Essentials of Accounting
for Governmental and
Not-for-Profit
Organizations
Chapter 1
Introduction to Accounting and
Financial Reporeting for
Governmental
and Not-for-Profit
Organizations
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Chapter 1 – Learning Objectives
Obtain an overview of financial reporting
for nonbusiness entities
 Distinguish between private and public
sector organizations
 Identify the sources of authoritative
accounting standards for various public
and private sector organizations
 Define the 11 fund types used by state
and local governments

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1-2
Why Study GNP Accounting?



Governments and NFP (not-for-profit)
organizations hire accountants
Governments and NFPs engage
accountants to perform their audits
As citizens and donors we wish to better
understand how taxes and charitable
donations are used
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1-3
Differences in the GNP Environment

Organizational Purposes: Governments
exist to further the well-being of citizens by
providing public services, not for the purpose
of generating returns to owners.

Sources of Revenues: Governments derive
many of their resources from taxes and other
non-exchange transactions.
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1-4
Differences in the GNP Environment
continued

Potential for Longevity: Governments very rarely go out of
business. This long-term view of operations changes the
focus of accounting to a longer-term focus on the
sustainability of services and the ability to meet future
demand.

Relationship with Stakeholders: Governments have an
obligation to demonstrate accountability for public funds.

Role of the Budget: Government budgets often carry the
authority of law, preventing public officials from spending
outside their budgetary authority.
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1-5
Government & Not-for-Profit Accounting
Practices Differ from Business
They have different
purposes in society.
Management has a
special duty to be
accountable for how
resources are used
in providing services.
They are financed by
resource providers who do
not expect benefits
proportional to the resources
they provide.
1-6
Types of Governments
General purpose
governments
provide a broad
array of services.
Special purpose
governments
usually provide
only a single or
just a few
services.
• Federal government, state
governments, cities, towns,
townships, villages, counties,
boroughs, and parishes
• Independent school
systems, public colleges
and universities, public
hospitals, fire protection
districts, and many others
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Not-for-Profit Organizations
Not-for-profit organizations are legally
separate organizations which are usually
exempt from federal, state, and local taxation.
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Characteristics of Government and Notfor-Profit Organizations
Unlike for-profit organizations, resource providers do
not expect to receive repayment or proportional
benefits.
The organization lacks a profit motive.
There is an absence of transferable ownership
rights.
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Characteristics of Government
Organizations
Power ultimately rests in the hands of the people.
People delegate power to public officials through the
election process.
Empowered by and accountable to a higher level
government.
The organization has the power to tax.
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How Accounting Must Adapt to GNP
Environmental Differences





Traditional view of the equity accounts must be
modified
Budget compliance may be as important as income
measurement
When do we recognize revenue in the absence of an
exchange transaction?
Reports must reflect the existence of restrictions on the
use of certain resources
Non-financial performance measures are relatively
more important for measuring effectiveness
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1-11
U.S. STANDARD SETTERS

Federal government and its
agencies

FASAB – Federal Accounting Standards Advisory
Board



GAO – Governmental Accountability Office
U.S. Treasury Department
OMB – Office of Management and Budget
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1-12
STANDARD SETTERS continued
State and Local Governments – Covers basic
governments and entities owned or controlled by
governments

Predecessor: NCGA – National Council on Governmental
Accounting
Private Not-for-profits – Covers not-for-profits not
controlled by government entities — private nonprofit
hospitals, colleges, museums, etc.
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1-13
Authoritative Literature
 The sources of authoritative GAAP for state and
local governments are:
Category A: GASB Statements (and Interpretations)
 Category B: GASB Implementation Guides, GASB
Technical Bulletins, and literature of the American
Institute of Certified Public Accountants (AICPA)
specifically cleared by the GASB

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1-14
How hierarchy works:
 If the accounting treatment for a given
transaction is not specified by a statement
in Category A, a state and local
government should consider whether it is
covered by one of the sources identified in
Category B.
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1-15
Other sources:


