16/02/2012

Accounting for Government and Nongovernment Organization

Based on a Study of: 1. Financial Reporting for Governmental and Not-for-Profit Entities (Chapter 1) & 2. Principles of Accounting and Financial Reporting for State and Local Governments (Chapter 2)

Term Paper On Accounting for Government and Nongovernment Organization

Prepared For:
Mohammad Mizanour Rahman Lecturer Department of Accounting & Information Systems Comilla University

Prepared by:
Zenith

Consisting of: Farhana Afroje (07) Gulam Mostafa (35) Md. Iqramul Hasan Atik (36) Arzuman Fatema (49) Mosharref Husain (51) Department of Accounting & Information Systems (1st Batch) Comilla University

Date of Submission: February 16, 2012

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Comilla University
Comilla February 16, 2012 Mohammad Mizanour Rahman Lecturer Department of Accounting & Information Systems Comilla University Sir, Here is the term paper on the Accounting for Government and Non-government Organization you asked us to prepare on February 8, 2012. As you will see, our term paper pointed to some specific aspects of the required subject. We are confident that this will satisfy you. We appreciate having this term paper assigned on us. Sincerely Yours

Farhana Afroje (On behalf of the group Zenith)

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ACKNOWLEDGEMENTS
I take immense pleasure in thanking the Almighty Allah for making us capable of preparing and submitting this term paper. I would like to express our deep sense of gratitude to our course coordinator Mohammad Mizanour Rahman for his able guidance and useful suggestions, which helped us in completing the term paper, in time. Needless to mention that Gulam Mostafa (35), Md. Iqramul Hasan Atik (36), Arzuman Fatema (49),Mosharref Hossain (51); that is all of my group members have made unlimited effort to make this task successful. I want to thank all of them for all their valuable assistance in the term paper. Words are inadequate in offering my thanks to my classmates for their cordial help with adequate information in preparing the term paper.

Sincerely,

(Farhana Afroje) On behalf of Zenith

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Executive Summary
The assigned term paper includes discussions on the following topics: Financial Reporting for Governmental and Not-for-Profit Entities Principles of Accounting and Financial Reporting for State and Local Governments These two topics are again discussed under several different subtopics. Such as: The first topic is about Sources of Financial Reporting Standards, Distinguishing Characteristics of Government and Not-for-Profit Entities, Objectives of Financial Reporting, Governmental Financial Reporting, Financial Reporting of Not-for-Profit Entities, brief discussions about these topics and a brief conclusion on all these topics. Under the second and final topic we discussed Accounting and Reporting Capabilities, Fund Accounting Systems, Accounting for Fixed Assets and Long-Term Liabilities, Accrual Basis in Government Accounting, Budgeting, Budgetary Control and Budgetary Reporting, Interim and Annual Financial Reports and finally a brief conclusion on these topics. At the end of the term paper we specified the sources of our information of these terms paper and finished the term paper with that.

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TABLE OF CONTENTS
1 FINANCIAL REPORTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT ENTITIES ............................................. 1
1.1 SOURCES OF FINANCIAL REPORTING STANDARDS ................................................................. 1 1.1.1 FASB ............................................................................................................................ 1 1.1.2 IASB ............................................................................................................................. 2 1.2 DISTINGUISHING CHARACTERISTICS OF GOVERNMENT AND NOT-FOR-PROFIT ENTITIES ......... 2 1.3 OBJECTIVES OF FINANCIAL REPORTING ................................................................................. 4 1.3.1 Reporting objectives for Governmental Entities ......................................................... 4 1.3.2 Reporting objectives for other not-for-profit organizations ......................................... 4 1.4 GOVERNMENTAL FINANCIAL REPORTING................................................................................ 5 1.4.1 Introductory Section ..................................................................................................... 5 1.4.2 Financial Section ......................................................................................................... 5 1.4.3 Statistical Section ........................................................................................................ 6 1.5 FINANCIAL REPORTING OF NOT-FOR-PROFIT ENTITIES........................................................... 6 1.5.1 Receipts and Payments Account ................................................................................ 6 1.5.2 Income and Expenditure Account ............................................................................... 7 1.5.3 Balance Sheet.............................................................................................................. 7 CONCLUSIONS .................................................................................................................................. 7

