Government and Not-for-Profit Accounting:
Concepts and Practices, 5e
Michael H. Granof
Saleha B. Khumawala
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Chapter 1
The Government and
Not-for-Profit Environment
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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?

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 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 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
 GASB: sets standards for all state and
local governments and governmental nonprofits. 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
 “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

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
• 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
(16,519)
(19,492)
(13,051)
(3,033)
(37,381)
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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%)
Charitable bequests (7.6%)
Foundations (12.6%)
Corporate (5.1%)
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229.03 billion
23.15 billion
38.52 billion
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%)
Charitable bequests (7.6%)
Foundations (12.6%)
Corporate (5.1%)
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229.03 billion
23.15 billion
38.52 billion
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?
• 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
•
•
•
•
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)
Source: GASB Statement 34
Management’s discussion and analysis
Government-wide
financial statements
Fund financial
statements
Notes to the financial statements
Required supplementary information
(other than MD&A)
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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
 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)
 Auditor’s report
 MD&A
 Basic Financial Statements
 Required Supplementary Information
RSI (Other than MD&A)
 Combining the individual fund
statements and schedules
Remember GASB Statement No. 34 is the CURRENT
Reporting 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

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
 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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