Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 1: Introduction to GNP Organizations

2. 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 • Primary reporting principles for SLGs

3. Governments and NFP organizations hire accountants to manage funds CPA firms and states hire GNP auditors To better understand reports on how their taxes and charitable donations are used Why Study GNP Accounting?

4. Differences in the GNP Environment • Absence of individuals with legal claim to the excess of revenues over expenses • Generating net income is not the main goal • Formal and restrictive budgets • Resource providers (taxpayers or donors) may not receive equivalent value in return for the resources given • Resources often have restrictions as to how or when they may be used

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 • Revenue recognition 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

6. U.S. STANDARD SETTERS • Federal level • FASAB - Federal Accounting Standards Advisory Board • GAO - General Accounting 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

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 GovernmentalAccounting • 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)

8. AuthoritativeLiterature • 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 1-1) guides the auditor in the priority of importance for accounting guidance

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

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

11. FASB Concepts StatementNo. 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

12. GASB Concepts Statements • Citizens have a right to know why resources are being raised and how they will be used • 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

13. How Do GASB SLG 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 emphasizes outcomes may have to be measured by means other than dollars

14. 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

15. 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 sales of water • 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

16. Reporting Perspectives • The government-wide reports are a new phenomenon in SLG reporting • Historically, SLG 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

17. 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 heavily financed by taxes and involuntary contributions

18. 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

19. 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

20. Implications for Expenditures under Modified Accrual Basis • 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 • 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

21. 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 not listed on the fund balance sheet

22. Fund vs. Government-Wide Statements • Government-wide statements use accrual basis and list long-term assets and liabilities for all fund types • Fund perspective statements use modified accrual for governmental type funds and omit long-term assets and long-term liabilities on government fund balance sheet

23. Fund and Government-Wide Reporting • Two perspectives allow users to see • Long run — accrual basis effects • Short run — budget oriented “ current spending” effects: • bond money treated as inflow • bond repayments treated as outflows • purchases of long-term assets treated as outflows

24. What Is a “Fund” as the Term Is Used for SLG Accounting? • A fund is • Represents a part of the activities of some organization • An accounting entity • Self-balancing set of accounts, reflecting the assets, liabilities, net assets, and changes in those balances • Segregated for specific activities • In such a way as to ensure compliance with appropriate regulations or restrictions

25. 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

26. Five Governmental-Type Funds • PERMANENT FUND - report financial resources that are legally restricted so only earnings, not principal, may be expended, and 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 GENERAL fixed assets (i.e. 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 on GENERAL long-term debt (i.e. long term debt other than that associated with enterprise or fiduciary funds).

27. Five Governmental-Type Funds - continued • 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

28. 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.

29. 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 - Accounts for the external portion of investment pools reported by the sponsoring government. • 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 - report all other trust arrangements under which principal and income benefit individuals, private organizations, or other governments.

30. How Many Total 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; could possibly combine some. • Exact number depends on judgment. • Use the minimum number that will allow compliance with legal and other restrictions

31. Importance of the Budget in SLG 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

32. Capital Assets in Government-Wide Statements • Capital assets are generally recorded at historical cost and depreciated similar to business accounting • cost includes installation, freight, etc. • Depreciation exception for infrastructure assets such as bridges, tunnels, drainage systems, etc. • If government can document these are adequately maintained, maintenance costs are expensed and depreciation expense is not recorded

33. Capital Asset Exceptions • Collections — artwork or historical treasures • Have option to not capitalize if • (1) held for exhibition, (2) protected for future use, and (3) can be sold only to acquire other collection pieces • Infrastructure assets must be capitalized • but option to not depreciate requires • complete assessment every three years showing condition level is being maintained

34. 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