2 PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND LOCAL GOVERNMENTS .... 8
2.1 ACCOUNTING AND REPORTING CAPABILITIES ......................................................................... 8 2.2 FUND ACCOUNTING SYSTEMS................................................................................................ 8 2.2.1 Types of Funds ............................................................................................................ 8 2.2.2 Number of Funds ......................................................................................................... 9 2.3 ACCOUNTING FOR FIXED ASSETS AND LONG-TERM LIABILITIES .............................................. 9 2.3.1 Valuation of Fixed Assets ............................................................................................ 9 2.3.2 Depreciation of Fixed Assets..................................................................................... 10 2.4 ACCRUAL BASIS IN GOVERNMENT ACCOUNTING .................................................................. 10 2.5 BUDGETING, BUDGETARY CONTROL AND BUDGETARY REPORTING ...................................... 10 2.6 INTERIM AND ANNUAL FINANCIAL REPORTS.......................................................................... 11 CONCLUSION .................................................................................................................................. 11

BIBLIOGRAPHY ............................................................................ 12

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Financial Reporting for Governmental and Not-for-Profit Entities

If accounting is the language of finance then financial reporting is the communication of financial information useful for making investment, credit, and other business decisions. Such communications include general purpose financial statements such as income statements, balance sheets, equity reports, cash flow reports, and notes to these statements. Additionally, items such as SEC filings, press releases, meeting minutes, and auditors reports are also included in financial reporting. Many financial reports, or the accounts and data they represent, are subject to various regulations and standards from organizations such as the Securities Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB). Much like any language, financial statements could have their own dialect so to speak. For example, knowing about the use of cash-based accounting versus accrual based accounting could impact some very serious business or investment decisions. The various regulations, standards, and Generally Accepted Accounting Principles (GAAP) helps to make sure were all on the same page. Financial reporting is essential for governmental and not-for-profit entities along with business entities. But forms or reporting have different ways for these two categories of entities. Here we will go with the ways of first one, i.e. reporting of governmental and not-for-profit entities.

1.1 Sources of Financial Reporting Standards

Accounting and financial reporting standards for government and not-for-profit entities have some basic sources and formats. These reports are not prepared as the entities want. They have to follow some established standards which are worldwide recognized and used. These overall accepted sources are:

1.1.1 FASB
The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP). Before the present structure was created, financial accounting and reporting standards were established first by the Committee on Accounting Procedure of the American Institute of Certified Public Accountants (19361959) and then by the Accounting Principles Board, also a part of the AICPA (195973). Pronouncements of those predecessor bodies remain in force unless amended or superseded by the FASB. The FASB's structure is very different from its predecessors in many ways. The board consists of seven full-time members. These members are required to sever all ties to previous firms and institutions that they may have served prior to joining the FASB. This is to ensure the impartiality and independence of the FASB. They are appointed for a five year term and are eligible for one additional five year term. In additional to the full-time members, there are approximately 68 staff
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members. This staffs are, "professionals drawn from public accounting, industry, academe, and government, plus support personnel." The FASB's mission is "to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information." To achieve this, FASB has five goals: Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency. Keep standards current to reflect changes in methods of doing business and in the economy. Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting. Promote international convergence of accounting standards concurrent with improving the quality of financial reporting. Improve common understanding of the nature and purposes of information in financial reports.

1.1.2 IASB
The International Accounting Standards Board (IASB) is an independent, privately funded accounting standard-setter based in London, England. The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee (IASC). It is responsible for developing International Financial Reporting Standards (the new name for International Accounting Standards issued after 2001), and promoting the use and application of these standards. The IASB has 15 Board members, each with one vote. They are selected as a group of experts with a mix of experience of standard-setting, preparing and using accounts, and academic work. At their January 2009 meeting the Trustees of the Foundation concluded the first part of the second Constitution Review, announcing the creation of a Monitoring Board and the expansion of the IASB to 16 members and giving more consideration to the geographical composition of the IASB. The IFRS Interpretations Committee has 14 members. Its brief is to provide timely guidance on issues that arise in practice.

1.2 Distinguishing Characteristics of Government and Not-for-Profit Entities

In the Statement of Financial Accounting Concepts No. 4, the Financial Accounting Standard Board noted the following characteristics the Board felt distinguished governmental and not-forprofit entities from business organizations: Receipt of significant amounts of resources from resource providers who do not expect to receive either repayment or economic benefits proportionate to the resources provided. Operating purposes that are other than to provide goods or services at a profit or profit equivalent, and

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 Absence of defined ownership interests that can be sold, transferred, or redeemed, or that convey entitlement to a share of a residual distribution of resources in the event of liquidation of the organization. We can further differentiate governmental and not-for-profit entities from business organizations in the following forms:

Subject
Owners

Governmental and Not-for-profit Entities

None

Business Organizations
Stockholders Earn profits for stockholders Provide services or sell goods

