Professional Documents
Culture Documents
Accounting For Government and Other Not-For-Profit Entities
Accounting For Government and Other Not-For-Profit Entities
operate on a year to- year basis, raising such resources as they can and
expending them in serving their customers. They may seek to increase
the amount of resources made available to them each year and most do
but this is to enable the organization to provide more or better goods
and services, not to increase its wealth. In sum, whereas private
businesses seek to increase their wealth for the benefit of their owners,
NFP organizations seek to expend their available financial resources for
the benefit of their owners, NFP organization seek to expend their
available financial resources for the benefit of their clientele.
Some colleges and universities rely heavily upon donations and income from trust
funds; others depend primarily upon state appropriations and/or tuition charges
for support. Finally, hospitals generally charge their clientele, though few select
their patients on the basis of ability to pay and many rely heavily upon gifts and
bequests.
User charges, where levied, usually are based on the cost of the goods or services
rendered rather than upon supply and demand related pricing policies common
to private enterprise.
Charges levied for goods or services often cover only part of the costs
incurred to provide them; e.g., tuition generally covers only a fraction of
the cost of operating state colleges or universities, and token charges (or
no charges) may be made to a hospitals indigent patient.
Remember the points in relation to accounting principles that you have taken in
the previous accounting modules. That was the principles which are strictly
applied to the profit entities. The same concepts and terms are used in NFP
entities but with different connotation. This may incorporate;
They are integral parts of the same economic system and utilize similar
resources in accomplishing their purposes.
Both must acquire and convert scarce resources into their respective
goods or services.
Both profit and NFP entities are applying the concept of double entry
accounting
The concept of accounting cycle that begins from business transaction,
recording in journals, posting to the ledger, summarizing in the form of
trial balance and working papers, recording adjusting entries, preparing
financial statements, recording closing entries, and preparing post
closing trial balances are similarly maintained.
cast his dollar vote for that firm providing the goods or services most suitable to
him. In this situation a firm whose management is incompetent or unresponsive
to the desires of the consuming public will be unprofitable and will ultimately be
forced out of business. Therefore, the profit motive and profit measurement
constitute an automatic regulating device in our free enterprise economy.
Such a concept which is applied to business entities are not applied in a manner
similar to governmental and other NFP entities. That means, the profit
test/regulator device is not present in the usual not for profit situation, and most
NFP organizations must strive to attain their objectives without its benefits. In
addition, many not for profit organizations provide goods or services having no
open market value measurement by which to test consumer satisfaction because,
as discussed earlier NFP entities are operated under the absence of the need to
operate profitably, there is lack of an open market test of the value of the
organizations output, there is the remote and indirect relationship, if any,
between the resource contributor and the goods or services recipient, and in the
case of governments, the ability to force resource contributions via taxation,
might make it possible for an inefficient, uneconomical, or even ineffective notfor-profit organization to continue operating indefinitely. Not-for-profit
organizations, particularly governments, are therefore subject to more stringent
legal, regulatory, and other controls than are private businesses.
Further constraints are imposed on state and local governments by the existence
of the federal system in which higher levels of government encourage or dictate
activities by lower levels and finance the activities (partially, at least) by an
extensive system of inter governmental grants and subsidies that require the
lower levels to be accountable to the entity providing the resources, as well as to
the citizenry. Revenues raised by each level of government come, ultimately, from
taxpayers.
Since governments may have a monopoly on the services they provide to the
public, the lack of a competitive market place makes it difficult to measure
efficiency in the provision of the services. It is also extremely difficult to measure
optimal quantity or quality for many of the services rendered by government for
example, how many policies are needed and enough? The governmental
accounting standards board notes the determination of optimal quantity or quality
of government services is complicated by the involuntary nature of the resources
provided. A consumer purchasing a commercial product can determine how much
to purchase and may choose among good, better, or best quality and pay
accordingly. A group of individuals paying for governmental services (and paying
in different proportions for services that some of them may not use or desire)
presents a far more complex situations.
The primary sources of accounting and financial reporting standards for business,
governmental and not -for-profit organization are not the same. As shown below,
the Financial Accounting Standards Board (FASB) establishes accounting and
financial reporting standards for profit seeking businesses and for
nongovernmental not-for-profit organizations. The governmental accounting
standards Board (GASB), sets accounting and financial reporting standards for
governmentally related not-for-profit organizations, such as colleges and
universities, health care entities, museums, libraries and performing arts
The GASB and the FASB are parallel bodies under the oversight of the Financial
Accounting Foundation (FAF). The FAF appoints the members of the two boards
and provides financial support to the boards by obtaining contribution from
business corporation; professional organization of accountants, financial analysts,
and other groups concerned with financial reporting, CPA firms, debt rating
agencies; and state and local governments (for support of the GASB). Because of
the breadth of support and the lack of ties to any single organizations or
government, the GASB and the FASB are referred to as independent standards
setting bodies in the private sector. Standards set by the FASAB, GASB and FASB
are the primary sources of generally accepted accounting principles (GAAP) as the
term is used in accounting and auditing literature.
