Accounting for
Governmental
& Nonprofit
Entities
17/e
JACQUELINE L. RECK
SUZANNE L. LOWENSOHN
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
9-1
Financial Reporting of
State and Local
Governments
C
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A
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9
9-2
Learning Objectives
9-1
9-2
9-3
Describe the concepts related to the financial
reporting requirements of the GASB reporting
model.
Explain the key concepts and terms used in
describing the governmental reporting entity.
Apply the GASB criteria used to determine
whether a potential component unit should be
included in the reporting entity and, when
included, the manner of reporting component
units.
9-3
Learning Objectives
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9-5
9-6
Identify and describe the contents of a
comprehensive annual financial report
(CAFR).
Prepare governmental fund financial
statements and government-wide financial
statements and understand how to reconcile
the two.
Identify and explain financial reporting issues
and topics.
9-4
Conceptual Framework for Financial
Reporting
• Provide
information that
can be used to
assess a
government’s
accountability
• Assist users in
making economic,
social, and political
decisions
Primary
Users
• Those external to
government;
principally, citizens,
legislative and
oversight bodies,
and creditors
•
•
•
•
•
•
Understandable
Reliable
Relevant
Timely
Consistent
Comparable
Usefulness
Objectives
9-5
Useful Information
• Communicating the information in a manner that is
helpful to the user is an important part of making
information useful.
• Areas identified in GASB Concepts Statement 3
are
– recognition in the financial statements,
– disclosures in the notes to the financial statements,
– presentation as required supplementary information,
or
– presentation as supplementary information.
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Recognition and Disclosure
• An item of information that meets the definition of
an element and is measurable with sufficient
reliability should be recognized in the financial
statements.
• A note should be used if it can help support an item
recognized in a financial statement or provide
information that is essential to the user’s
understanding of the item.
9-7
Required Supplementary Information
(RSI)
• Required supplementary information is used to
provide information that is essential.
• Without this information, the financial statements
and related notes cannot be placed in the correct
context.
• Examples of RSI include the management
discussion and analysis, budget to actual
schedules and several pension disclosures.
9-8
Other Supplementary Information
• Other supplementary information is used to provide
information that is useful.
• Other supplementary information is useful but not
essential in understanding the financial statements
and related notes.
• Much of the other supplementary information is
found in the statistical section of the
comprehensive annual financial report (CAFR).
9-9
The Governmental Reporting Entity
State or General
purpose
governments
Other
agencies
Boards
Primary
Government
Special purpose
governments
Special
Districts
Commissions
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The Governmental Reporting Entity
Primary
Government
Special
Districts
Other
agencies
Commissions
Boards
9-11
Financial Reporting Entity
• GASB takes the position that governmental
financial reporting should report on all governments
and organizations for which elected officials are
accountable.
• Collectively, these governments and organizations
are referred to as the financial reporting entity.
• A financial reporting entity is the primary
government and organizations for which the
primary government is financially accountable.
9-12
Financially Accountable
A primary government is
financially accountable for
another organization if
the primary government appoints
a voting majority of the
organization’s governing board
AND
it is (a) able to impose its
will on the organization
OR
(b) there is a potential for the
organization to provide specific
financial benefits to, or impose
specific financial burdens on,
the primary government.
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Component Units
• Component units are included as a part of the
reporting entity.
• A component unit is defined as a legally separate
organization for which the elected officials of the
primary government are financially accountable.
• Examples of component units include not-for-profit
organizations, for-profit firms or a nonprimary
government.
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Presentation of Component Units
Blended presentation is
when the component unit’s
financial data for its funds
and activities are reported
with the same fund types
and activities of the primary
government.
Discrete presentation is
when financial data of the
component unit are reported
in one or more columns,
separate from the financial
data of the primary
government.
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Is the Component Unit Part of the
Primary Government?
Is the governing body of the
component unit substantially
the same as that of the
primary government? Is there
is a financial benefit/burden
relationship between the
primary government and the
component unit? Does the
primary government have
operational responsibility for
the component unit?
Does the component unit exist
primarily to provide services to
the primary government or
otherwise exclusively, or nearly
exclusively, benefit the primary
government?
Is the component unit’s
debt expected to be
paid entirely or almost
entirely by the primary
government?
9-16
Discrete Presentation
Discrete presentation is used
when
The component unit
does not meet the
criteria for blending
The assets received or held
by the component unit are
entirely or almost entirely for
the direct benefit of the
primary government, its
component units, or its
constituents
The component unit is a
legally separate, tax-exempt
organization that meets both
of the following criteria
The primary government, or its
component units, is entitled to, or has
the ability to otherwise access, a
majority of the assets received or
held by the component unit and these
assets are significant to the primary
government.
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Other Government Organizations
Joint Venture
Other
stand-alone
government
Jointly
owned
organization
9-18
Governmental Financial Reporting
• It is useful for financial reports to be prepared and
distributed at intervals throughout a fiscal period as
well as at period-end.
