1.

1 Distinguishing Characteristics of Not-for-profit (NFP) Entities

1. Definition
 Are organizations which usually arise to meet a need that society feels is
vital/essential but it is considered that this particular need could not be met by
profit-seeking organizations
 Examples include
o Water supply
o Public protection (police and defense)
o Religious services
o Infrastructure (roads)

2. Classification
 Broad classification
o Governmental organizations (GOs)
o Non-governmental organizations (NGOs) or private NFPs
 FASB classification
o Governmental units (federal, regional, local, etc)
o Educational (KGs, schools, colleges, universities, etc)
o Health and welfare (hospitals, orphanages, red cross/crescent, etc)
o Religious (churches, mosques, missions, etc)
o Charitable organizations
o Foundations

3. Distinguishing Characteristics
 Organizational objective
o Except for some proprietary activities, NFP entities have no profit motive
in providing goods and services
o Goals are something other than to earn net income and/or make profit
o Render goods/services with no expectation of receiving revenue
o GOs
 ultimate objective is to meet some political and/or social need
o NGOs
 ultimate objective is to meet some social need
o For-profit entities
 primary focus is on earning net income, return on investment and
earnings per share

 Ownership interest

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 o There is no clearly defined ownership interest that can be sold, transferred
or redeemed or that convey entitlement to a share of a residual distribution
of resources in the event of liquidation of the organizations
o Absence of individuals with legal claim to the excess of revenues over
expenses and excess of assets over liabilities.

o For-profit entities
 presence of individuals with legal claim to the excess of revenues
over expenses and excess of assets over liabilities
 Sources of financial resources
o Receive significant amount of resources from individuals/organizations
who/which do not expect to receive either repayment of or economic
benefits in return to the resources provided
o Citizenry support – depend on the general population for a substantial
portion of their support because revenues from charges for goods/services
are not intended to cover all operating costs
o GOs
 Primarily supported by taxes
 Legally forceful(involuntary) contributions
 Taxpayers do not necessarily receive an equivalent share of the
government’s goods/services
o NGOs
 Primarily supported by donations/grants
 Voluntary contributions
 Donors contributing resources do not necessarily receive an
equivalent share of the organization’s goods/services
o For-profit entities
 Primarily supported by retained profit and investment by the
owner/s
 Regulation and control
o Their activities and resources are subject to more stringent(strict) legal
and/or contractual requirements
o Restrictions as to how and when to use resources
o Formal and restrictive budgets
o Preparation of budgets is mandatory and imposes limit on spending
o Lack of competitive market, especially government forms a monopoly for
specified services (e.g. public protection)
o For-profit entities
 Market is the major regulatory mechanism
 Measurement of objectives/output
o Objectives and/or their outputs cannot be objectively measured in either
monetary or any other quantitative terms
o Neither net income or earnings per share can measure the performance of
a fire brigade or a church

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 o Due to absence of competitive market and involuntary contribution of
resources to government

o For-profit entities
 Objectives/outputs can be easily expressed in monetary or other
quantitative terms
4. Similarities with For-profit Entities
 Objective of financial reporting
 Basis of accounting
 Double entry accounting.
 Accounting cycle.
1.2 Financial Accounting and Reporting for NFP Entities
1. Accounting for NFP Entities
i) Basic features
 Use of fund and budgetary accounting
 Traditional view of equity accounts is modified – fund balance replaces the
traditional/commercial equity accounts
 Recognition of revenues and/or expenditures/expenses for non-exchange
transactions.
 Financial reports must reflect the existence of restrictions on use of certain
resources.
 Non-financial performance measures are relatively more important
 Gives more weight to budgetary compliance
ii) Fund accounting
 Accounting systems for many NFP entities are organized and operated on
fund basis.
 Use of multiple accounting entities to account for and report on resources
segregated according to purpose.
 Is a system meant to ensure that resources are used in accordance with
restrictions imposed on them
 In strict terms separate accounting records are kept and separate set of
financial statements are prepared for each fund.
 Designed primarily to meet internal reporting and control objectives
 Uses the equation assets = liabilities + fund balance
iii) Fund
 is a fiscal entity responsible for resources segregated for specific purposes
 is also an accounting entity with a self-balancing set of accounts recording
financial resources, claims against the financial resources and changes in these
items
 is a quasi-independent entity entrusted over resources segregated for the
purpose of carrying on specific activities or attaining certain objective in
accordance with special regulations, restrictions or limitations
 is a distinct entity within a larger entity
 a part of an organization for which separate accounting records are kept in
such a way that enables preparation of separate set of financial statements
 there may be several funds in an organization

