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

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Government and Not-for-Profit Accounting: Concepts and Practices, 5e Michael H. Granof Saleha B. Khumawala. Chapter 1. The Government and Not-for-Profit Environment. Thoughts to Ponder: Chapter 1. "A democratic society depends upon an informed and educated citizenry."

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Government and Not-for-Profit Accounting: Concepts and Practices, 5e

Michael H. Granof

Saleha B. Khumawala

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chapter 1

Chapter 1

The Government and Not-for-Profit Environment

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thoughts to ponder chapter 1
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

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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 (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).

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how do governmental and not for profit organizations differ from business organizations
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

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how do governmental and not for profit organizations differ from business organizations1
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;

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how do governmental and not for profit organizations differ from business organizations2
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.

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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

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governments vs non profits
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

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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

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objectives of financial reporting
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!

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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.

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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”!

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objectives of financial reporting federal government
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

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importance of accounting for slgs
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.

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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

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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

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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.

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who are the users of financial reports
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

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several forms of financial reporting
Several forms of Financial Reporting
  • Paper generated text financial statements
  • PDF
  • Internet- HTML or PDF
  • XBRL (eXtensible Business Reporting Language)

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general purpose external financial reports slgs
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)

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comprehensive annual financial report cafr
Comprehensive Annual Financial Report (CAFR)

CAFR -- recommended, but not mandatory

Three Sections:

  • Introductory section
  • Financial section
  • Statistical section

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cafr introductory section
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

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cafr financial section gasb statement no 34
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.

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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
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.

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fund financial statements
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

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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 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.

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