Government and Not-for-Profit Accounting: Concepts and Practices, 5e Michael H. Granof Saleha B. Khumawala

1. Government and Not-for-Profit Accounting: Concepts and Practices, 5e Michael H. Granof Saleha B. Khumawala Granof-5e

2. Chapter 1 The Government and Not-for-Profit Environment Granof-5e

3. Thoughts to Ponder: Chapter 1 "A democratic society depends upon an informed and educated citizenry." Thomas Jefferson “Service to others is the rent you pay for your room here on earth.” Mohammed Ali Granof-5e

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-5e

5. Learning Objectives (cont’d) • Contrast and compare the objectives of financial reporting for (1) state and local governments (2) the federal government and (3) not-for-profit organizations. • 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-5e

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 or Lack of a profit motive • Absence of transferable ownership rights • Collective ownership by constituents • Policy-setting process Granof-5e

7. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? • For businesses, annual report versus 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 non-profits; Granof-5e

8. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? • Restriction on assets for particular activities and purposes. --ex. 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-5e

9. How Do Governmental and Not-For-Profit Organizations differ from Business Organizations? • Power ultimately rests in the hands of the people • People vote and delegate that power to public officials • Created by and accountable to a higher level government – • Power to tax citizens for revenue Granof-5e

10. Governments Vs. Non-profits GASB: sets standards for all state and local governments and governmental non-profits. Established in 1984, it has 56 stds and 4 concepts stmts as of Dec. 2009. FASB: sets standards for non governmental non-profits except federal government. FASAB: sets standards for the federal government

11. Objectives of Financial Reporting—State and Local Governments (SLG) Financial reports are used primarily to: • Compare actual results with the budget • Assess financial condition and results of operations • Assist in determining compliance • Assist in evaluating efficiency Granof-5e

12. Objectives of Financial Reporting • “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-5e

13. Objectives of Financial Reporting(cont’d) What do we mean by 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-5e

14. Objectives of Financial Reporting: (cont’d) 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-5e

15. Objectives of Financial Reporting—Federal Government • 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-5e

16. Importance of Accounting for SLGs • There are over 89,500 state and local governments in the United States • State and local governments are responsible for approximately 14 percent of total employment in the United States • State and local governments collected approximately $1.3 trillion in tax receipts in 2007. Granof-5e

17. Composition of the Local U.S. Government Units Granof-5e

18. Importance of the NFP Sector Size and Scope 2006-2007: • Number of not-for-profit organizations 1.9 million • Total nonprofit sector revenues (2006) $1.1 trillion • Annual contributions from private sources (2007) $306.39 billion • Percentage of wages and salaries paid in the US by NFP 8.3% • Percentage of NI attributed to the Indep. sector (2006) 5.3% Giving 2007: • Individuals contribution (74.8%) 229.03 billion • Charitable bequests (7.6%) 23.15 billion • Foundations (12.6%) 38.52 billion • Corporate (5.1%) 15.69 billion Granof-5e

19. Importance of the NFP Sector Size and Scope 2006-2007: • Number of not-for-profit organizations 1.9 million • Total nonprofit sector revenues (2006) $1.1 trillion • Annual contributions from private sources (2007) $306.39 billion • Percentage of wages and salaries paid in the US by NFP 8.3% • Percentage of NI attributed to the Indep. sector (2006) 5.3% Giving 2007: • Individuals contribution (74.8%) 229.03 billion • Charitable bequests (7.6%) 23.15 billion • Foundations (12.6%) 38.52 billion • Corporate (5.1%) 15.69 billion Granof-5e

20. Sources of GAAP and Financial Reporting Standards FASB – Financial Accounting Standards Board • Business organizations: ex. Wal-Mart • Nongovernmental not-for-profits: ex. Rice University, American Cancer Society, GASB – Governmental Accounting Standards Board • Governmental entities: ex. New York City, Atlanta • Governmental not-for-profits: ex. University of Houston FASAB – Federal Accounting Standards Advisory Board • Federal Government and its agencies • Ex. Department of Agriculture, Department of Transportation, Department of Energy, Department of Education, Department of Defense, HUD, HHS and others. Granof-5e

21. 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-5e

22. Several forms of Financial Reporting • Paper generated text financial statements • PDF • Internet- HTML or PDF • XBRL (eXtensible Business Reporting Language) Granof-5e

23. General Purpose External Financial Reports (SLGs) Source: GASB Statement 34 Management’s discussion and analysis Government-wide Fund financial financial statements statements Notes to the financial statements Required supplementary information (other than MD&A) Granof-5e

24. Comprehensive Annual Financial Report (CAFR) CAFR -- recommended, but not mandatory Three Sections: • Introductory section • Financial section • Statistical section Granof-5e

25. 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 2009, 2008, and other years at the following link: http://www.houstontx.gov/controller/cafr.html Granof-5e

26. 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 CURRENTReporting Model that SLGs have to follow. Granof-5e

27. 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-5e

28. Basic Financial Statements • Government-wide Financial Statements • Statement of Net Assets • 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-5e

29. Fund Financial Statements • Governmental-type Funds Balance Sheet • Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds with reconciliation • Proprietary-type Funds • Statement of Net Assets • Statement of Revenues, Expenses, and Changes in Fund Net Assets • Statement of Cash Flows • Fiduciary-type Funds • Statement of Fiduciary Net Assets • Statement of Changes in Fiduciary Net Assets Granof-5e

30. CAFR - Statistical Section Tables and charts showing multiple-year trends in financial and socioeconomic information Granof-5e

31. 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-5e

32. Summary • In this course you will become familiar with current GASB, FASB, and FASAB standards relative 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 different purposes and reporting objectives. Granof-5e