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  the fund concept is aimed at clearly defining the purposes for which resources
are to be used and who will be held accountable for the resources
 fund may be unrestricted (general) – to be used for any purposes or restricted
to be used only for specific purpose
iv) Governmental fund accounting
 Uses modified accrual basis of accounting
 Focuses on measurement of current financial resources also called current
expendable resources
 Current financial resources include
o Cash and other assets which can be readily converted into cash within the
current period or short after the end of the current period (e.g. receivables
and short-term investments)
o Obligations to be settled within the current period or short after the end of
the current period
o Thus, capital assets, some prepaid items and long-term liabilities are
excluded from accounting records and reports

v) NGOs fund accounting

 Uses full accrual basis of accounting
 Focuses on measurement of all economic resources
 Thus, account for both current and non-current assets and liabilities
vi) Budgetary accounting
 Budgetary figures are incorporated/recorded in the accounting systems

2. Users – include
 Provides of resources
o Taxpayers and Donors/grantors
o Creditors
 Employees and managers
 Service beneficiaries and the public in general
 Financial analysts and advisors
 Legislative and oversight bodies
 Researchers and academic institutions and their constituents
3. Objectives – objectives of NFP entity financial reporting include
 To compare results with budgets
 To assess conditions and results
 To check compliance with laws and regulations
 To evaluate efficiency and effectiveness
 GOs – set by FASAB and GASB
o Inter-period equity – whether current year revenues are sufficient to pay
for current year services (present costs should not be transferred to future
years)
o Budgetary and fiscal compliance – whether resources are obtained and
used in accordance with legally adopted budgets, finance related laws and
other restrictions imposed by providers of resources

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 o Operating performance – evaluation of service efforts, costs and
accomplishments of the reporting entity
 NGOs – set by FASB
o Provide information useful to present and potential resources providers
and others in making decisions about allocating resources to the
organizations
o Determine compliance with finance related laws, rules and regulations
including budgets and other restrictions imposed by providers of resources
4. Financial Statements
 Both general purposes financial statements and specific purpose reports which
may include
o Statement of activities
 reporting revenues and expenditures/expenses
 revenues and other financial sources – expenditures/expenses and
other financial uses = net increase/decrease in fund balance
 similar to income statement of business entity
o Statement of net assets
 reporting assets, liabilities and fund balance
 assets – liabilities = fund balance
 similar to balance sheet of business entity
o Statement of cash flows
 reporting sources and uses of cash
 sources – uses + beginning cash balance = ending cash balance
o Note to financial statements
o Auditor’s report

 GOs
o Compressive Annual Financial Report(CAFR) is the government’s
official annual report prepared and published as a matter of public report,
contains:
1. The Introductory Section.
 Table of contents
 Letter of transmittal
 Organization structure & roster of elected officials.
2. Financial Section
 The auditor’s report.
 General purpose financial statements
 Combining and individual fund and account group statements.
 Schedules
3. Statistical Section
 NGOs
 Statement of Activities
 Statement of Net Assets
 Statement of Cash flows
5. Sources of Financial Accounting and Reporting Standards
 GOs

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 o Federal government – Federal Accounting Standards Advisory Board
(FASAB) as well as AICPA and FASB to some extent
o State and local governments – Governmental Accounting Standards Board
(GASB) as well as AICPA and FASB to some extent

 NGOs – Financial Accounting Standards Board (FASB) and AICPA

Principles of Accounting and Financial Reporting for State and Local Governments

Accounting and financial reporting principles for the governmental activities category
have evolved to meet the legal budgetary and financial compliance needs of government-
which is termed as fiscal accountability. Generally, these principles involve segregating
the accounting for the receipt and expenditures restricted use resources from general use
resources. Emphasis is added on reporting the inflows and outflows of current financial
resources. Current financial resources are cash or items expected to be converted into
cash during the current period, or soon enough thereafter to pay current liabilities.
Accounting and financial reporting principles for business type activities of a government
are quite similar to those commercial business entities. As in business needs to know the
full cost of those goods and services in order to determine appropriate prices. Knowing
the full cost is also essential in deciding whether the government should continue to
produce or provide particular goods or services, or contract for them with an outside
vendor. Thus, as in commercial business accounting, accrual accounting is essential to
measure the full cost of providing governmental business-type services, and reporting on
the extent to which each business type activity is self sufficient or has to be subsidized. In
short, the principles of accounting for business type activities are intended to measure and
report operational accountability.
Accounting and reporting for the fiduciary activities of a government use principles
similar to those of business-type activities. Certain fiduciary activities, those related to
defined benefit pension plan and similar postemployemnt health care pans, use unique
recognition standards prescribed by GASB.
GASB Statement No. 34 reporting standards reflect the GASB’s view that users such as
citizens, legislative and oversight bodies, and investors and creditors have diverse
information needs. In particular, users want and need information about the medium, to

