Governmental

and
Not-for-Profit Accounting
(ACFN 621)
MSc Accounting and Finance

Wubetu M. MBA,
Department of Accounting and Finance
Admas University
 Chapter-1
Introduction
to
Governmental Not-for-Profit
Accounting

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 What are Governmental
Organizations?
 General purpose governments
 Provide a wide variety of services
 Examples: Federal government, state governments, cities,

towns, townships, villages, counties, boroughs, and

parishes
 Special purpose governments
 Usually provide only a single or just a few services

 Examples: Independent school systems, public colleges

and universities, public hospitals, fire protection districts,

sewer districts, transportation authorities, and many others

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 What are Not-for-Profit
Organizations?
 Legally separate organizations
 Usually exempt from federal, state, and local
taxation
 Religious, community service, private educational
and health care, museums, and fraternal and
social organizations, among many other kinds of
organizations

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 How Do Governmental and
Not-For-Profit Organizations Differ
from Business Organizations?

 Resource providers do not expect to

receive proportional benefits
 Lack of a profit motive
 Absence of transferable
ownership rights

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 How Do Governmental Entities
Differ From Not-For-Profit
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
 Taxation powers

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 Criteria for Determining Whether
an NPO is Governmental

 Public corporations and bodies corporate and

politic
 Other organizations with one or more of the
following characteristics:
 Popular election of officers, or appointment of a
controlling majority of the governing body by
officials of another government
 Potential dissolution by a government with net
assets reverting to a government
 Power to enact and enforce a tax levy

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 Characteristics of G&NP
Organizations
 Absence of profit motive
 Owned by constituents – no stock
 Contributors of resources do not receive
proportional share of benefits
 Decisions made – directly or indirectly –
by voters
 Meetings where decisions are made
usually open to the public

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 Similarities to the Private Sector
 Operate in the same economy and compete
for same resources: financial, capital, and
human
 Acquire & convert scarce resources into
goods & services
 Provide goods and services, many of which
may be similar
 Use of accounting & other information
systems
 Need to operate economically, effectively, &
efficiently
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 Differences from the Private
Sector
 Organizational objectives
 Sources of financial resources
 Methods of evaluating performance and
operating results

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 Organizational Objectives
Businesses G&NPs
 Operating Motive:  Operating Motive:
maximize income maximize services
from revenues provided from
and other revenues and other
resources resources
 Operational  Operational Focus:
Focus: report operate on annual
quarterly but look budget, so current
to the long-tem as year is of primary
well importance

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 Typical Activities of a SLG
 Governmental activities – unique to
SLGs
 Police and fire protection
 Education
 Social Services
 Courts
 Business-type activities – similar to
private sector operations
 Utilities
 Golf Courses
 Airports
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 Purpose of Governmental
Activities
 Provide goods and services that all constituents
need regardless of ability to pay for goods and
services

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 Sources of Financial Resources
(not found in private sector)

 Taxes: property taxes, sales taxes, and

income taxes
 Intergovernmental revenues: from other
governments
 Licenses & permits
 Fines & forfeitures
 Debt proceeds (typically not used for
operations)

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 Resource Allocation Mechanisms
 Restrictions placed by providers: typical of
grantors, taxes for specific purposes, &
debt proceeds
 Budget – allocates resources to functions
 Holding public officials accountable for
actions

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 Sources of GAAP and
Financial Reporting Standards
FASB
 Business organizations
 Nongovernmental not-for-profits
GASB
 Governmental organizations
 Governmental not-for-profits
FASAB
 Federal government and its agencies
 SOURSE OF FINANCIAL REPORTING STANDARDS page
No 4
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 Why Must Governmental Financial
Reporting Differ from Business
Financial Reporting?
 Different financial report users with different
needs
 Governmental financial reporting focuses on
stewardship and accountability for how public
resources are raised and used to provide
services

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 Objectives of Financial Reporting—
State and Local Governments (SLG)

Governmental financial reports are used primarily

to:
 Compare actual financial results with legally
adopted budget
 Assess financial condition and results of
operations
 Assist in determining compliance with finance-
related laws, rules, and regulations
 Assist in evaluating efficiency and effectiveness
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 Objectives of Financial Reporting
SLG (Cont’d)

“ACCOUNTABILITY is the cornerstone of all

financial reporting in government “ (GASB
Concepts Statement No. 1, par. 56)

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 Objectives of Financial Reporting
— SLG (Cont’d)

Q: What do we mean by
accountability?

A: Accountability arises from 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
—SLG (Cont’d)

Q: How does “interperiod equity” relate

to accountability?

A: 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?
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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) standards are targeted at both
internal users (management) and external
users

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 Objectives of Financial Reporting
— Federal Government (Cont’d)

Federal government financial reporting should assist

report users in evaluating:
 Budgetary integrity
 Operating performance
 Stewardship
 Adequacy of systems and controls

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 Objectives of Financial Reporting
— Not-for-Profit (NFP)
Organizations
NFP financial reporting should provide information
useful in:
 Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and
performance
 Assessing economic resources, obligations, net
resources, and changes in them

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Minimum Requirement for General
Purpose External Financial Reporting
Management’s discussion and analysis

Government-wide Fund financial

financial statements statements

Notes to the financial statements

Required supplementary information

(other than MD&A)
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 Fund Accounting

 Funds have separate self-balancing sets of

accounts used to account for resources
segregated for specific purposes or restricted
as to use by donors or grantors
 Funds are separate accounting and fiscal
entities (Chapters 3 provide detail information)

