Chapter 1 The Government and Not-For-Profit Environment

1
Chapter 1The Government and Not-For-Profit
Environment

• A. How Do Governments and Not-For-Profits
  Compare With Business?

2
A. How Do Governments and Not-For-Profits
Compare With Business?

•   1. Governments and not-for-profits provide
  services targeted to groups of constituents,
  advocating a political or social cause, or
  carrying out research or other activities for the
  betterment of society

3
A. How Do Governments and Not-For-Profits
Compare With Business?

• 2. The objectives of governments and
  not-for-profits cannot generally be quantifiable
• 3. Governments and not-for-profits have
  relationships with the parties providing their
  resources that are unlike those of businesses

4
A. How Do Governments and Not-For-Profits
Compare With Business?

• 4. Governments and many not-for-profits establish
  the level of services that they will provide,
  calculate their costs and then set tax rates and
  other fees to generate the necessary revenue.
•  
• 5. The budget not the annual report is the most
  significant financial document
•  

5
A. How Do Governments and Not-For-Profits
Compare With Business?

• 6. Budgets are the predominant factor in the
  determination of current accounting and financial
  reporting rules for governments

6
A. How Do Governments and Not-For-Profits
Compare With Business?

• 7. The accounting systems of governments and
  not-for-profits need to assure interperiod equity
  - Table 1-1 p. 5 
• a. The concept that constituents pay for the
  services that they receive and do not shift the
  costs to future years is referred to as
  interperiod equity

7
A. How Do Governments and Not-For-Profits
Compare With Business?

• 8. In governmental and not-for-profit accounting
  no direct link between revenues and expenses may
  exist - matching principle may not be applicable
  for governmental and not-for-profit accounting
•  
• 9. Capital assets may neither produce revenues
  nor save costs

8
A. How Do Governments and Not-For-Profits
Compare With Business?

• 10. The resources received by governments and
  not-for-profits may be restricted to specific
  uses
• 11. Neither governments nor not-for-profits have
  defined ownership interests like those of
  businesses

9
A. How Do Governments and Not-For-Profits
Compare With Business?

• 12. Less distinction exists between internal and
  external accounting and reporting in governmental
  accounting compared to business accounting

10
B. What Other Characteristics of Governments and
Not-For-Profits Have Accounting Implications?

• 1. Many different types of governments exist in
  the U.S. - Figure 1-2 p. 9
•  
• 2. Many different types of not-for-profits exist
  in the U.S. - Table 1.2 p. 10
•  
•  

11
B. What Other Characteristics of Governments and
Not-For-Profits Have Accounting Implications?

• 3. Government officials face election every two
  to four years, so they may have a very short-term
  focus
•  
• 4. Governments and not-for-profits engage in
  business-type activities

12
C. How Do Governments Compare With
Not-For-Profits?

• 1. Governments have authority to command
  resources - power to tax
•  
• 2. Governments can issue tax-exempt debt directly
•  

13
C. How Do Governments Compare With
Not-For-Profits?

• 3. The governing boards are either popularly
  elected or are appointed by another government
•  
• 4. Another government can unilaterally dissolve
  it and assume its assets without

14
D. What Is the Purpose of Financial Reporting?

• 1. Assess financial condition
•  
• 2. Compare actual results with the budget
•  
• 3. Determine compliance with appropriate laws,
  regulations, and restriction on the use of funds
•  
• 4. Evaluate efficiency and effectiveness

15
E. What Are the Uses of Financial Reports?

• 1. Governing boards 
• 2. Investors and creditors - Figure 1-3 p. 14 
• 3. Citizens and organizational members 
• 4. Donors and grantors 
• 5. Regulatory agencies 
• 6. Employees and other constituents

16
F. What Are the Objectives of Financial
Reporting?

• 1.The first GASB objective is accountability. The
  GASB divided the objective of accountability into
  three subobjectives.
• a. Interperiod equity - Financial reporting
  should provide information to determine whether
  current-year revenues were sufficient to pay for
  current-year services.
•    

17
F. What Are the Objectives of Financial
Reporting?

• b. Budgetary and fiscal compliance - Financial
  reporting should demonstrate whether resources
  were obtained and used in accordance with the
  entitys legally adopted budget it should also
  demonstrate compliance with other finance-related
  legal or contractual requirements.

18
F. What Are the Objectives of Financial
Reporting?

• c. 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.

19
F. What Are the Objectives of Financial
Reporting?

• 2. The second GASB objective is that financial
  reporting should assist users in evaluating the
  operating results of the governmental entity for
  the year. - Table 1-3 p. 18
•  

20
F. What Are the Objectives of Financial
Reporting?

• a. Financial reporting should provide
  information about sources and uses of financial
  resources. Financial reporting should account for
  all outflows by function and purpose, all inflows
  by source and type, and the extent to which
  inflows met outflows. Financial reporting should
  identify material nonrecurring financial
  transactions.

21
F. What Are the Objectives of Financial
Reporting?

• b. Financial reporting should provide
  information about how the government entity
  financed its activities and met its cash
  requirements.
•  
• c. Financial reporting should provide
  information necessary to determine whether the
  entitys financial position improved or
  deteriorated as a result of the years
  operations.

22
F. What Are the Objectives of Financial
Reporting?

• 3. The third GASB objective is that 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. - Table 1-3, p. 18

23
F. What Are the Objectives of Financial Reporting?

• a. Financial reporting should provide
  information about the financial position and
  condition of a governmental entity. Financial
  reporting should provide information about
  resources and legal obligations, both actual and
  contingent, current and noncurrent. The major
  financial resources of most governmental entities
  are derived from the ability to tax and issue
  debt. As a result, financial reporting should
  provide information about tax sources, tax
  limitations, tax burden, and debt limitations.

24
F. What Are the Objectives of Financial Reporting?

• b. Financial reporting should provide
  information about a governmental entitys
  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. This
  information should be presented to help users
  assess long- and short-term capital needs.

25
F. What Are the Objectives of Financial Reporting?

• c. Financial reporting should disclose legal or
  contractual restrictions on resources and risks
  of potential loss of resources.

26
F. What Are the Objectives of Financial Reporting?

• 4. Clash among Reporting Objectives- Interperiod
  Equity - Example pp. 18-19
•  
• 5. FASBs Objectives
• a. FASB objectives are similar to GASB objectives
  except FASB objectives refer only obliquely to
  budgetary compliance
•  
• b. FASB objectives - Table 1-4 p. 20

27
G. Do Differences In Accounting Principles Really
Matter?

• 1. User adjustments
• a. In Practice p.22 
• 2. Economic consequences
• a. Most jurisdictions must present balanced
  budgets in accord with accounting principles that
  either they select themselves or that are imposed
  upon them by higher-order governments. 
• b. Most governments budget on cash or near cash
  basis.

28
H. Who Establishes Generally Accepted Accounting
Principles (GAAP)?

• 1. For governments, excluding the federal
  government, Governmental Accounting Standards
  Board (GASB) establishes GAAP
•  
• 2. For not-for-profits, the Financial Accounting
  Standards Board (FASB) establishes GAAP
•  
• 3. For federal government, Federal Accounting
  Standards Advisory Board (FASAB) establishes GAAP

29
H. Who Establishes Generally Accepted Accounting
Principles (GAAP)?

• 4. Hierarchy of Generally Accepted Accounting
  Principles - Table 1-5 p. 26
• a. Note a pronouncement of the FASB that has not
  been specifically adopted by the GASB ranks no
  higher than other accounting literature.  
• 5. Entities common to government and
  not-for-profit sectors
•