Government and Not-for-Profit Accounting:
Concepts and Practices, 5e
Michael H. Granof
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Chapter 1
The Government and
Not-for-Profit Environment
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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)
 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-ForProfit Organizations differ from Business
Organizations?
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Budgets, not the market place govern.
• through the budgetary process GNPs control or
strongly influence both their revenue and
expenditures. A government’s revenues may be
determined by legislative fiat, so that the
government may not be subject to the forces of
competition faced by businesses.
Expenditures may drive revenues.
GNPs establish the level of services that they
will provide, calculate their cost and then set
tax rates and other fees to generate the revenues
required to pay for them.
Budgets drive accounting & financial reporting
Constituents of an organization want information on
the extent of adherence to the budget. They want
assurance that the organization has not spent more
than was authorized. They want to know that R & E
estimates were reliable. So the accounting information
must designed to provide that information.
Need to ensure inter-period equity.
- Interperiod equity
is the concept that taxpayers of today pay for the ser
vices that they receive and not shift the payment burd
en to taxpayers of the future. So the accounting
system of NGPs must provide information as to
whether this objective is being attained.
 No direct link between revenues and expenses.
GNPs revenues may not be related to expenditures. Donations
to GNPs may increase from one year to the next without a
corresponding increase in the quantity, quality, or cost of the
services provided. Thus, the matching concept may have a
different meaning for GNPs than for businesses. Businesses
attempt to match the costs of specific goods or services with the
revenues they generate. GNPs can associate only overall
revenues with the expenditures they are intended to cover.
 In GNPs, revenues may not be linked to constituent
demand or satisfaction.
For businesses, the greater the revenues are, the greater the
demand is—an indication that the entity is meeting a societal
need. For GNPs, revenues may not be linked to constituent
demand or satisfaction. An increase in tax revenues, for
example, tells nothing about the quality of services provided.
Therefore, a statement of revenues and expenditures cannot
supply information about the demand for services.
 Different Role for Capital Assets
Unlike businesses, GNPs make significant investments
in assets that neither produce revenues nor reduce
expenditures. Therefore, conventional business
practices for valuing assets, such as comparing the
present values of the asset’s expected cash outflows
and inflows, may not apply to GNPs.
 Resources of government may be restricted.
In contrast to business resources, many GNPs assets
are restricted for particular activities or purposes.
 No distinguished ownership interests.
GNPs typically cannot be sold or transferred, mainly absence
of transferable ownership rights. If they are dissolved, there
are no stockholders entitled to receive residual resources.
Thus, their financial statements must be prepared for parties
other than stockholders.
Less distinction between internal and external
accounting and reporting.
• The line between external and internal accounting and
reporting is less clear-cut for GNPs than for businesses.
Ex: in business the budget is only an internal document.
In GNPs, the budget is the key fiscal document and is as
important to taxpayers, bondholders, and others as it is
to managers.
The budget is the most significant financial
document, not the annual report.
- For GNPS, budget takes center stage, because budget is
the culmination of the political process. It encapsulate all
the decisions made by an organization.
- For business, the annual report is the most significant
financial document, and the budget is not more than an
internal document, seldom made available to investors or
the general public.
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
 Governmental Accounting Standards Board(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.
• Financial Accounting Standards Board (FASB): sets
standards for non governmental non-profits
except federal government.
• Federal Accounting Standards Advisory Board (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 AS SET
FORTH BY THE GASB
 The overall objective of financial reporting is to meet the
information needs of report users.
 Because of the unique characteristics of governments and
their environment, the GASB has established
accountability as the cornerstone of financial reporting.
 ‘‘Accountability,’’ it says, ‘‘requires governments to
answer to the citizenry—to justify the raising of public
resources and the purposes for which they are used.’’
 Accountability ‘‘is based on the belief that the citizenry
has a ‘right to know,’ a right to receive openly declared
facts that may lead to public debate by the citizens and
their elected representatives.’’
OBJECTIVES OF FINANCIAL REPORTING AS SET
FORTH BY THE GASB
The GASB has divided the objective of accountability
into three sub-objectives:
1. Interperiod equity. ‘‘Financial reporting should provide
information to determine whether current-year revenues
were sufficient to pay for current-year services.’’
2.Budgetary and fiscal compliance. ‘‘Financial reporting
should demonstrate whether resources were obtained and
used in accordance with the entity’s legally adopted budget.
3.Service efforts, costs, and accomplishments. ‘‘Financial
reporting should provide information to assist users in
assessing the service efforts, costs, and accomplishments of
the governmental entity.’’
Objectives of Financial Reporting
 “ACCOUNTABILITY is the cornerstone of all
financial reporting in government,” (GASB
Concepts Statement No. 1, par. 56).
 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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GASB's Additional Objectives of Financial
Reporting
1. Financial reporting should provide information about
sources and uses of financial resources. It should
account for all outflows by function and purpose, all
inflows by source and type, and the extent to which
inflows met outflows.
2. It should provide information about how the
governmental entity financed its activities and met its
cash requirements.
3. It should provide information necessary to determine
whether the entity’s financial position improved or
deteriorated as a result of the year’s operations.
4. Financial reporting should assist users in assessing the
level of services that can be provided by the
governmental entity and its ability to meet its obligations
as they become due.
GASB's Additional Objectives of Financial
Reporting
5. It should provide information about the financial
position and condition of a governmental entity.
Financial reporting should provide information about
resources and obligations, both actual and
contingent, current and noncurrent. The financial
reporting should provide information about tax
sources, tax limitations, tax burdens, and debt
limitations.
6. It should provide information about a governmental
entity’s physical and other nonfinancial resources
having useful lives that extend beyond the current
year, including information that can be used to assess
the service potential of those resources.
7. It should disclose legal or contractual restrictions on
resources and risks of potential loss of resources.
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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Users of financial reports
• Governing boards:
the prime recipients of the report
because they approve budgets, major purchases, contracts and
significant operating policies.
•
•
•
•
•
Investors & creditors
Citizens & organizational members
Donors & grantors
Regulatory agencies
Employees
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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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:
1. Introductory section
2. Financial section
3. 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
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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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