Accounting For Governmental & Nonprofit Entities: of Mcgraw Hill

JACQUELINE L.
RECK
SUZANNE L. LOWENSOHN
Accounting for DANIEL G. NEELY
Governmental &
Nonprofit Entities
19/e
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent
1-1
of McGraw Hill.
Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
C
H
A
P
Introduction to Accounting T
and Financial Reporting for E
Government and Not-for-
R
Profit Entities
1
1-2
Learning Objectives
(1 of 2)
1-1 Identify and explain the characteristics that

distinguish government and not-for-profit entities
from for-profit entities.
1-2 Identify the authoritative bodies responsible for
setting financial reporting standards for
(1) state and local governments, (2) the federal
government, and (3) not-for-profit organizations.
1-3 Contrast and compare the objectives of financial
reporting for (1) state and local governments, (2)
the federal government, (3) and not-for-profit
organizations.
1-3
Learning Objectives
(2 of 2)
1-4 Explain the minimum requirements for general

purpose external financial reporting for state and
local governments and how they relate to
comprehensive annual financial reports.
1-5 Identify and describe the required financial
statements for the federal government.
1-6 Identify and describe the required financial
statements for not-for-profit organizations.
1-4
Government & Not-for-Profit Accounting
Practices Differ from Business
They have Management has

different purposes a special duty to
in society. be accountable for
how resources are
used in providing
services.
They are financed by

resource providers who
do not expect benefits
proportional to the
resources they provide.
1-5
Types of Governments
• Federal government, state

General purpose governments, cities,
governments towns, townships, villages,
provide a broad counties, boroughs, and
array of services. parishes
Special purpose • Independent school

governments systems, public colleges
usually provide and universities, public
only a single or hospitals, fire protection
just a few districts, and many others
services.
1-6
Not-for-Profit Organizations
Not-for-profit organizations are legally separate

organizations which are usually exempt from federal,
state, and local taxation.
1-7
Characteristics of Government and
Unlike for-profit organizations, resource

providers do not expect to receive repayment
or proportional benefits.
The organization lacks a profit motive.
There is an absence of transferable ownership

rights.
1-8
Characteristics of Government
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.
The organization has the power to tax.
1-9
Sources of Financial Reporting
Standards
Nongovernmental not-for-profits •
FASB Business organizations •
Governmental not-for-profits •
GASB organizations
State and local government •
and departments
FASAB Federal government and its agencies •
1-10
Objectives of Financial Reporting
(1 of 2)
“Accountability is the cornerstone of all financial

reporting in government.” –GASB, Concepts
Statement No. 1.
Accountability requires governments to justify the

raising and use of public resources, such as
taxes.
1-11
Objectives of Financial Reporting
(2 of 2)
Interperiod equity is a government’s obligation to

disclose whether current-year revenues were
sufficient to pay for current-year benefits—or will
future taxpayers be required to pay for them
instead?
1-12
Objectives of Financial Reporting for
State and Local Governments
Government financial reports are used

primarily by those outside government to:
Compare Assist in
Assist in
actual Assess determining
evaluating
financial financial compliance
efficiency
results with condition and with finance-
and
the legally results of related laws,
effectiveness
adopted operations. rules, and
.
budget. regulations.
1-13
the Federal Government
Federal government financial reporting should

assist internal and external report users in
evaluating:
Adequacy of
Budgetary Operating
Stewardship. systems and
integrity. performance.
controls.
1-14
Not-for-Profit (NFP) Organizations
NFP financial reporting should provide

external users with information useful in:
Assessing
Assessing Assessing economic
Making
services and management resources,
resource
the ability to stewardship obligations,
allocation
provide and net resources,
decisions.
services. performance. and changes
in them.
1-15
Minimum Requirements for General Purpose
External Government 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)
1-16
Government Financial Statements
There are two categories of basic government

financial statements:
Government-wide financial statements, which

provide an aggregated overview of a government’s
net position and changes in net position.
Fund financial statements, which provide more

detailed financial information about a government.
1-17
Government-wide Financial
Statements
• Assist in assessing operational accountability—