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 Fund Accounting

Fund categories:
 Governmental
 Proprietary
 Fiduciary

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 Governmental Funds
Characteristics:
 Focus on short-term flow of financial resources
 Only account for current assets and current
liabilities
 Use modified accrual basis of accounting
(revenues recognized when measurable and
available for spending and expenditures when
incurred)
 Closely tied to budgetary accounting
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 Proprietary and Fiduciary Funds
Characteristics:
 Focus on flow of economic resources
 Accrual basis of accounting (revenues recognized
when earned and expenses when incurred)
 Account for both current and noncurrent assets
and current and noncurrent liabilities—similar to
business accounting

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 Reporting Issues & Problems
 Demonstrate compliance with restrictions on
use of financial resources
 Budgetary reporting
 Impact of restrictions on revenue recognition
 Difficulty in measuring effectiveness and
efficiency of operations
 Opportunity to hide or disguise availability of
resources
 Tax and debt limits
 Impact of materiality of reporting certain
actions
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 Financial Report Uses

 Comparing results with legally adopted

budgets
 Assessing financial condition and results
of operations
 Assisting in determining compliance with
finance-related laws, rules & regulations
 Assisting in evaluating efficiency &
effectiveness

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 Comprehensive Annual Financial
Report (CAFR)

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)

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 CAFR - Financial Section

 Auditor’s report
 Basic financial statements
 Required supplementary information
(RSI)(other than MD&A)
 Combining and individual fund
statements and schedules

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 CAFR - Statistical Section

Tables and charts showing multiple-year

trends in financial and socio-economic
information

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 Management’s Discussion and
Analysis (MD&A)

providing management’s
analysis of the government’s
financial performance

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 Basic Financial Statements

Government-wide financial statements

 Statement of net assets (Illustration A1-1)
 Statement of activities (Illustration A1-2)

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 Basic Financial Statements
Government-wide Financial
Statements (Cont’d)

Points of interest (Ill. A1-1 and A1-2)

 Information is reported separately for the
primary government and discretely presented
component units
 Within the primary government, information is
reported separately for governmental and
business-type activities

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 Basic Financial Statement—
Government-wide Financial
Statements (Cont’d)
Points of interest (Cont’d)
 All financial information in the government-
wide financial statements is reported on the
accrual basis with an economic resources
focus
—similar to business financial reporting
 Assists in assessing operational accountability
—how efficiently resources are being used

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 Basic Financial Statements—Fund
Financial Statements
Governmental funds
 Balance sheet—governmental funds (Ill. A1-3)
with reconciliation (Ill. A1-4)
 Statement of revenues, expenditures, and
changes in fund balances—governmental funds
(Ill. A1-5) with reconciliation (Ill. A1-6)
 These statements report information separately for
the General Fund and other major funds (Chapter
2 defines major funds)

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 Basic Financial Statements—Fund
Financial Statements (Cont’d)

Governmental funds—points of interest

 Focus on flow of current (i.e., short-term)
financial resources recognized on the
modified accrual basis of accounting
 Assist in assessing fiscal accountability—
whether financial resources were raised and
expended in compliance with budgetary and
other legal provisions

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 Basic Financial Statements—Fund
Financial Statements (Cont’d)
Governmental funds—points of interest
(Cont’d)
 Reporting the same information about
governmental activities in two different ways
creates a need to reconcile the information
reported in the governmental fund financial
statements to that in the Governmental
Activities Column of the government-wide
statements (see Illustrations A1-4 and A1-6)

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 Basic Financial Statements—Fund
Financial Statements (Cont’d)
Proprietary funds
 Statement of net assets—proprietary funds
(Ill. A1-7)
 Statement of revenues, expenses, and
changes in fund net assets—proprietary
funds (Ill. A1-8)
 Statement of cash flows—proprietary funds
(Ill. A1-9)

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 Basic Financial Statements—Fund
Financial Statements
Proprietary funds—points of interest
 Reports information for enterprise funds and
internal service funds using an economic
resources focus and accrual basis of
accounting
 Information is reported in separate columns for
major enterprise funds. All internal service
fund information reported is combined in a
single column
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 Basic Financial Statements—Fund
Financial Statements (Cont’d)

Fiduciary funds
 Statement of fiduciary net assets (Ill. A1-10)
 Statement of changes in fiduciary net assets
(Ill. A1-11)

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 Basic Financial Statements—Fund
Financial Statements (Cont’d)

Fiduciary funds—points of interest

 Fiduciary activities relate to the government’s
responsibility as an agent or trustee to hold
and/or manage resources for the benefit of
private parties
 Since fiduciary resources cannot be used by
the government, they are reported only in the
fiduciary fund financial statements—not in the
government-wide statements

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 Annual Financial Reporting

Comprehensive Annual Financial Report (CAFR)

 Should be prepared for all governmental
entities
 Sections include:
 Introductory – little GAAP for this section
 Financial – most GASB standards apply to
this section
 Statistical – see recently issued GASBS 44

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 Annual Financial Reporting

Minimum reporting requirements

 Management’s Discussion & Analysis
 Basic Financial Statements
 Government-wide financial statements
 Fund financial statements
 Notes to the financial statements
 Required supplementary information
other than MD&A

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 Concluding Comments

 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
 Familiar with current GASB, FASB, and FASAB
standards relative to governmental and not-for-
profit organizations

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 Thank you

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