MODULE 1

1
MODULE 1

• Basics of Governmental Nonprofit Accounting
  Chapters 1-5

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Module 1 Content

• Government, NFP Basics
• Fund Accounting
• Budgeting
• Modified Accrual vs. Full Accrual
• Financial Reporting GASB 34
• Revenues
• Expenditures

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Chapter 1

• The Government and Not-for-Profit Environment

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Basics

• Describing governments nonprofits
• Governmental characteristics
• Nonprofit characteristics
• Standard-setting GASB FASB
• Financial Reporting
• Users

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Describing Governments Nonprofits

• US governments federal, state local
• Branches legislative, executive judicial
• Constitution federal vs. state jurisdiction
• Nonprofits over 1.5 million organizations, 1.3
  trillion in assets
• Nonprofits colleges universities, hospitals,
  voluntary health welfare organizations, other
• Nonprofits importance of IRS tax-exempt status

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Characteristics of Governments Nonprofits

• No profit motive
• Ownership interests are nontransferable (
  usually not defined)
• Fund accounting recommended
• Differential GAAP
• Emphasis of accountability of resources flow of
  these resources
• Unique revenue sources
• Often lack of direct cost/benefit relationships
• Importance of budgeting

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Government Characteristics

• Federal Government Broad jurisdiction, 2000
  receipts 1,958 billion 2000 outlays 1,781
  billion
• 50 states jurisdiction defined in Constitution,
  establishes legal roles of local governments
• 87,453 local governments 3,043 counties 36,001
  cities 13,726 school districts 34,683 special
  districts

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Other Governmental Financial Characteristics

• Ability of governments to levy taxes
• Use of modified accrual revenues expenditures
  budget entries
• Financial operations may be restrictedone reason
  for fund accounting
• Power to issue tax-exempt debt (e.g, municipal
  bonds)
• Intergovernmental financial relationships
  (importance of intergovernmental revenues)
• Overlapping jurisdictions overlapping debt
• GASB 34 addition of government-wide statements
  (full accrual) other reporting requirements

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Nonprofit Characteristics

• Importance of IRS tax-exempt status
• Nonprofits must file for tax-exempt status
  charities are recognized as 501(c)(3)
  organizations, based on filing Form 1023
• Annual report, Form 990, must be followed using
  IRS format
• Other nonprofit categories also exist
• See www.irs.ustreas.gov/

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Purpose of Financial Reporting

• Assess financial condition (operating results
  financial resources)
• Compare actual results with the budget
• Legal compliance
• Evaluate performance (especially efficiency and
  effectiveness service effort accomplishment)

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Governmental Financial Reports

• Comprehensive Annual Financial Report (CAFR)--two
  levels of reporting (1) government-wide (full
  accrual), (2) fund accounting (modified accrual
  for governmental funds)
• Annual Operating Budget(s)
• Other documents for citizens or media
  specialized reports, etc.
• Most governments have well-developed web pages
• Note importance of interperiod equity

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Users of Governmental Financial Reports

• Executives employees
• Governing Boards (legislative function)
• Investors Creditors (importance of municipal
  bonds credit-rating agencies)
• Taxpayers voters
• Regulatory agencies (e.g., Texas Education Agency
  for Texas ISDs)

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Standard Setting
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Standard Setting History

• Government GAAP initially established by National
  Council of Governmental Accounting (NCGA) GASB
  established in 1984
• Nonprofit GAAP initially established by
  industry (1) colleges universities, (2) NP
  hospitals, (3) otherAICPA would write two audit
  guides (voluntary health welfare organizations
  other) FASB took over jurisdiction in the
  1980s.
• Federal government establishes its own standards,
  through the Federal Accounting Standards Advisory
  Board (FASAB)

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Chapter 2

• Fund Accounting

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Fund Accounting

• What is a Fund? The government or nonprofit is
  the economic entity. The fund is the fiscal
  accounting entity. Each organization usually has
  several funds. Each fund is a separate
  self-balancing set of accounts. A major reason
  for funds is control purposes, both legal fiscal

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Funds Used by State Local Governments

• Governmental Funds also called source
  disposition funds or expendable funds. Most
  governmental activities are financed through
  these funds.
• Proprietary Funds also called business-type
  funds, which handle most activities financed
  through user charges.
• Fiduciary Funds or trust agency funds, where
  government acts as trustee or agent

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Governmental Funds

• General Fund primary operating fund by
  definition it accounts for all activities not
  required for another fund. The General Fund is
  used for unrestricted operations.
• Special Revenue Fund specific revenue source
  used for a specific purpose. This is an
  operating fund.
• Capital Projects Fund Used specifically for the
  acquisition construction of capital assets.
• Debt Service Fund Used for funding payment of
  interest principal on long-term debt.
• Permanent Fund New-required by GASB 34Trust
  Funds to support government programs.