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long term financial performance of government as well as information about short term
financial compliance with budget and finance related laws and regulations. To achieve
operational accountability reporting for the government as a whole, Statement No. 34
requires highly aggregated financial statements (called government-wide statements) that
report both government activities and business type activities on the accrual basis (the
accounting basis used by business organizations), in addition to the traditional
disaggregated financial statements (called fund financial statements).
The proceeding overview provides a good foundation for better understanding the
principles of governmental accounting and financial reporting provided in the GASB’s
Codification of Governmental Accounting and Financial Reporting Standards as
modified by GASB Statement No. 34.

Summary Statement of Principles

At its inception in 1984, the GASB adopted 12 accounting and financial reporting
principles for state and local governments that had been established by its predecessor
standards setting body, the National Council on Government Accounting (NCGA). The
standards prescribed by GASB Statement No. 34 retain, with certain modifications, the
original NCGA principles. A separate principle has been articulated for long-term
liabilities, bringing the total now to 13 principles. The following overview of these
principles, including those charged or added by Statement No. 34, should afford the
reader an understanding of the unique nature and complexity of governmental and
financial reporting.
1. Accounting and Reporting Capacities
A governmental accounting system must make it possible both:
a) to present fairly and with full discourse the funds and activities of the
government in conformity with the generally accepted accounting
principles, and
b) To determine and demonstrate compliance with finance-related legal and
contractual provisions.
Adherence to generally accepted accounting principles (GAAP) is essential to ensuring a
reasonable degree of comparability among the general purpose financial reports of state

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and local governmental units. The American Institute of the Certified Public Accountants
(AICPA) recognizes the GASB as the designated body to establish accounting principles
for state and local governments under the AICPA Ethics Rule 203, Accounting
Principles.
In some states, however, laws require the state government and the local governments
within the state to follow practices (such as cash basis of accounting) not consistent with
GAAP. In those cases, fiscal statements and reports prepared in compliance with state
law are considered “special reports” or “supplemental schedules” and are not the basic
financial statements: one set in compliance with legal requirements and one set in
conformity with GAAP.
2. Fund Accounting Systems
Governmental accounting system should be organized and operated on a fund basis. A
fund is defined as a fiscal and accounting entity with a self-balancing set of accounts
recording cash and other financial resources, together with related liabilities and residual
equities or balances, and changes therein, which are segregated for the purpose of
carrying on specific activities or attaining certain objectives in accordance with special
regulations, restrictions, or limitations.
Fund Financial statements should be used to report detailed information about the
primary government, including blended component units. The principle quoted below
defines and categorizes the various fund types that should be used, as needed, by state
and local governments, both general purpose and special purpose such as public school
systems.
3. Types of Funds
The following types of funds should be used by state and local governments to the extent
that they have activities that meet the criteria for using those funds.
a) Governmental Funds
(i) The General Fund – to account for all financial resources except
those required to be accounted for in another fund.
(ii) Special Revenue Funds – to account for the proceeds of specific
revenue sources (other than private-purpose trusts or for major capital
projects) that are legally restricted to use for specified purposes.

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 (iii) Capital Projects Funds – to account for financial resources to be used
for the acquisition or construction of major capital facilities (other than
those financed by proprietary funds and trust funds).
(iv) Debt Service Funds – to account for the accumulation of resources
for, and the payment of, general long-term debt principal and interest.
(v) Permanent Funds – to account for legally restricted resources
provided by trust in which the earnings but not the principal may be
used for purposes that support the primary’s government’s programs
(those that benefit the government or its citizenry)1.
b). Proprietary Funds
(vi) Enterprise Funds- to account for operations
 That are financed and operated in a manner similar to private business
enterprises –where the intent of the governing body is that the costs
(expenses, including depreciation) of providing goods or services to the
general public on a continuing basis be financed or recovered primary
through user charges; or
 Where the governing body has decided that periodic determination of
revenues earned, expense incurred, and/or net income is appropriate for
capital maintenance, public policy, management control, accountability
or other purposes.
(vi) Internal Service Funds – to account for the financing of goods or
services provided by one department or agency to other departments or
agencies of the governmental unit, or to other governmental units, on
cost-reimbursement basis.
c). Fiduciary Funds
These are trust and agency funds that are used to account for assets held by governmental
unit in a trustee capacity or as an agent for individuals, private organizations, and other
governmental units. Theses include:
(vii) Pensions (and other employment benefit) trust funds - are use

1
Similar permanent funds that benefit private individuals, organizations, or other governments-that is,
private purpose trust funds- are classified as fiduciary funds.

