NOT-for-PROFIT ACCOUNTING Basic Concepts

1. NOT-for-PROFIT ACCOUNTING Basic Concepts

2. NOT-FOR-PROFITACCOUNTING • Governmental units (state & local) • Colleges and Universities • Hospitals • Voluntary Health and Welfare Organizations • Others • Trade & Professional associations • Performing arts associations • Religious organizations • Museums and art districts • Research & Scientific organizations

3. Why study NFP Accounting? • Emphasis on CPA Exam • May audit an NFP Entity • Employment by NFP Entity • Voluntary service to an NFP Entity

4. 16-4 Importance of Governmental Accounting • Absence of profit removes an important internal control • Allocation of limited resources to unlimited needs creates public debate • Focus on methods used to generate financial sources and the uses made of those funds • Need to keep public informed (Stewardship) • Massive • Federal government • 50 State governments • Thousands of local governmental units

5. GOVERNMENTAL VS.FOR-PROFIT ENTITIES 1. Governmental entities collect resources and make expenditures to fulfill societal needs. 2. Generally, governmental entities do not have a profit motive. 3. Government entities have legal authority for their existence, revenue raising powers through taxation, and mandated expenditures to provide services. Continued

6. GOVERNMENTAL VS.FOR-PROFIT ENTITIES • Governmental entities use comprehensive budgetary accounting and fund accounting (significant control mechanisms). • Primary emphasis in governmental accounting is to measure and report on management’s stewardship. • Governmental entities typically are required to establish separate funds to carry out their various missions. • 7. Many fund entities do not record fixed assets or long-term debt in their funds.

7. GOVERNMENT ACCOUNTING STANDARDS • Municipal Finance Officers Association (1951) • National Committee on Governmental Accounting • (1968) “Governmental Accounting, Auditing, and Financial Reporting,” GAAFR • Periodic updates - latest in 1994 • AICPA • (1974) Industry Audit Guide - “Audits of State and Local Government Units” • (1979) National Council on Governmental Accounting (NCGA) - Statement No. 1 • (1986) Audit and Accounting Guide - “Audits of State and Local Government Units” • GASB (1984) • Created by FASB • Responsible for maintaining and developing accounting and reporting standards for state and local governmental entities • Issues GASB Statements which are authoritative source of GAAP

8. FINANCIAL REPORTING BY GOVERNMENT ENTITIES • Definition of government entity (GASB No. 14 - 1991) • Appoints majority of organization’s governing body • Ability to impose its will on an organization • Posseses financial benefit or assumes financial burden from organization

9. FINANCIAL REPORTING BY GOVERNMENT ENTITIES(GASB NO. 34 1999-2003) • MD&A • Basic financial statements • Government-wide financial statements • Fund financial statements • Notes to financial statements • Other supplementary information

10. GOVERNMENT-WIDE FINANCIAL STATEMENTS 1) Statement of Net Assets 2) Statement of Activities 3) Reconciliation Schedules 4) Budgetary Comparison Schedules 5) Other Required Supplementary Information (RSI) a) Management’s Discussion and Analysis (MDA) b) Information about Infrastructure Assets c) Footnotes

11. FUND ACCOUNTING CONCEPTS Fund = “A fiscal and accounting entity with a self-balancing set of accounts” • Unique nature of operations • Legal requirements or limitations • Distinct funding sources and/or activities or objectives • Emphasis on financial controls • Records cash and other resources, related liabilities, and residual balances

12. 16-12 Fund-Based Financial Statements Seek to Answer Three Questions How did the government generate its current financial resources? What amount of financial resources is presently held? Where did those financial resources go?