Primary mission Provide services needed by society Secondary mission: Ensure that revenues are greater than expenses so that the services provided can be maintained or expanded Exempt from income taxes if approved by IRS Statement of Financial Position Statement of Activities Statement of Functional Expenses (for some nonprofits) Statement of Cash Flows

Tax status: Main financial statements required by GAAP:

Corporations (or their owners) are subject to income taxes Balance Sheet Income Statement or Statement of Operations

Statement of Cash Flows Statement of Stockholders' Equity

Notes to Financial Statements Total assets minus total liabilities is reported as: Examples of revenues: Net assets

Notes to Financial Statements Stockholders' equity

Donor contributions, membership dues, program fees, fundraising events, grants, and investment income

Sales of merchandise, fees from services, investment income, gains on investments

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Subject
Non-profit expenses are reported by these functions: Sources of money other than revenues and the sale of assets:

Governmental and Not-for-profit Entities

Program, management and general, and fundraising

Business Organizations
No non-profit expenses

Borrow from lenders

Borrow from lenders Issue shares of stock

1.3 Objectives of Financial Reporting

1.3.1 Reporting objectives for Governmental Entities
Objectives of governmental units of preparing reports are: Comparing actual financial results with the legally adopted budget Assessing financial condition and results of operations Assisting in determining compliance with finance-related laws, rules, and regulations and Assisting in evaluating efficiency and effectiveness.

1.3.2 Reporting objectives for other not-for-profit organizations

Objectives of other not-for-profit than governmental units of preparing reports are: Making resource allocation decisions Assessing services and ability to provide services Assessing management stewardship and performance and Assessing economic resources, obligations, net resources and changes in them. The objectives of financial reporting for governmental and not-for-profit stress the need for the public to understand and evaluate the financial activities and management of these organizations. All readers must already be aware of the impact on their lives, and on their bank accounts, of the activities of the layers of government they are obliged to support. Since each of

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us is vitally affected, it is important that we be able to read intelligently the financial reports of governmental and not-for-profit entities.

1.4 Governmental Financial Reporting

Governmental Financial Reporting provides accountability for, and control of, public moneys. Governments may maintain hundreds of funds. Financial statements, such as a balance sheet and a statement of revenues and expenditures or expenses, can be prepared for each individual fund. A way is needed to summarize fund information for financial reporting so that the reports are of a manageable size but still provide useful information, including the restrictions on resources that funds represent. One possibility is simply to combine or aggregate the fundsadd them together without adjusting for interfund activities and balances. Another is to consolidate the fundsadd them together, but eliminate interfund activities and balancesand prepare financial statements for the government as a single economic entity. Traditionally, government financial reporting standards required the first solution. However, as we shall see, the current standards incorporate both solutions to some extent.

1.4.1 Introductory Section

Introductory materials includes such items as title page and contents page, the letter of transmittal, and other material deemed appropriate by management

1.4.2 Financial Section

The financial section of comprehensive annual financial report should include: An auditors report General purpose financial statements and Combining and individual fund and account group statements and schedules. Law relating to the audit of governmental units vary markedly from state to state. In some, all state agencies and all governmental created pursuant to the state law are required to be audited by an audit agency of the state government. In others, local governmental units are audited by independent certified public accountants. The financial section should contain sufficient information to disclose fully and present fairly the financial position and results of financial operations during the fiscal year. General Purpose Financial Statements of the state and local governments are combined statements in which financial data are combined form of different types of funds and account groups. That is why this financial statement is called consolidated financial statement and that must include the followings in the financial section. Combined Balance Sheet all fund types, account groups and discretely presented component units. Combined Statement of Revenues, Expenditures and Changes in Fund Balances. Combined Statement of Revenues, Expenditures and Changes in Fund Balances Budgeted and Actual. Combined Statement of Revenues, Expenditures and Changes in Retained Earnings.
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 Combined Statement of Cash Flows The notes to the financial statements are an integral part of the General Purpose Financial Statements and are intended to be read with the General Purpose Financial Statements. Governments may have many different funds within each fund type; therefore persons with a depth of interest in financial condition and financial operations of governmental reporting entity will wish to refer to the Combining and Individual Fund Statements, which are used to aggregate the financial data of all funds within each fund type.

1.4.3 Statistical Section

In addition to Introductory Section and Financial Section, a comprehensive annual financial report should also contain a statistical section, which presents tables and charts showing social and economic data, financial trends and the fiscal capacity of the government in details needed by readers who are more than casually interested in the activities of governmental units.

