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Accountin

g for

Governmental& Nonprofit

Entities

JACQUELINE L. RECK

U!ANNE L. L"#EN"$N

%'e

Copyright © 2016 McGraw-Hill Education. All rights resered. !o reproduction or distri"ution without the prior written

consent o# McGraw-Hill Education.

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Intro(uction to

Accounting an()inancial Reporting for

Governmental an( Not*

for*+rofit Entities

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Learning "-ectives

1. Identify and explain the characteristics that

distinguish governmental and not-for-profit entities from

for-profit entities

2. Identify the authoritative bodies responsible forsetting GAAP and financial reporting standards for

all governmental and not-for-profit organizations

. !ontrast and compare the ob"ectives of

financial reporting for state and local governments#the federal government# and not-for-profit

organizations

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Learning "-ectives

$. %xplain the minimum re&uirements for general

purpose external financial reporting of state and local

governments and ho' they relate to comprehensive

annual financial reports

(. Identify and describe the re&uired financial

statements for the federal government# and not-for-

profit organizations

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Government & Not*for*+rofit Accounting

+ractices /iffer from 0usiness

)hey have different

purposes in society

)hey are financed byresource providers 'ho do

not expect benefitsproportional to the

resources they provide

*anagement has aspecial duty to beaccountable for

ho' resources areused in providing

services

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,1pes of Governments

• +ederal government# stategovernments# cities#to'ns# to'nships# villages#counties# boroughs# and

parishes

General purposegovernments

provide a broad

array of services.

• Independent schoolsystems# public colleges

and universities# publichospitals# fire protectiondistricts# and many others

,pecial purposegovernments

usually provideonly a single or

"ust a fe'services.

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Not*for*+rofit "rgani2ations

ot-for-profit organizations are legally separate

organizations 'hich are usually exempt from

federal# state# and local taxation.

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C3aracteristics of Government an(

Not*for*+rofit "rgani2ations

nli/e for-profit organizations# resourceproviders do not expect to receive repaymentor proportional benefits.

)he organization lac/s a profit motive.

)here is an absence of transferable o'nershiprights.

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C3aracteristics of Government"rgani2ations

Po'er ultimately rests in the hands of the people

People delegate po'er to public officials throughthe election process

%mpo'ered by and accountable to a higher levelgovernment

)he organization has the po'er to tax

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ources of GAA+ an()inancial Reporting tan(ar(s

• 0usiness organizations• ongovernmental not-for-profits+A,0

• ,tate and local governmentalorganizations

• Governmental not-for-profitsGA,0

• +ederal government and its agenciesand departments+A,A0

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Accountability is the cornerstone of all financial

reporting in government Accountability re&uiresgovernments to ans'er to the citizenry3to "ustifythe raising of public resources and the purposesfor 'hich they are used.4

-GA,0 !oncepts ,tatement o. 1

"-ectives of )inancial Reporting

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Interperiod equity is a government5s obligation to

disclose 'hether current-year revenues 'eresufficient to pay for current-year benefits3or 'illfuture taxpayers be re&uired to pay for theminstead6

"-ectives of )inancial Reporting

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"-ectives of )inancial Reporting for

tate an( Local Governments

Governmental financial reports areused primarily to

!ompareactual

financialresults 'ith

legallyadoptedbudget

Assessfinancial

conditions

and results ofoperations

Assist indeterminingcompliance'ith finance-

related la's#rules andregulations

Assist inevaluating

efficiency andeffectiveness

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"-ectives of )inancial Reporting fort3e )e(eral Government

+ederal government financial reportingshould assist report users in evaluating

0udgetaryintegrity

7peratingperformance

,te'ardship Ade&uacy ofsystems and

controls

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"-ectives of )inancial Reporting for Not*for*+rofit 4N)+5 "rgani2ations

+P financial reporting should provideinformation useful in

*a/ingresourceallocation

decisions

Assessingservices andthe ability to

provide

services

Assessingmanagementste'ardship

and

performance

Assessingeconomicresources#obligations#

net resources#

and changesin them

6i i R i f G l

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6inimum Re7uirements for General

+urpose E8ternal )inancial Reporting

6anagement9s (iscussion an( anal1sis

Government*:i(e )un( financial

financial statements statements

Notes to t3e financial statements

Re7uire( supplementar1 information4ot3er t3an 6/&A5

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Government )inancial tatements

)here are t'o categories of basic government

financial statements8

Government-wide financial statements# 'hichprovide an aggregated overvie' of a government5s

net position and change in net position and

Fund financial statements# 'hich provide more

detailed financial information about a government

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Government*:i(e )inancial

tatements

Assist in assessing operational accountability 3

'hether government has used its resources efficiently

and effectively in meeting service ob"ectives.

+ocus on flow of economic resources

se the accrual basis of accounting # li/e businessorganizations

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+or no'# thin/ of a fund as a separate set ofaccounts used to /eep trac/ of resourcessegregated for a particular purpose 9 moredetail on funds is in !hapter 2

)un( )inancial tatements

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Assist in assessing fiscal accountability 3'hetherthe government raised and spent financial resourcesin accordance 'ith budgetary# legal# and regulatoryconstraints

+ocus on short-term flow of current financial

resources

se the modified accrual basis3revenues

recognized 'hen measurable and available forspending: expenditures recognized 'hen an

obligation is incurred that 'ill be paid from currently

available financial resources


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7ther fund categories ;see !hapter 2<8

• Proprietary funds report on business-li/e

activities of the government• Fiduciary funds report on fiduciary ;trust and

agency< activities of the government

•

0oth categories follo' accounting principlessimilar to businesses


Compre3ensive Annual )inancial Report

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Compre3ensive Annual )inancial Report4CA)R5

A Comprehensive Annual Financial Report

CAFR! provides more detail than the minimum

re&uirements for general purpose financial reporting

=hile not re&uired to prepare a !A+># most

governments do so

!A+> is prepared in conformity 'ith GA,0 standards

Compre3ensive Annual )inancial Report

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Compre3ensive Annual )inancial Report4CA)R5

A !A+> prepared according to GA,0

standards should contain three sections.

