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

Granof-5e


Chapter 1

Chapter 1 Practices, 5e

The Government and Not-for-Profit Environment

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Thoughts to ponder chapter 1
Thoughts to Ponder: Chapter 1 Practices, 5e

"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 Practices, 5e

  • 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) Practices, 5e

  • 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 from Business Organizations?

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


Objectives of Financial Reporting—State from Business Organizations?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 from Business Organizations?

  • “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 from Business Organizations?(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) from Business Organizations?

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— from Business Organizations?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 from Business Organizations?

  • 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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Composition of the local u s government units
Composition of the Local U.S. Government Units from Business Organizations?

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Importance of the NFP Sector from Business Organizations?

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 from Business Organizations?

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 from Business Organizations?

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? from Business Organizations?

  • 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 from Business Organizations?

  • 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) from Business Organizations?

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 from Business Organizations?(CAFR)

CAFR -- recommended, but not mandatory

Three Sections:

  • Introductory section

  • Financial section

  • Statistical section

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Cafr introductory section
CAFR - Introductory Section from Business Organizations?

  • 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 from Business Organizations?(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 from Business Organizations?(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 from Business Organizations?

  • 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 from Business Organizations?

  • 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 from Business Organizations?

Tables and charts showing multiple-year trends in financial and socioeconomic information

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Fund Accounting from Business Organizations?

  • 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 from Business Organizations?

  • 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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