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Chapter One

Chapter One. Financial Reporting for Governmental and Not-for-Profit Entities. Learning Objectives. After studying Chapter 1, you should be able to: Identify and explain the characteristics that distinguish governmental and not-for-profit entities from for-profit entities.

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Chapter One

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  1. Chapter One Financial Reporting for Governmental and Not-for-Profit Entities

  2. Learning Objectives • After studying Chapter 1, you should be able to: • Identify and explain the characteristics that distinguish governmental and not-for-profit entities from for-profit entities. • Identify the authoritative bodies responsible for setting GAAP and financial reporting standards for different governmental and not-for-profit entities.

  3. Learning Objectives (cont’d) • Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. • Distinguish MD&A, basic financial statements, and RSI of state and local governments from their comprehensive annual financial reports.

  4. Learning Objectives (cont’d) • Explain the different objectives, measurement focus, and basis of accounting of the government-wide financial statements and fund financial statements of state and local governments. • Explain why analysis of the financial performance of governmental and not-for-profit entities differs from that of for-profit entities.

  5. How Do Governmental and Not-For-Profit Organizations Differ From Business Organizations? • Benefits are not proportional to resources provided • Lack of a profit motive • Absence of transferable ownership rights

  6. 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 • Power to tax citizens for revenue

  7. Sources of GAAP andFinancial Reporting Standards FASB • Business organizations • Nongovernmental not-for-profits GASB • Governmental organizations • Governmental not-for-profits FASAB • Federal Government and its agencies

  8. Criteria for Determining Whether a Not-For-Profit Organization is Governmental • Public corporations and bodies corporate and politic • Other organizations with one or more of 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

  9. Objectives of Financial Reporting—State and Local Governments (SLG) • 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

  10. Objectives of Financial Reporting—SLG (cont’d) “ACCOUNTABILITYis the cornerstone of all financial reporting in government “ (GASB Concepts Statement No. 1, par. 56) What do we mean by accountability? How does “interperiod equity” relate to accountability?

  11. Objectives of Financial Reporting—SLG (cont’d) 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.

  12. Objectives of Financial Reporting—SLG (cont’d) 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?

  13. Objectives of Financial Reporting—Federal Government • Accountability is also the foundation of federal government financial reporting • Federal Accounting Standards Advisory Board (FASAB)’s standards are targeted at both: • internal users (management), and • external users

  14. General Purpose External Financial Reports Management’s discussion and analysis Government-wide Fund financial financial statements statements Notes to the financial statements Required supplementary information (other than MD&A)

  15. Comprehensive Annual Financial Report (CAFR) -- recommended, but not mandatory -- • Introductory section • Financial section • Statistical section

  16. CAFR - Introductory Section • Title page • Contents page • Letter of transmittal • Other (as desired by management)

  17. CAFR - Financial Section(GASB Statement No. 34) • Auditor’s report • MD&A • Basic Financial Statements • Required Supplementary InformationRSI (Other than MD&A) • Combining and individual fundstatements and schedules

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

  19. Basic Financial Statements • Government-wide Financial Statements • Statement of Net Assets (Ill. 2-1) • Statement of Activities (Ill. 2-2) • Fund Financial Statements (see next slide) • Notes to the Financial Statements

  20. Fund Financial Statements • Balance Sheet - Governmental Funds (Ill. 2-3) • Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds (Ill. 2-4) with reconciliation (Ill. 2-5) • Statement of Net Assets - Proprietary Funds (Ill. 2-6) • Statement of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Funds (Ill. 2-7) • Statement of Cash Flows - Proprietary Funds (Ill. 2-8) • Statement of Fiduciary Net Assets (Ill. 2-9) • Statement of Changes in Fiduciary Net Assets (Ill. 2-10)

  21. CAFR - Statistical Section • Tables and charts showing multiple-year trends in financial and socioeconomic information

  22. Fund Accounting • Fund accounting reports financial information for separate self-balancing sets of accounts, segregated for separate purposes or to account for resources restricted as to use by donors or grantors • Funds are separate accounting and fiscal entities (see Chapters 2-9 for more detail)

  23. Summary • In this course you will become familiar with current GASB, FASB, and FASAB standards relative to governmental and not-for-profit organizations. • 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.

  24. NOTE: “...Even when developed to the ultimate stage of perfection, governmental accounting cannot become a guaranty of good government. At best, it can never be more than a valuable tool for promotion of sound financial management...” Professor R. M. Mikesell, 1951

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