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to report resources that are required to be held in trust by the state for the members and
beneficiaries of defined benefit pension plans, defined contribution pension plans, and
other employee benefit plans
(viii) Investment trust funds - are used to report the external portion of the
Local Government Investment Pool, which is reported by the state as
the sponsoring government.
(ix) Private-purpose Trust Funds - are used to report trust arrangements,
other than pension and investment trusts, under which principal and
income benefit individuals, private organizations, or other
governments. The resources held under these arrangements are not
available to support the government’s own programs.
(x) Agency Funds - are used to account for resources held by the state in
a purely custodial capacity for other governments, private
organizations or individuals.
These funds types correspond to the types of activities in which government’s engage:
Governmental funds are used to account for governmental activities; propitiatory funds
are used to account for business-type activities, and fiduciary funds are used to account
for fiduciary activities. Both the definition of fund and the description of each
governmental fund type emphasis the segregation of accounting for restricted current
financial resources to facilitate reporting on fiscal accountability. Creating a separate elf-
balancing set of accounts (fund) for each business-type activity permits those activities to
be accounted for using accounting principles similar to those of commercial business
rather than using the principles for governmental funds. And accounting for fiduciary
funds follows the principles of accounting for business activities.
4. Number of Funds
Governmental units should establish and maintain those funds required by law and sound
financial administration. Only the minimum number of funds consistent with legal and
operating requirements should be established however, because unnecessary funds result
in inflexibility, undue complexity, and inefficient financial administration.

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The fund types defined in the types of funds principle are to be used if needed by a
governmental unit to demonstrate compliance with legal requirements or if needed to
facilitate sound financial administration.
Governments shall report only one general fund. This is basically because the primary
government's general fund is usually the main operating fund of the reporting entity and
often is a focal point for report users; its general fund should be the only general fund for
the reporting entity. The general fund of a blended component unit should be reported as
a special revenue fund. Some governmental units often need several funds of a single
type, such as special revenue or capital projects funds. On the other hand, many
governmental units do not need funds of all types at any given time. Some find it
necessary to use only a few of the specified types. For example, many small
governmental units do not require internal service funds. Moreover, resources restricted
to expenditure for purposes normally financed from the general fund may be accounted
for through the general fund provided that applicable legal requirements can be
appropriately satisfied; and use of special revenue funds is not required unless they are
legally mandated. Debt service funds are required if they are legally mandated.

5. Reporting Capital Assets

A clear distinction should be made between general capital assets and capital assets of
proprietary and fiduciary funds. Capital assets of proprietary funds should be reported in
both the government-wide and fund financial statements. Capital assets of fiduciary funds
should be reported in only the statement of fiduciary net assets. Since general capital
assets do not represent financial resources available for expenditure, they should not be
reported as assets in governmental funds. Rather, they are capitalized and depreciated in
the General Capital Assets Subsidiary Account, and reported in the governmental
activities column in the government-wide statement of net assets.
General capital assets include land, building improvements other than building, and
equipment used by activities accounted for by the fund type classified as governmental
funds. The following two principles establish requirements that relate to general capital
asset accounting,

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 6. Valuation of Capital Assets
Capital assets should be reported at historical cost. The cost of capital asset should
include capitalized interest and ancillary changes necessary to place the asset into its
intended location and condition fir use. Donated capital assets should be reported at their
estimated fair value at the time of the acquisition plus ancillary change, if any.

7. Depreciation of Capital Assets

Capital assets should be depreciated over their estimated useful lives unless they are
either inexhaustible or are infrastructure assets using the modified approach as set
forth in GASB Statement No. 34. Inexhaustible assets such as land and land
improvements should not be depreciated. Depreciation expense should be reported in:
 The government-wide statement of activities;
 The proprietary fund statement of revenues, expenses, and changes
in fund net assets; and
 The statement of changes in fiduciary net assets.