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Proprietary Funds

• Enterprise Funds provide services to the public
  on a user-fee basis. The most common category is
  government-owned utilities also, mass transit,
  airport, housing authorities, government-owned
  hospitals, etc.
• Internal Service Fund provide services to other
  departments in the same government, such as motor
  pool, data processing, or supplies purchasing.

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Fiduciary Funds

• Pension Trust Funds provide retirement benefits
  to governmental employees
• Permanent private-purpose trust funds endowments
  to benefit the government (accounted for as
  Permanent Funds), other organizations or
  individuals
• Agency Funds temporary accounting for assets
  held for other governments or organizations.

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Financial Reports

• The complete annual report is the Comprehensive
  Annual Financial Report (CAFR).
• The three sections are Introductory Section,
  Financial Section, Statistical Section.
• Governments also prepare annual operating budgets
  may have capital budgets other statements.
  

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CAFR (Old Format)

• Introductory Section includes transmittal letter
  may include Certificate of Achievement,
  organization chart, table of contents, etc.
• Financial Section includes Auditors Report
  Combined Financial Statements, Notes
  statements by fund category.
• Statistical Section various tables other
  information on economic, demographic
  supplementary fiscal data.

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CAFR (GASB 34 Format)

• Same basic format with the following additions
• Management Discussion Analysis (MDA) added to
  Introductory Section.
• Government-wide Financial Statements added, based
  on full accrual accounting(1) statement of net
  assets (2) statement of activities.

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Chapter 3

• Issues of Budgeting Control

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Budgeting

• The Current Operating Budget (also called an
  appropriation budget) a plan of financial
  operations for the period. The annual budget
  authorizes, and provides the basis for control
  of, financial operations during the year (NCGA
  Statement 1).
• The Budget is a formal expression of public
  policy on objectives priorities how the
  resources will be provided to meet them (NCGA
  Statement 1).

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Functions of Budgets

• Planning type, quantity quality of services to
  be provided how to pay for these services.
• Control budgets insure that resources are
  available are used to monitor compliance with
  legislative spending authority.
• Review budgets can be compared to actual results
  to evaluate whether legislative other legal
  mandates were carried out, as well as
  effectiveness efficiency.

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Types of Annual Operating Budgets

• Traditional Budget classifies spending by line
  item (object classification), which focuses on
  control. Appropriations specifically limits
  spending on each line item.
• Performance Budget use measurable units of SEA.
• Program Budgets budgets are defined by
  programs, based on specific objectives for each
  identified program.

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The Budget Cycle

• Budget Preparation (several months before the
  start of the fiscal year)
• Legislative Approval (before the start of the
  fiscal year)
• Fiscal Year Operations (Budget Execution)
• Feedback Review (after the end of the fiscal
  year)

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Budget Preparation

• Chief financial officer (CFO) accumulates budget
  requests based on chief executive officer (CEO)
  City Council objectives, along with revenue
  forecasts to develop a proposed budget.
• Inputs revenue forecasts, expenditure requests
  priorities
• Outcome proposed (executive) budget

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Legislative Approval

• Legislature must approve the budget before taxes
  can be levied appropriations spent.
• Considerations tax levy(ies), bond ( other
  borrowing) initiatives, budget authorization
  mandate
• Outcome annual operating budget (this process
  the budget is publicly available)

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Fiscal Year Operations (Execution)

• Budget journal entries begin the new fiscal year
  accounting operations depend on these budget
  entries.
• Actual revenues expenditures
• Budget revisions transfers
• Adjusting closing process

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Feedback Review

• Reporting auditing financial reports are
  prepared audited
• CAFR is issued
• Other analysis conducted budget to actual
  comparisons, service effort accomplishment, etc.

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Budget Entries

• Revenue-related Debit estimated revenues
  Credit fund balance.
• Expenditure-related Debit fund balance credit
  Appropriations.
• Operations revenues are credited when
  measurable available expenditure debited
  when corresponding liability is recorded.
• Both budget actual entries are closed out at
  year-end.
  