13. FUNDS & ACCOUNT GROUPS Governmental Funds Fiduciary Funds and Similar Component Units 1. General fund 2. Special revenue funds 3. Capital projects funds 4. Debt service funds 5. Permanent funds 8. Pension funds and other employee benefit trust funds 9. Investment trust funds 10. Private-purpose trust funds 11. Agency funds Proprietary Funds 6. Enterprise funds 7. Internal service funds

14. 16-14 Coverage of Fund Accounting Procedures

15. Restricted activities such as maintenance of public parks GOVERNMENTAL FUNDS • General Fund • Routine operations • Not accounted for elsewhere • Special Revenue Funds • Specific revenue sources • Expenditures restricted to a purpose

16. GOVERNMENTAL FUNDS Account for the acquisition or construction of major capital facilities or improvements that benefit the public. • Capital Projects Funds • Debt Service Funds • Accumulation of resources for, and payment of principal and interest on long-term general obligation debt

17. GOVERNMENTAL FUNDSPermanent Funds Established in those cases in which the fund principal must be preserved but that the income from the permanent funds is required to be used for the benefit of the government’s programs or its general citizenry.

18. busses airports sports arenas utilities PROPRIETARY FUNDS ENTERPRISE FUNDS Governments sometimes offer goods or services for sale to the public. Such operations are accounted for in an enterprise fund. • Same GAAP as • commercial entities

19. PROPRIETARY FUNDS INTERNAL SERVICE FUNDS Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies, on a cost reimbursement basis. centralized purchasing vehicle pools supplies inventory

20. FINANCIAL STATEMENTSGovernment Funds 1. Balance sheet 2. Statement of revenue, expenditures and changes in fund balance

21. Exh. 16-1 16-21 Statement of Net Assets Note that we keep the Governmental Activities separate from the Business-Type Activities.

22. Exh. 16-1 16-22 Statement of Net Assets Also note that this statement does not give information about Fiduciary Funds This is consistent with the economic resources management focus which only includes assets and liabilities that are available to use for governmental purposes.

23. Exh. 16-2 16-23 Statement of Activities The net for a given function is determined horizontally, while the totals for expenses and revenues are determined vertically.

24. BASIS OF ACCOUNTINGGovernmental Funds • Modified Accrual • Applications of modified accrual • Revenues recorded when measurable and available to finance expenditures in current period • Expenditures recorded in period when liabilities are measurable and incurred

25. BUDGETARY ACCOUNTING • Formally recorded in accounts • Operating budget • Capital budget • Legal basis for action • Emphasis on control

26. EXPENDITURE PROCESS • Appropriation • Legal authority to expend resources • Recorded as part of budget • Encumbrance • Recorded when order is placed for goods or services • Control function • Expenditure • Recorded when goods or services are received • Voucher system • Disbursement

27. ENCUMBRANCES • Reservation of appropriations • Outstanding at fiscal year end • Lapsing = authority expires and must be re-established in following year • Non-lapsing = spending authority carries over to the following year Final result of either method is identical

28. REVENUE CATEGORIES • Derived tax revenues • Imposed nonexchange revenues • Government-mandated nonexchange transactions • Voluntary nonexchange transactions

29. RECOGNITION OF REVENUE • Property taxes • Accrued when levied and available (often basis for ST financing) • Current year and collected within 60 days • Net of estimated uncollectibles • Maintain current/deliquent classification • Interest on investments & deliquent taxes • Accrued when earned available • Income and sales taxes • When subject to acrual (measurable and available) • Miscellaneous revenues (fees, fines, licenses) • Cash receipt • Grants, entitlements, shared revenue • When local government has the right to receive (meets eligibility requirements

30. RECOGNITION OF EXPENDITURES • Personal services & normal operating items • Cash payment • Goods & services • When received • Capital outlays for long-term facilities • In the period of acquisition • Interest on long-term debt • Period when payable

31. INVENTORY EXPENDITURES • Purchase method • Acquisition = Expenditure • Consumption method • Use of inventory = Expenditure Material amount of inventory • Recognition as an asset • Reservation of fund balance

32. INTERFUND TRANSFERS & TRANSACTIONS • Interfund loans • Usually short-term (rec. or pay. on balance sheet) • Interfund services provided and used • Formally called “quasi-external transactions • Would be revenue or expenditure with external parties • Interfund transfers • To be used by receiving fund for operations • Not expected to be repaid • Not revenue for receiving fund (already shown in transferring fund) – avoids “double counting” • Interfund reimbursements • Initially made from fund • Properly chargeable to another fund