organizations, or other 1-33
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? Might use four capital projects funds; or could possibly combine some.
Exact number depends on judgment.
Use the minimum number that will allow compliance with legal and other restrictions 1-34
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 1-35
Long-Term Assets and Debt in Government-Wide vs. Fund Statements
Governmental-type balance sheets generally show only short-term assets and liabilities Proprietary-type balance sheets generally show short-term and long-term assets and liabilities Government-wide statements must report short-term and long-term assets and liabilities in Statement of Net Assets Therefore, total assets and liabilities will differ between the two types of statements Statements will include a reconciliation schedule 1-36