• Reports prepared at times other than year-end are
called interim reports.
• Interim financial reports are useful for both
government administrators and the legislative
branch, especially those serving on the finance
committee.
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Suggested Interim Reports
• Schedule of actual and budgeted revenue (for the General
Fund and special revenue funds and other funds for which
budgets have been legally adopted)
• Schedule of actual and budgeted expenditures (for the
General Fund and special revenue funds and other funds
for which budgets have been legally adopted)
• Comparative schedule of revenue and expense (for each
enterprise and internal service fund)
• Combined schedule of cash receipts, disbursements, and
balances—all funds
• Forecast of cash positions—all funds
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Annual Financial Reports
Management
News media
Debt rating
agencies
Legislature
Users of
Annual
Financial
Reports
Citizens
Creditors
Higher
governments
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Comprehensive Annual Financial
Report (CAFR)
• CAFRs are prepared by most larger governments
• A CAFR is the government’s official annual report
prepared and published as a matter of public record
• A CAFR includes the minimum requirements of
general purpose external financial reporting:
– management’s discussion and analysis (MD&A),
– basic government-wide and fund financial statements
and related notes, and
– required supplementary information (RSI)
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Comprehensive Annual Financial
Report (CAFR)
• In addition, a CAFR includes
–
–
–
–
–
–
individual fund and combining financial statements,
schedules,
narrative explanations,
a statistical section,
other material management deems relevant, and
if the CAFR contains audited financial statements,
the auditor’s report should also be included
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Sections of a CAFR
Introductory Section
Financial Section
Statistical Section
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Introductory Section
• Since the introductory section is generally not
covered by the auditor’s report, it may present
information of a more subjective nature, including
prospective information such as forecasts or
expectations.
• This section includes:
– Table of contents
– Letter of transmittal
– Other material deemed appropriate by
management
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Financial Section
The minimum content for the financial section of a CAFR
includes
– Auditor’s report
– MD&A
– Basic financial statements
• Government-wide financial statements
• Fund financial statements
• Notes to the financial statements
– Required supplementary information other than MD&A,
including, but not limited to, the budgetary comparison
schedule
– Combining statements and individual fund statements and
schedules
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Statistical Sections
• There are five categories defined by the GASB that
should be included in the statistical section. The
most recent 10 years of data should be presented
for each.
– Financial trends information
– Revenue capacity information
– Debt capacity information
– Demographic and economic information
– Operating information
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Financial Trends Information
Shows how a government’s
financial position has
changed over time
Focus is on showing the
trend in fund balances and
net position categories
Prepared at both the fund
level and government-wide
level
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Revenue Capacity Information
Shows the government’s
ability to generate its own
revenues
Information on the revenue
base
Information on revenue rates
Principal revenue payers
Property tax levy and
collection information
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Debt Capacity Information
Shows existing debt burden
and ability to issue debt
Ratios of outstanding debt to
total personal income of
residents
Information about direct and
overlapping debt
Legal debt limitations and
margins
Information about pledged
revenues
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Demographic and Economic
Information
Shows socioeconomic
environment in which the
government operates
Personal income
Unemployment rates
Employers
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Operating Information
Provides a context in which
the government’s operations
and resources can be better
understood
Number of government
employees
Indicators of demand or level
of service
Capital asset information
9-32
Preparing the Financial Statements
• All necessary adjusting entries, including depreciation,
should be prepared and posted.
• A pre-closing trial balance is prepared to provide all
information needed for the Governmental Activities
column of the government-wide financial statements.
• All temporary accounts should be closed.
• Reclassification entries are prepared and posted for
each of the three net position accounts.
• The government-wide statements of net position and
activities are prepared.
9-33
Fund Financial Statements
• Fund financial statements are prepared for all
governmental funds and proprietary funds.
• Governmental fund financial statements include
– Balance sheet – governmental funds
– Statement of revenues, expenditures, and changes in fund
balances—governmental funds
• Fund balances must be classified according to constraints
on their use: nonspendable, restricted, committed,
assigned and unassigned.
• Only the General Fund can have unassigned fund
balances.
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Required Reconciliations
Fund financial
statements
reconcile to
Governmental
activities
column
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Other Financial Reporting Issues and
Topics
• GASB’s Recognition and Measurement Attributes
project
• Popular reporting
• Other comprehensive basis of accounting
(OCBOA) of special-purpose frameworks
• International accounting standards
9-36
Looking Forward
In this chapter, we explored financial reporting of
state and local governments. Key concepts were
explained, including that of component units. The
contents of a CAFR were described and required
reconciliations were identified.
The next chapter begins Part 2 of the text which
focuses on accountability for public funds. The
chapter looks at the analysis of governmental
financial performance.
9-37