,tatistical ,ection

+inancial ,ection

Introductory ,ection

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CA)R * Intro(uctor1 ection

7ther ;as desired by management<

?etter of transmittal

!ontents page

)itle page

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)he financial section should contain sufficient

information to disclose fully and present fairly the

financial position and results of financial operations

during the fiscal year. Items included in the financialsection are8

Auditor5s report

*anagement5s discussion and analysis ;*@A<

0asic financial statements ;and notes thereto<

>e&uired supplementary information ;>,I<;other than*@A<

!ombining and individual fund statements and schedules

CA)R * )inancial ection

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)he statistical section typically presents tables and

charts sho'ing demographic and economic data#

financial trends# fiscal capacity# and operatinginformation of the government in the detail needed by

readers 'ho are more than casually interested in the

activities of the government.

CA)R * tatistical ection

"vervie: of )e(eral Government

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"vervie: of )e(eral Government

)inancial Reporting

+ederal financial reporting occurs at t'o

levels8

.,. government-'ide 9 prepared by .,. )reasury

*a"or agencies and departments 9 prepared by

ma"or agencies and departments follo'ingre&uirements established in 7ffice of *anagementand 0udget ;7*0< !ircular A-1B

U Government :i(e )inancial

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U.. Government*:i(e )inancial

Reporting

@espite the enormous dollar amounts involved# the

.,. !omptroller General has never been able to

issue an audit opinion on the federal government5s

consolidated financial statements.

In general# serious financial management and data

deficiencies are cited for the !omptroller General5s

continuing disclaimer of opinion.

U Government :i(e )inancial

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U.. Government*:i(e )inancial

Reporting

)he consolidated report includes8

A plain language4 !itizen5s Guide

*anagement5s @iscussion and Analysis ;*@A<

,everal financial statements ;see !hapter 1C<

,upplemental information reporting on both budgetaryand proprietary ;operating< financial activities# as 'ell asreconciliation of the t'o activities

)e(eral Agenc1 an( /epartment

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)inancial Reporting

*a"or federal agencies and departments must

prepare a performance and accountability report

4PAR 5 that includes an annual performance reportAPR!# annual financial statements# and a variety of

management reports on internal control and other

accountability issues.


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)inancial Reporting

)he PA> should include four sections8

1. An *@A# providing an overvie' of PA> and

a clear description of the department or

agency5s mission

2. Performance section containing the AP>#

'hich provides information about agency5s

performance and progress in achieving its

performance goals


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)inancial Reporting

. 0asic financial statements8 balance sheet#statement of net cost# statement of changes innet position# statement of budgetary resources#

statement of custodial activity and statement ofsocial insurance

$. 7ther accompanying information such as

information about tax burden# tax gap#challenges facing management# and revenue

forgone

Not*for*+rofit 4N)+5 "rgani2ations

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Not for +rofit 4N)+5 "rgani2ations

)inancial Reporting

)he primary purpose of +P financial statements is to

provide decision-useful financial information to

resource providers# such as donors# members# and

creditors.

)hese resource providers need information to assess

the services provided by an +P and the ability of the

+P to continue to provide those services# as 'ell as

management5s performance and ste'ardship of

resources.


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)inancial Reporting

)hose +P organizations that arenongovernmental in nature are re&uired to

follo' +A,0 accounting and financialreporting standards. )hese standards re&uirepresentation of a

,tatement offinancial position;balance sheet<

,tatement ofactivities ;income

statement<,tatement ofcash flo's


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)inancial Reporting

In addition to these statements# voluntary health and

'elfare organizations# such as the D*!A# nited

=ay# and the American @iabetes Association# are

re&uired to present a statement of functionalexpenses.

)his statement classifies expenses into program and

supporting services categories# in addition to

traditional line item classifications.

Reporting Re7uirements Uni7ue to

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Reporting Re7uirements Uni7ue to

Not for +rofit "rgani2ations

@emonstrating 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 ;< unrestricted

>eporting program service expenses separately

from supporting service expenses. )he latter

include overhead ;such as# non-programmanagement and general expenses< and fund-

raising expenses

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"t3er Accounta-ilit1 Reporting

Popular >eports 9 highly condensed and

unaudited

,ervice %fforts and Accomplishments ;,%A< 9 include both financial and nonfinancial

measures of service efforts and service

accomplishments

L ;i A3 (

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Loo;ing A3ea(

• @iscuss in detail GA,0 principles#standards and financial reporting#focusing on state and localgovernments.

!hapters

2 9 E

• @escribe 'ays that public financialmanagers provide accountabilityover funds entrusted to them.

!hapters 1F#11 and 12

•

+ocus on not-for-profit organizationsand federal government accountingand reporting.

!hapters1 - 1C

A Q t f t3 " i i l A t3

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A Quote from t3e "riginal Aut3or

...%ven 'hen developed to the ultimate

stage of perfection# governmental

accounting cannot become a guaranty ofgood government. At best# it can never

be more than a valuable tool for

promotion of sound financial

management...4

Professor R. M. Mikesell, 1951

chapter_01 - 17

Documents

required financial statements

fund financial statements

federal government

detailed financial information

government accountability

notforprofit organizations1

notforprofit entitieschapter

business organizations1