If the accounting treatment is not specified within one of the
authoritative sources, the government should consider whether the
transaction is sufficiently similar to ones covered by one of the
authoritative sources that a similar accounting treatment can be
applied.
If not, the government may use nonauthoritative sources for
guidance, including:





GASB Concept Statements,
FASB, FASAB, or International Standards Board pronouncements,
AICPA literature not specifically cleared by the GASB,
Other sources provided by professional organizations, regulatory agencies,
textbooks, and published articles, or
Prevalent practices that evolved among governments without specific
authoritative action
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1-16
Concepts Statements


Concepts project began in the 1970s to guide the
standard setters in establishing GAAP
Concepts statements guide the development of new
standards

Concepts statements are not intended as authoritative GAAP, but
are used for guidance only if no other literature addresses an
issue
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1-17
Codifications


The GASB, FASB, and FASAB publish codifications (organized
versions) of accounting standards. The GASB also publishes a
comprehensive collection of its implementation guides.
The advantage of using the codified versions of standards is that all
relevant standards for a particular topic are presented together and
any superseded segments of standards have been removed.
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1-18
Codifications continued
 The GASB, FASB and FASAB publish
codifications (organized versions) of accounting
standards. As you would expect, the GASB
Codification includes statements, interpretations
and technical bulletins issued by the GASB.
 However, the Codification also includes level-B
standards issued through AICPA Audit and
Accounting Guides and Statements of Position.
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1-19
Using the GASB codification
 Codification references are presented in
two parts: the first (section) identifies a
topic and the second identifies a paragraph
within the codification.
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1-20
Format of Codification References
Section #s
Topics
1000 – 1900
General Principles
2000 – 2900
Broad Financial Reporting Requirements
Letters (A – Z)
Specific Balance Sheet or Operating Accounts
Double letters
Specialized Industries or Reporting Units
Paragraph #s
Level of Authority
100 – 499
GASB Statements (Level A GAAP)
500 – 599
Definitions
600 – 699
GASB Technical Bulletins and AICPA Audit and Accounting Guides
and Statements of Position (Level B GAAP)
700 – 799
AICPA Practice Bulletins (Level C GAAP)
900 – 999
Nonauthoritative discussions
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1-21
Concepts Statements

All three standard setting bodies have a series of
Concepts Statements:



FASAB – federal government
FASB – private entities
GASB – state and local governments
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1-22
FASAB Concepts: 8 Concept Statements
Concepts 1: Objectives of Federal Financial Reporting
 Concepts 2: Entity and Display
 Concepts 3: Management’s Discussion and Analysis
 Concepts 4: Intended Audience and Qualitative
Characteristics for the Consolidated Financial Report
of the United States Government

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1-23
FASAB Concepts: Concept Statements
continued
Concepts 5: Definitions of Elements and Basic
Recognition Criteria for Accrual-Basis Financial
Statements
 Concepts 6: Distinguishing Basic Information,
Required Supplementary Information, and Other
Accompanying Information
 Concepts 7: Measurement of the Elements of Accrual
Basis Financial Statements after Initial Recording
 Concepts 8: Federal Financial Reporting

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1-24
Objectives of NFP Financial reports


Main Objective of NFP Financial Statements is
 To provide information useful to present and
potential resources providers and others in
making decisions about allocating resources to
the NFP organization
Which emphasizes that
 Donors, government grantors and banks are
primary users
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1-25
GASB Concepts Statements: Statement
#1 – Objectives


Citizens have a right to know why resources
are being raised and how they will be used
GASB #1 Objectives of Financial Statements:
o
o
o
o
Allow comparison of actual with budgeted results
Help users assess financial condition and results
of operations
Show compliance with laws, rules and regulations
Assist in evaluating efficiency and effectiveness
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1-26
Concept Statement #2 and #5

Service Efforts and Accomplishments
Reporting (covered in Chapter 13) and
amended by Concepts Statement 5

Includes both Financial and Nonfinancial
measures of performance
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1-27
GASB Concept Statement #3
Communication Methods in General
Purpose Financial Reports that Contain
Basic Financial Statements
 Established the framework for what
information is presented in:





Basic Financial Statements
Notes
Required Supplementary Information
Supplementary Information
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1-28
GASB Concept Statement #4

Concepts Statement No. 4 provides key definitions of
items appearing in financial statements. Not
surprisingly, assets, liabilities, and net position (residual
equity) are each defined. However, GASB utilizes two
additional elements that do not appear in the balance
sheets of nongovernmental organizations: deferred
inflows and deferred outflows of resources.
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1-29
GASB Concept Statement No. 6

Concept Statement No. 6 examines the issue of when it
is most appropriate to measure assets and liabilities at
historical cost and when it is more appropriate to
remeasure assets to fair value or settlement amount. In
general, remeasurement is appropriate for assets that
will be converted to cash and liabilities where there is
uncertainty over the timing and amount of payments
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1-30
How Do GASB’s Objectives Differ
from Business Objectives?


There is more emphasis on
 The budget
 Legal compliance
 Efficiency and effectiveness measures other
than net income
GASB Concepts Statement No. 2 explains that
nonfinancial measures (i.e. measures other than
dollars) are required to assess effectiveness
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1-31
Required Content
of State and Local
Government
Financial Reports
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distribution without the prior written consent of McGraw-Hill Education.
1-32
Overview of Basic
Financial Statements

Government-wide Statements

Statement of Net Position


Statement of Activities


Similar to business balance sheet
Similar to business income statement
Fund Financial Statements


Detailed reports of governmental, proprietary, and fiduciary activities
Illustrated in Chapter 2
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1-33
Overview of Fund Financial Statements

Governmental — general citizen services



Proprietary — business-like activities such as water
utility




Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund
Balance
Statement of Net Position
Statement of Revenues, Expenses, and Changes in Fund Net
Position
Statement of Cash Flows
Fiduciary — holding money in trust for others


Statement of Fiduciary Net Position
Statement of Changes in Fiduciary Net Position
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1-34
Reporting Perspectives

Internal accounting still tends to emphasize
individual funds (pools of money)

Government-wide reports are an attempt to
aggregate data into a format more familiar to
users — business-type financial statements
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1-35
Accrual and Modified
Accrual Basis

Accrual Basis/Economic Resources
Measurement Focus:


General business concepts of revenue and
“expense” apply when recording exchange-like
transactions
Modified Accrual Basis/Current Financial
Resources Measurement Focus:

Applies to funds financed by taxes and other
involuntary contributions
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1-36
Modified Accrual Basis

Revenues are recorded when “measurable
and available”


For example, property taxes revenues are
recorded as revenues if levied this year and
collected this year, or soon enough after the
year end to still pay current year bills
Outflows are called “expenditures”

Expenditures are recorded in the fund when a
liability is incurred
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1-37
What is a “fund” - as the term is used for
state and local government accounting?

A fund



Represents a part of the activities of some organization
Is an accounting entity

Self-balancing set of accounts, reflecting the
assets, liabilities, net assets, and changes in those
balances
Segregates resources for specific activities

In such a way as to ensure compliance with
appropriate regulations or restrictions
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1-38
State and Local Government
Fund Types

Governmental type


Proprietary type


Used for activities that are largely unique to the
government environment and do not fall into either
the proprietary or fiduciary categories
Business-type activities
Fiduciary type

Acting as an agent or trustee of moneys that
generally belong to other parties
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1-39
Five Governmental-Type Funds
(1 of 3)

PERMANENT FUNDS - account for and report
resources that are restricted to the extent that only
earning, and not principal, may be used for
purposes that support the reporting government’s
programs

CAPITAL PROJECTS FUNDS - account for and
report financial resources that are restricted,
committed or assigned to expenditure for capital
outlays. As such, it accounts for the purchase or
construction of major capital improvements, except
those purchased or constructed by a proprietary
(and less commonly, fiduciary) fund
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1-40
Five Governmental-Type Funds
(2 of 3)

DEBT SERVICE FUNDS - account for and report
financial resources that are restricted, committed or
assigned to expenditure for principal and interest,
other than interest or principal on proprietary or
fiduciary activities.
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1-41
Five Governmental-Type
Funds (3 of 3)

SPECIAL REVENUE FUNDS - account for and report
the proceeds of specific revenue sources that are restricted
or committed (not merely assigned) to expenditure for
specified purpose other than debt service or capital projects.
These include activities funded by federal or state grants or
by taxes specifically restricted to certain activities.

