government and not-for-profit accounting: concepts and practices, 6e
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Government and Not-for-Profit Accounting: Concepts and Practices, 6e . Michael H. Granof Saleha B. Khumawala. Chapter 1. The Government and Not-for-Profit Environment. Thoughts to Ponder: Chapter 1. “We make a living by what we get. We make a life by what we give.” Winston Churchill - PowerPoint PPT PresentationTRANSCRIPT
Government and Not-for-Profit Accounting: Concepts and Practices, 6e
Michael H. Granof Saleha B. Khumawala
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CHAPTER 1The Government and Not-for-Profit Environment
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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
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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.
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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).
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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.
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How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? – Cont’d
• For GNP entities, budget is very important.o Budget is the culmination of the political process. o 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.
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How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? –Cont’d
• Restriction on assets for particular activities and purposes. o 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.
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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.
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Objectives of Financial Reporting State and Local Governments (SLGs)• Financial reports are used primarily to:o Compare actual results with the budget.o Assist in determining compliance.o Assist in evaluating efficiency & effectiveness.o Assess financial condition and results of operations .
• Remember:o Financial statements are a report of the past; your focus
must be on the future. o 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.
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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.o What do we mean by accountability?o How does “interperiod equity” relate
to accountability?These questions are very important!
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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.
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Objectives of Financial Reporting State and Local Governments (SLGs)
• How does “interperiod equity” relate to accountability?o 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”!
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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:
o Internal users (management), and o External users
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Composition of the Local U.S. Government Entities
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Based on 2012 CensusCounties; 3,031
Municipalities; 19,522
Towns/ townships; 16,364
School districts; 12,884
Special districts; 37,203
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Importance of the NFP Sector
Size and Scope 2009-2011:Number of not-for-profit organizations 2.2 millionTotal nonprofit sector revenues (2009) $1.87 trillion Annual contributions from private sources (2011) $347 billionPercentage of wages and salaries paid in the US(2010) 9% Giving 2011:Individuals contribution (73%) 211.77 billionCharitable bequests (8%) 22.83 billionFoundations (14%) 41 billionCorporate (5%) 15.29 billion
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Sources of GAAP and Authoritative Bodies
Authoritative Bodies:• FASB – Financial Accounting Standards Board
o Business organizations: ex. Wal-Mart, Exxono Nongovernmental not-for-profits: ex. Rice University, o American Cancer Society
• GASB – Governmental Accounting Standards Boardo Governmental entities: ex. New York City, Atlanta, Harris
Countyo Governmental not-for-profits: ex. University of Houston
• FASAB – Federal Accounting Standards Advisory Boardo Federal Government and its agencies: o Ex. Department of Defense, Department of Transportation,
Department of Energy, Department of Education, Department of Agriculture, HUD, HHS and others.
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Who are the users of financial reports?• Governing Boards o 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
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Several forms of Financial Reporting
• Paper generated text financial statements• PDF• Internet- HTML or PDF• XBRL (eXtensible Business Reporting Language) C
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General Purpose External Financial Reports (SLGs)
Source: GASB Statement 34
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Management's discussion and analysis
Required supplementary information (other than MD&A)
Notes to the financial statements
Government-wide financial statements
Fund financial statements
Summary <------------------------------> Detail
Components of the Annual Financial Report
Management’s Discussion and
Analysis
Government-wide
Financial Statements
Fund Financial
Statements
Basic Financial Statements
Notes to the
Financial Statements
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Comprehensive Annual Financial Report
(CAFR)• Three Sections:
• Introductory section• Financial section • Statistical section
• Recommended, but not mandatory
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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
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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.
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CAFR—Financial Section (GASB Statement No. 34)• Auditor’s report • MD&A• Basic Financial Statements• Required Supplementary Information
RSI (Other than MD&A)• Combining the individual fund
statements and schedules• Remember GASB Statement No. 34 is the Reporting
Model that SLGs have to follow.
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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.”
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Basic Financial Statements
• Government-wide Financial StatementsoStatement of Net Position oStatement 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.
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Fund Financial Statements• Governmental-type Fundso Balance Sheeto Statement of Revenues, Expenditures, and Changes in Fund
Balances - Governmental Funds and a schedule of reconciliation
• Proprietary-type Fundso Statement of Net Position o Statement of Revenues, Expenses, and Changes in Fund Net
Position o Statement of Cash Flows
• Fiduciary-type Fundso Statement of Fiduciary Net Position o Statement of Changes in Fiduciary Net Position
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CAFR – Statistical Section
Tables and charts showing multiple-year trends in financial and socioeconomic information
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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.
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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.
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