8. Reporting Long-Term Liabilities

A clear distinction should be made between fund long-term liabilities and general
long-term liabilities. Long-term liabilities directly related to and expected to be paid
from proprietary funds should be reported in the proprietary fund statement of net
assets and in the government-wide statement of net assets. Long-term liabilities
directly related to and expected to be paid from fiduciary funds should be reported in
the statement of fiduciary net assets. All other unmatured general long-term liabilities
of a governmental unit should not be reported in governmental funds but should be
reported in the governmental activities column in the government-wide statement of
net assets.

9. Measurement Focus and Basis of Accounting in the Basic Financial

Statements
Measurement focus is concerned with what financial transactions and events will be
recognized in the accounting records and reported in the financial statements.

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 Measurement focus is concerned with the inflow and outflow of resources - what is
being measured. While there are a number of measurement focuses, the following
two are fundamental to current governmental accounting principles:
 Flow of economic resources - focus considers all of the assets available to the
governmental unit for the purpose of providing goods and services. Under
this focus, all assets and liabilities, both current and long-term, are recorded
within the fund and depreciation is recorded as a charge to operations.
 Flow of current financial resources - focus measures the extent to which
financial resources obtained during a period are sufficient to cover claims
incurred during that period. The emphasis of this focus is on cash and assets
that will convert into cash during the current or shortly after the current
period. Long-term capital assets and long-term obligations are not recorded
within a fund under this measurement focus.
Basis of accounting refers to when transactions and events will be recognized in the
accounting records and presented in the financial statements. Governmental accounting
transactions and events are recognized on either the accrual basis or the modified accrual
basis.
 Accrual basis - of accounting records revenues in the period in which they are
earned and become measurable; expenses are recorded in the period incurred,
if measurable. Or revenues are recorded in which the service is given,
although payment is received in prior or subsequent period, and expenses
should be recorded in the period in which the benefit is received, although
payment is made in a prior or subsequent period.
 Modified accrual basis - of accounting recognizes revenues in the period in
which they become available and measurable.
 Revenues are considered available when they will be collected either
during the current period or soon enough thereafter to pay liabilities of
the current period.
 Revenues are considered measurable when they are reasonably
estimable or capable of being expressed in monetary terms.

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 Expenditures are generally recognized when the fund liability is
incurred, if measurable.
GASB standard require the accrual of revenue from property taxes in the period
for which the taxes are levied. For other categories of nonexchange revenue
transactions, except when certain time requirements and eligibility requirements
have not been met, revenues should be accrued if both measurable and available.
In respect to expenditure recognition, the modified accrual basis is almost
identical to the accrual basis when only assets of a fund are financial resources.
Under generally accepted accounting principles, the measurement focus and basis of
accounting applied varies with fund type category.

a. Government-wide Financial Statements

The government-wide financial statement of net assets and statement of activities should
be prepared using the economic resource measurement focus and the accrual basis of
accounting. Revenues, expenses, gains, losses, assets, and liabilities resulting from the
exchange and exchange like transactions should be recognized when the exchange takes
place.

b. Fund Financial Statements

In fund financial statements, the modified accrual or accrual basis of accounting as
appropriate should be used in measuring financial position and operating results.
(1) Financial statements for governmental funds should be presented using the
current financial resources measurement focus and the modified accrual basis of
accounting. Revenues should be recognized in the accounting period in which
they become available and measurable. Expenditures should be recognized in the
accounting period in which fund liability is incurred, if measurable, except for
unmatured interest on general long-term liabilities, which should be recognized
when due.
(2) Proprietary fund statements of net assets and revenues, expenses, and changes in
fund assets should be presented using the economic resources measurement
focus and the accrual basis of accounting.

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 (3) Financial statements of fiduciary funds should be reported using the economic
resource measurement focus and the accrual basis of accounting except for
recognition of certain liabilities of defined benefit pension plans and certain
postemployemnt healthcare plans.
(4) Transfers between funds should be reported in the accounting period in which
the interfund receivable and payables arise.
10. Budgeting, Budgetary Control, and Budgetary Control
a. An annual budget(s) should be adopted by every governmental unit.
b. The accounting system should provide the basis for appropriate budgetary control.
c. Budgetary comparison schedules should be presented as required supplementary
information (RSI) for the general fund and each major special revenue fund that
has legally adopted annual budget. The budgetary comparison schedule should
present both
 The original
 The final appropriated budgets for the reporting period as well as
 Actual inflows, outflows, and balances stated on the governmental
budgetary basis.

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