CHAPTER1

THE GOVERNMENT AND NOT-FOR-PROFIT

ENVIRONMENT
WHY STUDY GNP ACCOUNTING?
 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 all governmental
and not-for-profit organizations
Contrast and compare the objectives of financial reporting
for state and local governments, the federal government, and
not-for-profit organizations
 LEARNING OBJECTIVES (CONTD)
Explain the minimum requirements for general purpose
external financial reporting of state and local governments
and how they relate to comprehensive annual financial
reports
Explain and identify the required financial statements for
state and local governments, the federal government, and
not-for-profit organizations
 HOW DO GOVERNMENTAL AND NOT-FOR-PROFIT
ORGANIZATIONS DIFFER FROM BUSINESS ORGANIZATIONS?

Different purposes in society

Financed by resource providers who do not
expect benefits proportional to the resources they
provide
Management has a special duty to be accountable
for how resources are used in providing services
Resource providers do not expect to receive
proportional benefits
Lack of a profit motive 5

Absence of transferable ownership rights

WHAT ARE GOVERNMENTAL ORGANIZATIONS?

LETS Practice (PQ)

WHAT ARE GOVERNMENTAL ORGANIZATIONS?
PQ1.1:
WHAT ARE GOVERNMENTAL ORGANIZATIONS?
PQ1.1:
WHAT ARE GOVERNMENTAL ORGANIZATIONS?
PQ1.2:
WHAT ARE GOVERNMENTAL ORGANIZATIONS?
PQ1.3:
WHAT ARE GOVERNMENTAL ORGANIZATIONS?
PQ1.4:
WHAT ARE GOVERNMENTAL ORGANIZATIONS?

PQ1.5

A primary characteristic that distinguishes governments from

businesses is

a. The need to generate revenues equal to or in excess of

expenditures/expenses.
b. The importance of the budget in the governing process.
c. The need to provide goods or services.
d. The correlation between revenues generated and demand for
goods or services.
 How Do Governmental Entities Differ
From Not-For-Profit Organizations?

Power ultimately rests in the hands of the people

People delegate power to public officials through the
election process
Empowered by and accountable to a higher level
government
Taxation powers
 Sources of GAAP and
Financial Reporting Standards

FASB

GASB

FASAB
 Sources of GAAP and
Financial Reporting Standards
PQ1.6

PQ1.7
 Sources of GAAP and
Financial Reporting Standards

PQ1.8

PQ9
Why Governmental Financial Reporting Must
Differ from Business Financial Reporting?

Different financial report users with different

needs
Governmental financial reporting focuses on
stewardship and accountability for how public
resources are raised and used to provide services
Objectives of Financial ReportingState
and Local Governments (SLG)

Governmental 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
 Objectives of Financial Reporting
SLG (Contd)

ACCOUNTABILITY is the cornerstone of all

financial reporting in government (GASB
Concepts Statement No. 1, par. 56)
Objectives of Financial Reporting
SLG (Contd)

Q: What do we mean by accountability?

A: Accountability arises from 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
Objectives of Financial ReportingSLG
(Contd)

Q: How does interperiod equity relate to

accountability?

A: Interperiod equity is a governments obligation to

disclose whether current-year revenues were
sufficient to pay for current-year benefitsor did
current citizens defer payments to future
taxpayers?
 INTERPERIOD EQUITY
PQ1.10 Certain fiscal practices of governments promote interperiod
equity while others do not. For the situations listed below, indicate
whether interperiod equity is promoted or undermined. Why?

a) Issuing 30-year serial bonds to finance the construction of capital

assets with estimated 30-year lives.
b) Paying for the pensions of retired employees out of resources
provided by current-period taxpayers.
c) Charging the cost of supplies as expenditures in the year in which
they were used rather than when they were purchased.
d) Issuing 30-year bonds to finance a portion of the current-period
operating costs of a citys school system
e) Charging payments of wages and salaries made in the first week
of a new year to the previous fiscal year, the year in which the
wages and salaries were earned.
 Objectives of Financial Reporting
Federal Government

Accountability is also the foundation of federal

government financial reporting

Federal Accounting Standards Advisory Board

(FASAB) standards are targeted at both internal
users (management) and external users
 Objectives of Financial Reporting
Federal Government (Contd)

Federal government financial reporting should assist

report users in evaluating:

Budgetary integrity
Operating performance
Stewardship
Adequacy of systems and controls
 Objectives of Financial Reporting
Not-for-Profit (NFP) Organizations

NFP financial reporting should provide information

useful in:

Making resource allocation decisions

Assessing services and ability to provide services
Assessing management stewardship and performance
Assessing economic resources, obligations, net resources, and
changes in them
WHO ARE THE USERS OF FINANCIAL REPORTS?
Governing Boards
Investors and creditors
Citizens and organizational members
Donors and Grantors
Regulatory Agencies
Employees and other constituents

