Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 2: Overview of SLG Financial Reporting

2. Overview of Chapter 2 • Chapter 2 provides illustrations of SLG financial reports introduced in Chapter 1 • The slides that follow will emphasize points you should notice in the various statements. • Ideally the student will obtain a full set of SLG financial statements to review.

3. CAFR vs. Minimum Reporting • The complete CAFR is recommended • See Chapter 1 pages 8-10 for details of information included • Some smaller governments may report somewhat less than the information in the full CAFR as listed on page 25 • NOTE: Though not listed, auditor’s report is still required • Main differences — • Less statistical information • Combining statements omitted

4. Government Reporting Entity • In business, parent companies generally include subsidiaries as part of consolidated statements in order to see the whole picture • Likewise, if a primary government is financially accountable for a sub-government the “component unit” must be included as part of the primary government’s report • This requirement prevents main governments from creating separate units that hide part of the government debt or resources

5. Government-Wide Statements • Statement of Net Assets (similar to business balance sheet) • Statement of Activities (similar to business income statement) • Statements include all of the activities of governmental and proprietary type funds on accrual basis including depreciation • Entity-wide statements do not include fiduciary fund balances as these resources belong to others

6. Govt-Wide Statements Cont’d • If SLG has multiple component units • Can have two or more columns to show their component information separate from primary government • May need to preparing a COMBINING statement to total up the multiple component units before putting only one column in main statements • May show condensed financial statements of the component units in the notes

7. Govt-Wide Statements Cont’d • May show prior year data in comparison to current year results • While the gov’t-wide statements are intended to approximate business style financial reports, SLGs prepare the statements using FASB statements current only through November 30, 1989 • Therefore, some items such as investments may use somewhat different categories than those used by businesses

8. Statement of Net Assets • Assets listed in order of liquidity • Classifying assets and liabilities into current and noncurrent categories is optional • Receivables are listed net of allowances • Capital assets are listed net of accumulated depreciation • NET ASSETS broken into three categories • 1. Invested in capital assets net of related debt • 2. Restricted • 3. Unrestricted

9. Statement of Net Assets Cont’d • The primary government results must show a separate column for Governmental Activities and for Business Activities • The numbers in these columns derive from the totals in the individual governmental and business type fund statements adjusted to accrual basis • Component Units will have one or more columns or be shown in notes • Fiduciary activities are not on the statement

10. Statement of Net Assets Cont’d • Even in business consolidations of parent companies and subsidiaries, receivables and payables owed to each other are eliminated • The internal balance figure represents the net (receivable less payables) owed between the governmental and business type funds • On page 31, the governmental funds have a net receivable of $175,000 owed to them by the business type funds • This offsetting prevents creating fictitious assets on the balance sheet through internal borrowings

11. Statement of Activities • Businesses generally calculate net ‘income’ • Because most government functions are not expected to pay for themselves from exchange-like transactions — • This statement attempts to show the net ‘cost’ of activities after deducting the revenues that can be directly attributed to each function • General revenues such as property taxes are then added at the bottom to get the “Change in net assets” • By adding the change in net assets to beginning assets, this reconciles the Activity statement back to the Statement of Net Assets on page 31

12. Statement of Activities Cont’d • Extraordinary items, transfers, and unusual but not infrequent (special) items appear after general revenues • Some expenses and revenues must be allocated to functional activities • Depreciation on equipment can be allocated • Depreciation on infrastructure assets is not allocated • Interest is not allocated unless specific to a functional area

13. Fund Level Statements • Governmental Funds have • Balance Sheet • Statement of Revenues, Expenditures and Changes in Fund Balance • Required supplementary Budgetary Comparison • Proprietary Funds have • Statement of Net Assets (Balance Sheet) • Statement of Revenues, Expenses and Changes in Net Assets • Statement of Cash Flows • Fiduciary Funds have • Statements of Net Assets and of Changes in Net Assets

14. Government Fund Balance Sheet • Major funds concept • Must show column for General Fund • Separate column for other MAJOR funds • Fund has 10% of the total assets, liabilities, revenues, or expenditures in the GOVT category, or • 5% of total of GOVT + ENTERPRISE amounts • Remaining funds added together and shown in one column • Use total column • Break Fund Balance into Reserved and Unreserved Categories