Financial
accounting
foundation
Financial accounting
standards board (FASB)
Business (for
profit)
organizations
Governmental
accounting standards
board (GASB)
Nongovernmental
not-for-profit
organizations
Federal accounting
standards advisory
board (FASAB)
Federal
governments
Source: http://www.gasb.org
FASAB, GASB, and FASB standards are set forth primarily in documents called
statements. Independent auditors are engaged to express their opinion that the
financial statements of a client present fairly, in all material respects, the clients
financial position as of the end of a fiscal year and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles (GAAP).
All three standard setting organizations the federal accounting standards advisory
board, the financial accounting standards board, and the government accounting
standards board take the position that the establishment of accounting and
financial reporting standards should be guided by conceptual considerations so
that the body of standards is internally consistent and the standards address
board issues expected to be of importance for a significant period of time. The
As per the GASB issued its concepts statement No. 1, Objectives of financial
reporting, for state and local governments .In that statement the board note the
following;
GASB issued its concepts statement No. 2, Service Efforts and Accomplishments
Reporting to encourage state and local governments to experiments with
reporting more complete information about a governmental entitys performance
than can be displayed in traditional financial statements. Indicators of service
efforts include inputs of non-monetary resources as well as inputs of dollars.
Indicators of service accomplishments include both outputs and outcomes.
The objectives stem primarily from the needs of external users who
generally cannot
prescribe the information they want from an organization.
In addition to information provided by general purpose external financial
reporting, managers and, to some extent, governing bodies need a great
deal of internal accounting information to carry out their responsibilities in
planning and controlling activities.
The Governmental Accounting Standard Board (GASB) originally identified four
groups of primary users of external financial reports of governmental units and
added a fourth group in its mission statement. They are discussed below:
1. The citizenry: Those to whom the government is primarily accountableincluding citizens (taxpayers, voters, service recipients), the media, advocate
groups, and public finance researchers.
2. Legislative and oversight bodies: Those who directly represent the
citizens including members of state legislatures, county commissions, city
councils, boards of trustees and school boards, and executive branch
officials with oversight responsibility over other levels of government.
3. Investors and creditors: Those who lend or participate in the lending
processincluding individual and institutional investors and creditors,
municipal security underwriters, bond rating agencies, bond insurers, and
financial institutions. The needs of intergovernmental grantors and other
users are considered by the GASB to be encompassed within those of these
three primary user groups. Further, internal executive branch managers
usually have ready access to the financial information through internal
reports. Thus they are not considered as primary users of external financial
reports.
4. Government administrators: Include internal executive branch managers if
they do not have ready access to the governments internal information.
There are two basic concepts of financial accounting, which it will be useful to
define before we discuss users and their needs, particularly because their use in
ordinary language is often not helpful in understanding their technical meaning.
These are a stewardship and accountability, and they represent the ends of a
spectrum of reporting possibilities.
State and local government financial reporting is addressed by the twelfth principle set forth in the GASB Codification. That principle states, in part:
i. Appropriate interim financial statements and reports of financial position,
operating results, and other pertinent information should be prepared to
facilitate management control of financial operations, legislative
oversight, and, where necessary or desired, for external reporting
purposes.
Introductory section;
Appropriate combined, combining and individual fund statements;
Notes to the financial statements;
Required supplementary information;
Schedules;
Narrative explanations; and
Statistical tables.
The reporting entity is the primary government including its blended component
units and all discretely presented component units.
iii. General purpose financial statements [GPFS] of the reporting entity may
be issued separately from the comprehensive annual financial report.
Such statements should include the basic financial statements and notes
to the financial statements that are essential to fair presentation of
financial position and results of operations (and cash flows of those fund
types and discretely presented component units that use proprietary fund
accounting). Those statements may also be required to be accompanied
by required supplementary information essential to financial reporting of
certain entities. The characteristics of each report are described as
follows:
Interim Reporting:
Very few governments publish interim financial statements for external use.
Rather, interim statements of governments are prepared on the budgetary basis
and are designed primarily to meet the needs of administrative personnel such as
the chief executive, departmental supervisors, and budget examiners. But
sometimes legislators may be interested in them. Interim statements help
administrative personnel to determine how well the executive branch is
complying with budgetary and other finance-related legal requirements. In
addition, interim statements are important to controlling current operations
because they disclose variations from plans that may require altering the plans or
improving operating performance and assist in planning future operations.
The key criteria by which internal interim reports are evaluated are their relevance and usefulness for purposes of management control. They include planning
future operations as well as evaluating current financial status and results to date.
Because managerial styles and perceived information needs vary widely,
however, appropriate internal interim reporting is largely a matter of professional
judgment rather than one to be set forth in detail here.
Interim reporting typically is for internal use, and individual managers and environments require different types of interim reports. Thus, neither the GASB nor
any other recognized body has set forth what might be considered generally
accepted principles of interim reporting.