26
SEVERAL FORMS OF FINANCIAL REPORTING
Paper generated text financial statements
PDF
Internet- HTML or PDF
XBRL (eXtensible Business Reporting Language)

27
REQUIRED REPORTING : GENERAL PURPOSE
EXTERNAL FINANCIAL REPORTS (SLGS)
Management's discussion and analysis

Government-wide Fund financial

financial statements statements

Required supplementary information

(other than MD&A)

Notes to the financial statements

28
 GOVERNMENT-WIDE FINANCIAL STATEMENTS

Provide an aggregated overview of the

governments net position and
change in net position, reported
for the government as a whole
Assist in assessing operational accountabilitywhether
government has used its resources efficiently and
effectively in meeting service objectives
Focused on flow of economic resources, recognized on
the accrual basissimilar to business organizations
 Fund Financial Statements

For now you should view a fund

as a separate set of accounts
used to account for resources
segregated for a particular
purpose (see Chapter 2 for the
formal definition of fund)
FUND FINANCIAL STATEMENTS (CONTD)
Funds that focus on the flow of current financial
resources are called governmental funds
Governmental fund financial statements assist in
assessing fiscal accountabilitywhether the
government raised and spent financial resources in
accordance with budgetary, legal, and regulatory
constraints
Governmental fund revenues and expenditures are
recognized on the modified accrual basisrevenues
are recognized when measurable and available for
spending; expenditures when an obligation is incurred
that will be paid from currently available financial
resources
 Fund Financial Statements (Contd)

Other fund categories (see Chapter 2):

Proprietary funds report on business-like activities
of the government
Fiduciary funds report on fiduciary (trust and
agency) activities of the government
Both categories follow accounting principles similar
to businesses
OPTIONAL REPORTING: COMPREHENSIVE ANNUAL
FINANCIAL REPORT (CAFR)

Introductory section

Financial section

Statistical section
CAFR - Introductory Section

a) Letter of transmittal
b) Organizational chart
c) List of principal officers
 CAFR - Financial Section

a) Management's discussion and analysis

b) Government-wide financial statements
c) Fund financial statements
d) Notes to the financial statements
e) Required supplementary information
CAFR - Statistical Section

a) Ten years of selected

financial data
b) Ten years of economic
data (e.g., millage rates,
appraised values)
c) Other data
 OVERVIEW OF FEDERAL GOVERNMENT
FINANCIAL REPORTING
Federal financial reporting occurs at two levels:
U.S. Government-wide
o Prepared by U.S. Treasury
Major agencies and departments
o Prepared by each agency and department following
requirements established in Office of Management
and Budget (OMB) Circular A-136
 U.S. GOVERNMENT-WIDE FINANCIAL
REPORTING
Management and data deficiencies in some agencies
and departments continue to preclude fully auditable
government-wide financial statements
The consolidated report includes:
o A plain language Citizens Guide
o A Managements Discussion and Analysis (MD&A)
o Several financial statements (See Chapter 17)
o Supplemental information reporting on both budgetary
and proprietary (operating) financial activities, as well
as reconciliation of the two activities
 FEDERAL AGENCY AND DEPARTMENT
FINANCIAL REPORTING
Major federal agencies and departments must prepare
a performance and accountability report (PAR)
The PAR should include four sections:
o A Managements Discussion and Analysis (MD&A)
(e.g., overview of PAR and agencys mission)
o Performance section containing the annual performance
report (APR) (e.g., information about agencys goals
and performance)
o Basic financial statements (see names in the chapter)
o Other accompanying information (e.g., information
about tax burden, tax gap, challenges facing
management, and revenue forgone)
 OVERVIEWNOT-FOR-PROFIT (NFP)
ORGANIZATION FINANCIAL REPORTING
Primary purpose of NFP financial statements is to
provide decision-useful financial information to
resource providers, such as donors, members, and
creditors
Resource providers share the need for information to
assess:
o Services provided by the NFP and the ability to continue
to provide those services
o Managements performance and stewardship of
resources
 NOT-FOR-PROFIT (NFP) ORGANIZATION
FINANCIAL REPORTING (CONTD)

FASB standards require that NFPs provide the following

financial statements (See Chapter 13):
o Statement of financial position (i.e., balance sheet)
o Statement of activities (i.e., income statement)
o Statement of cash flows
o Statement of functional expenses (voluntary health and
welfare organizations only)
 NOT-FOR-PROFIT (NFP) ORGANIZATION
FINANCIAL REPORTING (CONTD)
Reporting requirements unique to NFP organizations
Demonstrating accountability for donor-imposed
restrictions by reporting net assets and changes in net
assets in the three categories of (1) permanently
restricted, (2) temporarily restricted, and (3)
unrestricted
Reporting program service expenses separately from
supporting service expenses. The latter include
overhead (such as, non-program management and
general expenses) and fund-raising expenses
END OF CHAPTER 01