15. Government Revenues/ Expenditures Statement • Format: • Revenues • Less Expenditures • + or - Other Financing Sources or Uses and Special Items • = Change in Fund Balance • + Beginning Fund Balance • = Ending Balance

16. Government Revenues/ Expenditures Statement • Expenditures classified by “character” • Current • Debt Service • Capital Outlay • ‘Character’ relates to ‘time’ or interperiod equity issues: • current outlays, past spending (paying off debts of previous generation) , or buildings that will benefit the future

17. Reconciliation Schedule page 40 • This schedule reconciles the changes in net assets shown on the entity-wide and the fund-level statements • Reconciliation is necessary because the entity-wide statements are on accrual basis, and government fund statements are on modified accrual basis • Later chapters will give more background on understanding modified accrual basis

18. Proprietary Statement of Net Assets • Show all major enterprise funds - 10% and 5% approach • Show additional column for any nonmajor enterprise funds • Show total enterprise funds • Show one column with the totals for all internal service funds • Don’t need reconciliation to entity-wide since both on accrual basis • Classify assets and liabilities as current and noncurrent • Net assets: capital assets net, restricted, unrestricted

19. Proprietary Revenue, Expenses and Changes in Net Assets • Format • Op Revenue - Op Expense - Nonoperating items less capital contribution, transfers and other special items then add to beginning balance • Nonoperating items would include interest expense or revenue and gains or losses on sales of assets • On accrual basis

20. Proprietary Statement Cash Flows • Four categories instead of the three used in business cash flow statements • 1. Operating • 2. Noncapital (short-term) financing • 3. Capital (long-term) financing • 4. Investing • In business reports — interest and dividend revenue is in operating, here it is in investing section • In business reports — interest expense in operating, here in related capital or noncapital financing section • In business reports — purchases or sales of long-term assets in investing, now in capital

21. Statement of Fiduciary Net Assets • Illustration 2-9 page 48, essentially a balance sheet • For fiduciary funds the accounting equation is • Assets - Liabilities = Net Assets • Exception for Agency funds, accounting equation is • Assets = Liabilities • No net asset claim

22. Statement of Change in Fiduciary Net Assets • Explains changes in fund balance (net assets) • Essentially a substitute of for an income statement • Not called net income, since not available for general government use • FORMAT: • Additions - Deductions = Change in Net Assets

23. Notes to the Financial Statements • Notes are considered an essential part of the financial statements. Not GAAP without them. • First note is called • SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES • Explains what is included in the financial statements • Explains which funds use accrual and which use modified accrual basis • Gives the choice made whenever more than one approach is allowed • Auditors work with a check list like the one on page 45 to make sure all appropriate disclosures are in notes

24. Required Supplementary Info • Major RSI items: • Budgetary Comparison Schedule • Information about infrastructure assets if modified approach is used (no depreciation) • Other miscellaneous, if applicable • Information about pension funding progress • Schedules for external investment pools

25. Budgetary Comparison • Shows the original budget and the final revised budget after revisions during the year • Shows comparison to actual results • The ‘actual’ figures may not be the same as those shown on modified accrual basis statement on fund statements because comparison is on ‘budget basis,’ which could be cash basis • Need to show reconciliation when budget basis is not the same as that on fund statements • Variance column is useful, but optional • Can include as regular stmt instead of in RSI

26. Modified Approach Infrastructure Information • Example provided in Illustration 2-11, page 52 • Required only if not recording depreciation expense • Shows the condition of infrastructure, to back up the assumption that depreciation is not needed

27. Combining and Individual Fund Information • A complete CAFR will provide additional details beyond the main statements • Any column, such as nonmajor funds, which is a total of more than one fund needs to have a combining statement to show the individual amounts that were added to get the total • Some individual funds may be broken down into more detail than on combining statements • For example, may wish to show more details of revenues or expenditures for some critical funds

28. Special Purpose Governments • Some governments have only business-type or only government-type activities • So, the general approach is modified …. • For a government with only business-type or only government-type activities, the fund and entity-wide statements would be repetitive • therefore, do not need both • Colleges may have choice of government and business, government only, or business only models

29. Slides prepared by • Dr. Louella Moore • Arkansas State University