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Encumbrances

• Encumbrances are journal entries used to
  recognize future commitments (such as purchase
  orders) earmark these funds for control
  purposes.
• When commitments are recognized (e.g., for
  approved purchase orders) debit encumbrances
  credit fund balance reserved for encumbrances.
• Encumbrances are reversed when expenditures are
  recognized for the commitments.

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Chapter 4

• Recognizing Revenues in Governmental Funds

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Revenues

• Basis of Accounting when transactions/events are
  recognized Modified Accrual Accounting in the
  Governmental Funds.
• Measurement Focus what is being measured
  Current (expendable) financial resources.
• Revenues are recognized when measurable
  available.

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Revenue Recognition

• Revenue must be measurable available.
• Measurable amount is known or can be reasonably
  estimated.
• Available physically available collected in
  cash during the fiscal year or shortly thereafter
  (60 day rule for property tax) legally
  available (e.g., levied or can can be spent based
  on contract or regulation).
• Note importance of nonexchange revenues (pp.
  123-4).

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Resource Inflows

• Revenues are recorded by source Property
  Taxes Sales Taxes Licenses
  permits Fines Forfeitures Intergovernmen
  tal Grants Other
• Other Financing Sources are resource inflows that
  include transfers in, bond proceeds, etc.

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Nonexchange Revenues

• Imposed nonexchange revenues assessment on
  individuals or businesses e.g., property taxes
  fines.
• Derived tax revenues taxes derived from exchange
  transactions, such as sales income taxes.
• Government-mandated, such as a state requiring a
  city to use resources for specific purposes.
• Voluntary contractual agreements such as
  contributions from donors.
• Note time purpose limitations (these usually
  must be met before revenues are recognized).

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Simplified Budgeting Strategy (Local Governments)

• Estimate spending needs.
• Forecast all revenues except property tax.
• The difference is the amount that has to be
  collected from property taxes.
• Calculate property tax rates (based on net
  assessed value collection estimates) total
  tax levy.

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Budget Strategy Example (1)Property Tax

• Anticipated spending needs 800,000 forecasted
  revenue, all sources except property tax
  200,000 then revenue collected from property
  tax 600,000.
• Assuming that 92 of property tax is collected
  (assume no delinquent tax collection) then tax
  levy 600,000/.92 652,174 for a balanced
  budget.

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Budget Strategy Example (2)Property Tax

• Net assessed value assume total assessed value
  of property is 2.3 billion less property
  exemptions of 300 millionnet assessed value
  2 billion.
• Tax rate property tax required / (collection
  rate x net assessed value/100) 600,000 / (.92 x
  2 billion) 0.3261 per 100 NAV.
• Tax levy 2 billion/100 x 0.326087 652,174.

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Budget Strategy Example (3)Journal Entries

• Budget entry (balanced budget) Estimated
  Revenues 800,000 Fund Balance 800,000
• Tax Levy Taxes Receivable Current
  652,174 Revenues-Property Tax
  600,000 Allowance for Uncoll. Tax 52,174

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Budget Strategy Example (4)Closing Entries

• Fund Balance 800,000 Estimated
  Revenues 800,000 Revenue-Property Tax
  600,000 Fund Balance 600,000

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Other Revenues

• Fines (pp. 129-130)
• Sales Taxes (pp. 130-3)
• Income Taxes (pp. 133-5)
• Grants (pp. 135-142) Unrestricted
  Grants Restricted Grants (designated
  purposes) Contingent Grants (based on specific
  actions or occurrences) Entitlements
  (entitled by formula) Shared Revenues (on a
  predetermined basis) Payments in Lieu of Taxes
  (replaces property taxes)
• Sale of capital assets (pp. 142-3)
• Investment Income investments recorded at fair
  value investment income includes changes in
  fair value (pp. 143-7).

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Other Financing Sources

• Resource inflows that include transfers in bond
  proceeds.
• They are operating inflows, but not considered
  revenues.
• Monies are often transferred from one fund to
  another e.g., the General Fund transfers 10,000
  to the Debt Service Fund for an interest payment
  this is an other financing sources to the DSF.
• Bond proceeds (usually to a Capital Project Fund)
  also are other financing sources (the money has
  to be paid back).

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Government-wide Statements

• In addition to fund accounting, state local
  governments prepare government-wide statements
  based on full accrual accounting.
• Generally, the government keeps its books using
  fund accounting, then makes an additional set of
  adjusting entries to arrive at the information to
  prepare government-wide statements.
• Therefore, revenues are recognized on a different
  basis, similar to commercial accounting.
• Generally, the major difference is that
  available is not a criteria for revenue
  recognition.

