Government and Not-for-Profit Accounting: Concepts and Practices, 6e

1. Government and Not-for-Profit Accounting: Concepts and Practices, 6e Granof & Khumawala -6e Michael H. Granof SalehaB. Khumawala

2. Chapter 1 The Government and Not-for-Profit Environment Granof & Khumawala -6e

3. Thoughts to Ponder: Chapter 1 “We make a living by what we get. We make a life by what we give.” Winston Churchill “Service to others is the rent you pay for your room here on earth.” Mohammed Ali Granof & Khumawala -6e

4. Learning Objectives After studying Chapter 1, you should be able to: • Understand the characteristics that distinguish governments and not-for-profit organizations from businesses (for-profit entities). • Identify the features that distinguish governments from not-for-profits. • Identify authoritative bodies responsible for setting GAAP and financial reporting standards for different governmental and not-for-profit entities. Granof & Khumawala -6e

5. Learning Objectives, continued • Compare and contrast the objectives of financial reporting for: (1) State and local governments (2) Not-for-profit organizations (3) The federal government • Distinguish Management Discussion & Analysis (MD&A), basic financial statements, and Required Supplementary Information (RSI) of state and local governments in their comprehensive annual financial reports (CAFR). Granof & Khumawala -6e

6. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? • No direct and proportional relationship between resources provided and the benefits received. • Absence of a profit motive. • Absence of transferable ownership rights. • Collective ownership by constituents. • Policy-setting process. Granof & Khumawala -6e

7. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? – Cont’d • For GNP entities, budget is very important. • Budget is the culmination of the political process. • The budget is the key fiscal document. • Ensure inter-period equity for most GNPs. • Revenues may not be linked to constituent demand or satisfaction. • No direct link between revenues and expenses. • The matching concept has different meaning for governments and not-for-profits. Granof & Khumawala -6e

8. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? –Cont’d • Restriction on assets for particular activities and purposes. • Example: Federal government grants for low-income housing; a state’s gasoline tax may be targeted by law at highway construction and maintenance. • No distinguished ownership interests. • Less distinction between internal and external accounting and reporting. Granof & Khumawala -6e

9. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations?–Cont’d • Power ultimately rests in the hands of the people. • Citizens vote and delegate that power to elected officials. • Different mission. • Exercise their sovereign power to collect taxes. • Created by and accountable to a higher level government. • Different reporting objectives. Granof & Khumawala -6e

10. Objectives of Financial Reporting State and Local Governments (SLGs) • Financial reports are used primarily to: • Compare actual results with the budget. • Assist in determining compliance. • Assist in evaluating efficiency & effectiveness. • Assess financial condition and results of operations . • Remember: • Financial statements are a report of the past; your focus must be on the future. • One main objective of financial analysis is to derive the economic substance of a transaction from the data provided in the financial statements. Then, it is up to you to recast the data in a form that best facilitates the decisions that you must make. Granof & Khumawala -6e

11. Objectives of Financial Reporting State and Local Governments (SLGs) • “ACCOUNTABILITY is the cornerstone of all financial reporting in government,” (GASB Concepts Statement No. 1, par. 56). • Please see the summary of Concepts Statement 1. • What do we mean by accountability? • How does “interperiod equity” relate to accountability? These questions are very important! Granof & Khumawala -6e

12. Objectives of Financial Reporting State and Local Governments (SLGs) What is accountability? • 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. Granof & Khumawala -6e

13. Objectives of Financial Reporting State and Local Governments (SLGs) • How does “interperiod equity” relate to accountability? • 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? • It is important to understand this concept of “interperiod equity”! Granof & Khumawala -6e

14. Objectives of Financial Reporting State and Local Governments (SLGs) • 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 Granof & Khumawala -6e

15. Composition of the Local U.S. Government Entities Based on 2012 Census Granof & Khumawala -6e

16. Importance of the NFP Sector Size and Scope 2009-2011: Number of not-for-profit organizations 2.2 million Total nonprofit sector revenues (2009) $1.87 trillion Annual contributions from private sources (2011) $347 billion Percentage of wages and salaries paid in the US(2010) 9% Giving 2011: Individuals contribution (73%) 211.77 billion Charitable bequests (8%) 22.83 billion Foundations (14%) 41 billion Corporate (5%) 15.29 billion Granof & Khumawala -6e