1.5 Financial Reporting of Not-for-Profit Entities

Not-for-Profit Entities must prepare regularly annual accounts reflecting the financial affairs of the organization for submitting to the members and government departments for financial grants and the like. A majority of the organizations keep their accounting records under the single entry system. They mainly maintain cash book, suppliers ledger and members register. Where the size of the organization is large, the accounts are kept under complete double accounts systems. Whatever may the system of accounting, these organizations prepare, at the year end, the following three key statements: Receipts and Payments Account Income and Expenditure Account and Balance Sheet Now, we explain below the three above three statements briefly.

1.5.1 Receipts and Payments Account

A Receipts and Payments Account is a summary of the cash book. This is the primary report prepared by the treasurers of clubs, societies etc to present the result of the years cash position. The features of a Receipts and Payments Account are the following: It is the summary of the cash and bank transactions, It starts with opening cash and bank balances and also ends with their closing balances, This account is usually not a part of double entry system. It is the duplicate of cash book in concise form, It includes all cash and bank receipts and payments whether they are related to current, past or future periods.

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 Surplus or deficit for an accounting period cannot be ascertained from this account, since it shows only the cash position and excludes all non-cash items, This account is not a trial balance, but it is a Cash Trial.

1.5.2 Income and Expenditure Account

The income and expenditure account is equivalent to the profit and loss account of a business enterprise. It is prepared by matching the revenue against the expenses for a specified period, usually a year. The features of an Income and Expenditure Account are the followings: It is a revenue account prepared at the end of the financial period for finding out the surplus or deficit of that period, It is prepared by matching expenses against the revenues of the period concerned, Both cash and non-cash items are taken into considerations, All capital expenditures and incomes are excluded, Only current years income and expenditures are considered,

1.5.3 Balance Sheet

The balance sheet of a non-profit concern is prepared on the same principles as balance sheet of a profit-seeking business. It may be prepared either in order of liquidity or in order of performance.

Conclusions
All ins and outs of reporting procedures of governmental and not-for-profit entities are almost impossible to describe in a limited time and words. Nevertheless we have made an effort to describe briefly the requirements of such types of reporting and different related terms related to these which cover the all above items and topics.

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Principles of Accounting and Financial Reporting for State and Local Governments

Whether we are a financial statement preparer or auditor, it is critical to understand the complexities of state and local governments, including revenue and expense recognition, asset valuation, and financial statement presentation. AICPA publications provide information on recent developments, guidance, practice aids, and illustrative examples for the common accounting and audit practices in state and local governments including: Understanding the unique accounting and auditing issues for state and local governments. Principles for reporting assets, liabilities and net assets, and related disclosures. Financial reporting requirements, including required supplementary information. Accounting for and reporting cash, investments, and investment-related transactions. Considerations for auditing primary government and component unit financial statements. Guidance on accounting and auditing considerations for capital assets and investments, including derivatives. Here, we will try to present some explanations of the principles and illustrate their applications to accounting and financial reporting of governmental units.

2.1 Accounting and Reporting Capabilities

A governmental accounting system must make it possible both: To present fairly and with full disclosure the financial position and results of financial operations of the funds and account groups of governmental unit in conformity with GAAP; To determine and demonstrate compliance with finance-related legal and contractual provisions.

2.2 Fund Accounting Systems

Governmental accounting should be organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances and change therein.

2.2.1 Types of Funds

a) Governmental Funds The General Fund to account for all financial resources except those requires to be accounted for in another fund.
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 Special Revenue Fund to account for the proceeds of specific revenue sources that are legally restricted to expenditures for specified purposes. Capital Project Funds to account for financial resources to be used for the acquisition or construction of major capital facilities Debt Service Fund to account for the accumulation of resources for, and the payment of general long-term debt principle and interest. b) Proprietary Funds Enterprise Fund to account for operations that are financed and operated in a manner similar to private business enterprise and also for operations where the governing body decided that periodic determinations. Internal Service Fund to account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost-reimbursement funds. c) Fiduciary Funds Trust and Agency Funds to account for assets held by a governmental unit in a trustee capacity or as an agent for individuals, private organizations, other governmental units and/or other funds.

2.2.2 Number of Funds

The importance of number of funds principle is sometimes overlooked by academicians and even independent auditors. There are seven types of fund used in governmental units to facilitate sound financial administration.