GENERAL FUND - accounts for most of the basic
services provided by the government. Technically, it
accounts for and reports all financial resources not
accounted for and reported in another fund.
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1-42
Two Proprietary Funds Types

ENTERPRISE FUND - An enterprise fund is a fund
established for the purpose of measuring net income for a
governmental department providing goods or services
primarily to outside consumers, in which it is the intent of the
government that the department operate on a cost-recovery
or profitable basis.

INTERNAL SERVICE FUND - An internal service fund is a
fund established for the purpose of measuring net income for
a governmental department providing services primarily to
other departments or agencies within the government, in
which it is the intent of the government that the department
operate on a cost reimbursement basis.
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1-43
Four Fiduciary Fund Types

INVESTMENT TRUST FUND - Accounts for the external
portion of investment pools governed by a trust agreement in
which the sponsoring government acts as trustee.

PENSION FUND - Pension funds are used to account for
assets provided to pension trusts. The earnings of these
assets are used to pay the pensions of public (government)
employees.

PRIVATE-PURPOSE TRUST FUNDS - report all other trust
arrangements under which principal and income benefit
individuals, private organizations, or other governments.

Custodial Funds – account for all other fiduciary activities,
including activities where a trust agreement is not in effect.
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1-44
How Many Funds Are Needed?




Must have one and only one General fund
May not need one of every fund type
 No outstanding long-term debt? Don’t need a
debt service fund.
More than one of some types of funds
 Four building projects? A government might
use four capital projects funds; or could choose
to combine some.
Exact number depends on judgment.
 Use the minimum number that will allow
compliance with legal and other restrictions
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1-45
Importance of the Budget in
Governmental Accounting



Every government should adopt an annual budget
Accounting system should make it possible to compare
actual and budgeted results
Budget vs. actual comparisons are included in the
required supplemental information for the general fund
and special revenue funds for which an annual budget
is adopted
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1-46
Comprehensive Annual Financial
Report
 The CAFR contains the financial report of
the governments.
 The components of a CAFR will be
illustrated in Chapter 2
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1-47
Sources of Financial Reporting
Standards
FASB
• Business organizations
• Nongovernmental not-for-profits
GASB
• State and local government organizations
• Governmental not-for-profits
FASAB
• Federal government and its agencies and
departments
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Objectives of Financial Reporting
(1 of 2)
“Accountability is the cornerstone of all financial
reporting in government.” –GASB, Concepts
Statement No. 1
Accountability requires governments to justify the raising
and use of public resources, such as taxes.
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Objectives of Financial Reporting
(2 of 2)
Interperiod equity is a government’s obligation to
disclose whether current-year revenues were
sufficient to pay for current-year benefits—or will
future taxpayers be required to pay for them
instead?
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Objectives of Financial Reporting for
State and Local Governments
Government financial reports are
used primarily to:
Compare
actual
financial
results with
the legally
adopted
budget.
Assess
financial
condition and
results of
operations.
Assist in
determining
Assist in
compliance
evaluating
with financeefficiency and
related laws,
effectiveness.
rules, and
regulations.
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Objectives of Financial Reporting for the
Federal Government
Federal government financial reporting
should assist report users in evaluating:
Budgetary
integrity.
Adequacy of
Operating
Stewardship. systems and
performance.
controls.
1-52
Objectives of Financial Reporting for
Not-for-Profit (NFP) Organizations
NFP financial reporting should provide
information useful in:
Making
resource
allocation
decisions.
Assessing
services and
the ability to
provide
services.
Assessing
management
stewardship
and
performance.
Assessing
economic
resources,
obligations,
net resources,
and changes
in them.
1-53