17. Sources of GAAP and Authoritative Bodies Authoritative Bodies: • FASB – Financial Accounting Standards Board • Business organizations: ex. Wal-Mart, Exxon • Nongovernmental not-for-profits: ex. Rice University, • American Cancer Society • GASB – Governmental Accounting Standards Board • Governmental entities: ex. New York City, Atlanta, Harris County • Governmental not-for-profits: ex. University of Houston • FASAB – Federal Accounting Standards Advisory Board • Federal Government and its agencies: • Ex. Department of Defense, Department of Transportation, Department of Energy, Department of Education, Department of Agriculture, HUD, HHS and others. Granof & Khumawala -6e

18. Who are the users of financial reports? • Governing Boards • The prime recipients of the report, because they approve budgets, major purchases, contracts and significant operating policies. • Investors and creditors • Citizens and organizational members • Donors and Grantors • Regulatory Agencies • Employees and other constituents Granof & Khumawala -6e

19. Several forms of Financial Reporting • Paper generated text financial statements • PDF • Internet- HTML or PDF • XBRL (eXtensible Business Reporting Language) Granof & Khumawala -6e

20. General Purpose External Financial Reports (SLGs) Management's discussion and analysis Source: GASB Statement 34 Government-wide financial statements Fund financial statements Required supplementary information (other than MD&A) Granof & Khumawala -6e Notes to the financial statements

21. Granof & Khumawala -6e Summary <------------------------------> Detail

22. Comprehensive Annual Financial Report (CAFR) • Three Sections: • Introductory section • Financial section • Statistical section • Recommended, but not mandatory Granof & Khumawala -6e

23. CAFR - Introductory Section • Title page • Contents page • Letter of transmittal • Other (as desired by management) • You can view online the City of Houston’s Annual Reports for the years 2012, 2011, and other years at the following link: http://www.houstontx.gov/controller/cafr.html Granof & Khumawala -6e

24. Award from the GFOA • The Government Finance Officers Association (GFOA) of the United States and Canada awarded a Certificate of Achievement for Excellence in Financial Reporting Program (CAFR Program) to the City of Houston for its CAFR for the fiscal year ended June 30, 2011. • The Certificate of Achievement is a prestigious national award-recognizing conformance with the highest standards for preparation of state and local government financial reports. Granof & Khumawala -6e

25. CAFR—Financial Section (GASB Statement No. 34) • Auditor’s report • MD&A • Basic Financial Statements • Required Supplementary InformationRSI (Other than MD&A) • Combining the individual fundstatements and schedules • Remember GASB Statement No. 34 is the Reporting Model that SLGs have to follow. Granof & Khumawala -6e

26. Management’s Discussion and Analysis (MD&A) • Brief objective narrative providing management’s analysis of the government’s financial performance • This is basically “Tell it like it is.” Granof & Khumawala -6e

27. Basic Financial Statements • Government-wide Financial Statements • Statement of Net Position • Statement of Activities • Fund Financial Statements (see next slide) • Notes to the Financial Statements • The Government-wide Financial Statements are the TWO additional F/S required under GASB 34. Granof & Khumawala -6e

28. Fund Financial Statements • Governmental-type Funds • Balance Sheet • Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds and a schedule of reconciliation • Proprietary-type Funds • Statement of Net Position • Statement of Revenues, Expenses, and Changes in Fund Net Position • Statement of Cash Flows • Fiduciary-type Funds • Statement of Fiduciary Net Position • Statement of Changes in Fiduciary Net Position Granof & Khumawala -6e

29. CAFR – Statistical Section Tables and charts showing multiple-year trends in financial and socioeconomic information Granof & Khumawala -6e

30. 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 • Chapter 2 explains the concept of fund accounting. Granof & Khumawala -6e

31. Summary • In this course you will become familiar with current GASB, FASB, and FASAB standards related 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 a different mission and reporting objectives. Granof & Khumawala -6e