2.3 Accounting for Fixed Assets and LongTerm Liabilities

A clear distinction should be made between (a) fund fixed assets and general fixed assets and (b) fund long-term liabilities and general long-term liabilities. a) Fixed assets related to specific proprietary funds or trust funds should be accounted for through those funds. All other fixed assets of a governmental unit should be accounted for through the General Fixed Assets Account Group. b) Long-term liabilities of proprietary funds and trust funds should be accounted for through those funds. All other unmatured general long-term liabilities of the government is obligated in some manner, should be accounted for through the General Long-Term Debt Account Group.

2.3.1 Valuation of Fixed Assets

Fixed assets should be accounted for at cost, or, if the cost is not practicably determinable, at estimated cost. Donated fixed assets should be recorded at their estimated fair value at the time received.

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2.3.2 Depreciation of Fixed Assets

a) Depreciation of general fixed assets should not be recorded in the accounts of governmental funds. Depreciation of general fixed assets may be recorded in cost accounting system or calculated for cost-finding analyses; and accumulated depreciation may be recorded in the General Fixed Assets Account Group. b) Depreciation of general fixed assets accounted for proprietary funds should be recorded in the accounts of that fund. Depreciation is also recognised in those trust funds where expenses, net income, and/or capital maintenance are measured.

2.4 Accrual Basis in Government Accounting

The modified accrual or accrual basis of accounting, as appropriate, should be utilized in measuring financial position and operating results. a) Governmental Fund revenues and expenditures should be recognised on modified accrual basis. Revenues should be recognized in the accounting period in which they become available and measurable. Expenditure should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term debt, which should be recognized when due. b) Proprietary fund revenue and expenditures should be recognized on the accrual basis. c) Fiduciary fund revenues and expenses or expenditure should be recognized o the basis consistent with the funds accounting measurement objective. d) Transfers should be recognized i the accounting period in which the interfund receivable and payable arise.

2.5 Budgeting, Budgetary Control and Budgetary Reporting

a) An accrual budgets should be adopted by every governmental unit. b) The accounting system should provide the basis for appropriate budgetary control. c) Budgetary comparisons should be included in the appropriate financial statements and schedules for governmental funds for which an annual budget has been adopted. Transfer, Revenue, Expenditure, and Expenses Account Classifications a) Interfund transfer and proceeds of general long-term debt issues should be classified separately from fund revenues and expenditures or expenses. b) Governmental fund revenues should be classified by fund and source. Expenditures should be classified by fund, function, organizational unit, activity, character and principal classes of objects. c) Proprietary fund revenues and expenses should be classified in essentially the same manner as those of similar business organizations, functions, or activities.

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2.6 Interim and Annual Financial Reports

a) Appropriate interim financial statements and reports of financial position, operating results, and other pertinent information should be prepared to facilitate management control of financial operations, legislative overweight, and, where necessary or desired, for external reporting purposes. b) A comprehensive annual financial report should be prepared and published covering all funds and account groups of primary government and providing an overview of all discretely presented component units of the reporting entity. c) General purpose financial statements of the reporting entity may be issued separately from the comprehensive annual financial report. Such statements should include the basic financial statements and notes to the financial statements that are essential to the fair presentation of financial position and results of operations. d) The financial reporting entity consists of (1) the primary government (a state government or general purpose local government), (2) organizations for which primary government is financially accountable, and (3) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entitys financial statements to be misleading or incomplete. e) The nucleus of financial reporting entity usually is a primary government. However, the governmental entity other than a primary government serves as nucleus for its own reporting entity when it issues separate financial statements.

Conclusion
Principles of Accounting and Financial Reporting for State and Local Governments cover broad areas and concepts. These concepts are again different for different countries. These are established by internationally accepted bodies, but are subject to be modified with the aspects of each different country. So, these broad concepts are changeable from time to time and are not strictly predictable. But every entity responsible for such type of reporting should know up to date modification in these concepts, principles and areas for maintaining a truthful, sound and reliable accounting and reporting system for the government.

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Bibliography
Accounting for Government and Nonprofit Entities By Leon E. Hay and Earl R. Wilson Modern Accountancy By A Mukherjee and M Hanif Class Lectures Delivered By the honourable course coordinator. http://media.wiley.com/product_data/excerpt/37/04712185/0471218537.pdf http://www.accountingcoach.com/nonprofit-accounting/index.html#nonprofit-forprofits

http://chuck.hubpages.com/hub/For-Profit-vs-Non-Profit-Form-of-Business http://www.allbusiness.com/glossaries/financial-reporting/4951111-1.html http://www.charleshooper.net/blog/what-is-financial-reporting-and-who-usesfinancial-reports/

www.google.com http://en.wikipedia.org/wiki/

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