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Chapter 5

• Recognizing Expenditures in Governmental Funds

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Expenditures

• Expenditures are associated with the acquisition
  of goods services (usually recognized when the
  liability is recorded). Expenditures are
  decreases in net financial resources.
• Expenses are associated with the consumption of
  goods services. Expenses are decreases in net
  economic resources.
• Expenditures are used instead of expenses in the
  governmental funds. Expenses are used for
  government-wide statements.
• The acquisition of equipment for 10,000 cash in
  a general fund would be
• Expenditures-Capital Asset 10,000 Cash
  10,000

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Resource Outflows

• Expenditures are usually cross-classified by (1)
  department or program (e.g., public works, public
  safety, parks recreation) (2) object of
  expenditures (e.g., salaries, supplies,
  maintenance, etc.).
• Other financing uses are resource outflows, with
  transfers out being the most common.

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Expenditure Characteristics

• Mainly associated with exchange transactions
  e.g., employee compensation, acquisition (or use)
  of supplies.
• Examples Wages Salaries (pp.
  164-171) Supplies (pp. 173-5) purchase or
  consumption methods allowed Capital assets
  (pp. 176-180) Non-exchange transactions (pp.
  183-4)

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Spending Entries (1) Budget

• Spending needs salaries, 650,000 supplies,
  150,000.
• Budget entry Fund Balance 800,000 Appro
  priations 800,000

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Spending Journal Entries--Salaries

• Salaries Expenditures-Salaries 642,000
  Salaries Payable 642,000
• Year-end accruals at year-end, expenditures are
  recognized for the days works for which they
  havent been paid. Expenditures-Salaries
  8,000 Accrued Salaries 8,000

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Spending Journal Entries--Supplies

• Supplies (Purchase method) Encumbrances
  150,000 Reserve for Encumbrances 150,000
• Reserve for Encumbrances 150,000
  Encumbrances 150,000
• Expenditures-Supplies 150,000
  Vouchers Payable 150,000 Note
  supplies on hand at year-end total 10,000.

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Spending Closing Entries

• Appropriations 800,000 Fund Balance 800,000
• Fund Balance 800,000 Expenditures-Salaries 65
  0,000 Expenditures-Supplies 150,000
• Inventory-Supplies 10,000 Fund Balance
  Reserved for Supplies 10,000

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Other Salary Considerations

• Vacation Pay recorded in year vacation actually
  taken accrued for government-wide reporting.
• Sick Leave recorded in year sick leave taken
  accrued for government-wide reporting.
• Pension contributions generally recorded when
  cash payment made to a pension trust fund
  recorded as expenses based on calculated amount
  for government-wide reporting.

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Supplies-Consumption Method

• Encumbrances, same as above.
• Supplies Inventory 150,000 Vouchers
  Payable 150,000
• Expenditures-Supplies 140,000 Supplies
  Inventory 140,000
• Fund Balance 10,000 Fund Balance
  Reserved for Supplies 10,000

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Prepayments

• Prepayments are common for insurance certain
  other spending items General Fund ( other
  governmental funds) can use the purchase or
  consumption method.
• Purchase method Expenditures-Insurance 10,00
  0 Vouchers Payable 10,000

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Prepayments-Consumption Method

• Prepaid Insurance 10,000 Vouchers
  Payable 10,000
• Usage (usually by month)
• Expenditures-Insurance 3,000 Prepaid
  Insurance 3,000

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Capital Assets

• Expenditures-Capital Assets 20,000 Contracts
  Payable 20,000
• If the money is on a long-term note Cash 20
  ,000 Other Financing Sources-
  Note proceeds
  20,000 Expenditures-Capital Assets
  20,000 Contracts Payable
  20,000
• Capital Lease Expenditures-Capital Assets
  20,000 Other Financing
  Sources- Capital Lease
  20,000
• Note long-term liabilities are serviced in a
  debt service fund.

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Multiple-fund Transactions

• Many transactions involve more than one fund
  therefore, journal entries are required in two or
  more funds.
• A common example in interfund transfers
  (classified as other financing sources uses).
  Other examples of financing sources uses
  include proceeds from long-term debt proceeds
  from the sales of capital assets.
• Note that charges for services would be recorded
  as revenue expenditures (or expenses).

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Interfund Transfer

• The General Funds sends 20,000 in cash to the
  Debt Service Fund for a future interest payment
  on long-term notes General Fund
  Transfers Out 20,000 Cash 20,000 Debt
  Service Fund Cash 20,000 Transfers
  In 20,000