whether a government has used its resources
efficiently and effectively in meeting service
objectives.
• Focus on flow of economic resources.
• Use the accrual basis of accounting, like

business organizations.
1-18
Fund Financial Statements
(1 of 3)
For now, think of a fund as a separate set of

accounts used to keep track of resources set apart
for a particular purpose—there is more detail on
funds in Chapter 2.
1-19
(2 of 3)
• Assist in assessing fiscal accountability—whether the

government raised and spent financial resources in
accordance with budgetary, legal, and regulatory
constraints.
• Focus on short-term flow of current financial
resources.
• Use the modified accrual basis—revenues are
recognized when measurable and available for
spending; expenditures are recognized when an
obligation is incurred that will be paid from currently
available financial resources.
1-20
(3 of 3)
Other fund categories (see Chapter 2):

• Proprietary funds report on business-like
activities of the government.
• Fiduciary funds report on fiduciary (trust and
agency) activities of the government.
• Both categories follow accounting principles
similar to businesses.
1-21
Comprehensive Annual Financial
Report (CAFR)
A Comprehensive Annual Financial Report

(CAFR) provides more detail than the minimum
requirements for general purpose financial
reporting.
While not required to prepare a CAFR, most

governments do so.
A CAFR is prepared in conformity with GASB

standards.
1-22
CAFR Sections
A CAFR prepared according to GASB standards

should contain three sections:
Introductory Section
Financial Section
Statistical Section
1-23
CAFR—Introductory Section
Title page
Contents page
Letter of transmittal
Other (as desired by management)
1-24
CAFR—Financial Section
The financial section should contain sufficient

information to disclose fully and present fairly the
financial position and results of financial operations
during the fiscal year. Items included in the financial
section are:
 Auditor’s report.
 Management’s discussion and analysis (MD&A).
 Basic financial statements (and related notes).
 Required supplementary information (RSI; other than
MD&A).
 Other supplementary information, such as combining
statements and individual fund statements and schedules.
1-25
CAFR—Statistical Section
The statistical section typically presents tables and

charts showing:
• Demographic and economic data,
• Financial trends,
• Fiscal capacity, and
• Operating information of the government.
Information should be provided in the detail needed
by readers who are more than casually interested in
the activities of the government.
1-26
Overview of Federal Government
Financial Reporting
Federal financial reporting occurs at two levels:
U.S. government-wide – prepared by U.S. Treasury
Major agencies and departments – prepared by

major agencies and departments following
requirements established in the Office of
Management and Budget’s (OMB) Circular A-136
1-27
U.S. Government-wide Financial
Reporting
Despite the enormous dollar amounts involved,

the U.S. Comptroller General has never been
able to issue an audit opinion on the federal
government’s consolidated financial statements.
In general, serious financial management and

data deficiencies are cited for the Comptroller
General’s continuing disclaimer of opinion.
1-28
U.S. Government-wide Consolidated
Report
The consolidated report includes:

A “plain language” Citizen’s Guide
Management’s Discussion and Analysis (MD&A)
Performance information
Several financial statements (see Chapter 17)
Supplemental information reporting on both budgetary

and proprietary (operating) financial activities, as well as
reconciliation of the two activities
1-29
Federal Agency and Department
Financial Reporting
Major federal agencies and departments must

prepare a performance and accountability report
(PAR) that includes an annual performance report
(APR), annual financial statements, and a variety of
management reports on internal control and other
accountability issues.
1-30
Performance and Accountability Report
(PAR) (1 of 2)
The PAR should include four sections:

1. An MD&A, providing an overview of PAR and
a clear description of the department or
agency’s mission.
2. Performance section containing the APR,

which provides information about the agency’s
performance and progress in achieving its
performance goals.
1-31
Performance and Accountability Report
(PAR) (2 of 2)
3. Basic financial statements: balance sheet,

statement of net cost, statement of changes in
net position, statement of budgetary resources,
statement of custodial activity, and statement
of social insurance.
4. Other accompanying information such as

information about tax burden, tax gap,
challenges facing management, and revenue
forgone.
1-32
Financial Reporting (1 of 3)
The primary purpose of NFP financial statements is to

provide decision-useful financial information to resource
providers, such as donors, members, and creditors.
Resource providers need information to assess:

 The services provided by an NFP.
 The ability of the NFP to continue to provide those
services.
 Management’s performance and stewardship of
resources.
1-33
NFP organizations that are nongovernmental in

nature follow FASB accounting and financial reporting
standards. FASB standards require presentation of a:
Statement of Statement of
Statement of
financial position activities (income
cash flows.
(balance sheet). statement).
1-34
In addition to the three statements, NFPs are

required to present information showing the
relationship between functional expenses and natural
expenses.
This information can be presented as one of the
following:
• Part of the statement of activities.
• A schedule in the notes to the financial statements.
• A separate financial statement.
1-35
Reporting Requirements Unique to
• Demonstrating accountability for donor-imposed

restrictions by reporting net assets and changes in
net assets in one of two categories: (1) net assets
without donor restrictions or (2) net assets with
donor restrictions.
• Reporting program service expenses separately
from supporting service expenses. Supporting
services include management and general
expenses, and fund-raising expenses.
1-36
Expanding the Scope of Accountability
Reporting
• Increased use of technology reporting (e.g., XBRL,

Open Government).
• Popular Reports – highly condensed and
unaudited.
• Service Efforts and Accomplishments (SEA) –
include both financial and nonfinancial measures of
service efforts and service accomplishments.
1-37
1-38
• Focus on not-for-profit organizations
13 - 17
and federal government accounting
and reporting.
Chapters
• Describe ways that public financial
10 - 12
managers provide accountability
over funds entrusted to them.
Chapters
• Discuss in detail GASB principles, 2-9
standards, and financial reporting,
focusing on state and local Chapters
governments.
Looking Ahead
A Quote from the Original Author
“Even when developed to the ultimate

stage of perfection, governmental
accounting cannot become a guaranty of
good government. At best, it can never be
more than a valuable tool for promotion of
sound financial management.”
Professor R. M. Mikesell, 1951
1-39

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JACQUELINE L.

1-1 Identify and explain the characteristics that

1-4 Explain the minimum requirements for general

They have Management has

They are financed by

• Federal government, state

Special purpose • Independent school

Not-for-profit organizations are legally separate

Unlike for-profit organizations, resource

The organization lacks a profit motive.

There is an absence of transferable ownership

Power ultimately rests in the hands of the

The organization has the power to tax.

“Accountability is the cornerstone of all financial

Accountability requires governments to justify the

Interperiod equity is a government’s obligation to

Government financial reports are used

Federal government financial reporting should

NFP financial reporting should provide

Management’s discussion and analysis

Government-wide Fund financial

Notes to the financial statements

Required supplementary information

There are two categories of basic government

Government-wide financial statements, which

Fund financial statements, which provide more

• Assist in assessing operational accountability—

• Focus on flow of economic resources.

• Use the accrual basis of accounting, like

For now, think of a fund as a separate set of

• Assist in assessing fiscal accountability—whether the

Other fund categories (see Chapter 2):

A Comprehensive Annual Financial Report

While not required to prepare a CAFR, most

A CAFR is prepared in conformity with GASB

A CAFR prepared according to GASB standards

Other (as desired by management)

The financial section should contain sufficient

The statistical section typically presents tables and

Federal financial reporting occurs at two levels:

U.S. government-wide – prepared by U.S. Treasury

Major agencies and departments – prepared by

Despite the enormous dollar amounts involved,

In general, serious financial management and

The consolidated report includes:

Management’s Discussion and Analysis (MD&A)

Several financial statements (see Chapter 17)

Supplemental information reporting on both budgetary

Major federal agencies and departments must

The PAR should include four sections:

2. Performance section containing the APR,

3. Basic financial statements: balance sheet,

4. Other accompanying information such as

The primary purpose of NFP financial statements is to

Resource providers need information to assess:

NFP organizations that are nongovernmental in

In addition to the three statements, NFPs are

• Demonstrating accountability for donor-imposed

• Increased use of technology reporting (e.g., XBRL,

“Even when developed to the ultimate

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