Accounting for Government and Non-Profit Chapter 1

Primary Users of Government F/S for Government Type Activities

1. Citizens 2. Legislative and oversight bodies 3. Investors and creditors This groups is consider primary user only if have no access to internal information 4. Government administrators Uses of Financial Statements: 1. comparing actual results with the legally adopted budget. 2. assessing financial condition and results of operations. 3. assisting in the determining compliance with the finance-related laws rules and regulations. 4. Assisting in evaluating efficiency and effectiveness.

Objectives of G&NP Accounting and Financial Reporting

1. External users who generally cannot prescribe information they want from an organization. 2. Managers and governing bodies need a great deal of internal accounting information to carry out their responsibilities in planning and controlling activities. Financial Reporting- to provide useful information to present and potential resource provider and others in: 1. making rational decisions about allocation of resources to organizations. 2. Assessing the services that a non business organization provides and its ability to continue to provide those services. 3. Assessing how managers of a non-business organization have discharged stewardship responsibilities and other aspects.

Primary Users of Government F/S for Government Type Activities

1. Generally the same users and uses as governmental type activities, but may differ depending on whether the activity reports separately or as part of broader general government. 2. Business type activities differ only in emphasis from use of financial reports of governmental type activities. They are more concerned with financial condition and results of operations from activities. Not concerned with comparing to actual budget. 3. If business activity is or will continue to generate sufficient cash to meet debt service requirements. 4. Citizen may use information to see if charges are reasonable. 5. Legislative and overboard use to review reasonableness of cash flows and user charges. 6. All user groups be be concerned with the relationship between the financial position and operating results of business type and government as a whole. Particularly if activity is subsidized.

Governmental Type Activities - Reporting issues and Problems

1. Ned to demonstrate compliance with restrictions on the use of financial resources 2. need for appropriate budget reporting 3. The impact of restrictions on the use of financial resources on revenue recognition. 4. Difficulty measuring and reporting the efficiency and effectiveness of SLG in providing services 5. Opportunity to hide or disguise the use of availability of resources for various purposes ]. 6. Lack of comparability that can result between financial reports of two similarly designated governments that perform different functions. 7. tax and debt limits. 8. impact on materiality and reporting judgement caused by over expenditure of appropriations being a violence of law and failure to follow compliance requirements related to intergovernmental revenues and possibly requiring forfeiture of such revenues of loss of future revenues. Because of short terms of officials must; must be responsive to practices that permit budget to be balanced but that is not actually balanced. GASB Requires notes on these because of that: 1. current operations financed b non-recurring revenues or by long term debt. 2 Certain essential costs that have been deferred.

Organizational Objectives

1. Provide as much of a service or product each year as resources permit. 2. G&NP organizations operate on a year to year basis. Each year raise as resources as necessary and expend them all through out year. 3. May Seek to increase the amount or resources made available to them each year to provide more or better services not to increase wealth In summary, G & NP organizations seek to expend financial resources for the benefit of their constitutes.

Other Differences between G&NP organizations and Private Enterprise:

1. Services such as police, fire department or other protection agencies are a monopoly. thus no open market for objectively appraising or evaluating their value does not exist. 2. User charges typically based on cost of service provided rather than on a supply and demand system. 3. Charges for goods or services often cover only part of cost. (EX. School tuition generally covers only a fraction of the school operating cost. 4. Growth is limited by geographic boundaries. (Once resources or clients in area is maxed it cannot expend reach to other community)

Unique Traits of Government and Non-profit

1. They do not attempt to earn a profit 2. They are owned collectively by their constituents. 3. Resource provides do not receive product or service proportioned to contribution. 4. Major Policy decisions, and some operating, are usually made by elected or appointed governing body. 5. Decisions usually made in public open meetings and have open books to public.

Performance Evaluation and operating results:

All facets of G&NP organization's operations, especially of state and local governments, may be affected by legal or quasi-legal requirement: 1. imposed externally, such as by federal or state statute, grant regulations, or judicial decrees. 2. Imposed internally or by mutual agreement such as by charter, bylaw, ordinance, trust agreement, donor stipulation or contract. Aspects that may be regulated or otherwise controlled: 1. Organization Structure: form; Composition of governing board; Number and duties of personnel, line of power and responsibility, policies concerned with officials and employees are to be elected, appointed or hired. 2. Personnel Policies and procedures: Who will appoint or hire, tenure of personnel, termination policies and procedures. compensation levels, promotion policies and types and amounts of compensation increments. 3. Sources of financial resources: types and max amounts of taxes, license, fines or fees a government may place. procedure for setting user charges; tuition rates; debt limits; purposes for which debt is to be taken; how to seek donations. 4. uses of fincanical resources: purpose for which resources may be used. Including legal restrictions, of certain resources only for specific uses. Purchasing procedures; budget methods. forms or procedures. 5. Accounting any or all phases of the accounting system. 6. Financial reporting: Type and frequency of Financial reports; report formats and contents and report recipients 7. Auditing- Frequency of audit; who is to perform the audit; scope and type of audit; time and place for filing audit report; who receives and has access to audit report.

Fixed-Dollar Budget

Chief executive or department heads ask governing body for permission to incur a specified amount of expenditures (Salaries, equipment, supplies, Etc) during budget period to carry out mission.

Why do G&NP organizations exist?

Community or society decides to provide certain goods or services to its group as a whole. Provide these weather or not the cost to produce is met. Even if they could exist on private market, many believe products or services are so vital to community or society that government supervise for well being.

Compare and Contrast Private Enterprise Vs G&NP Accounting:

Compare: 1. Integral parts of same economic system and use financial, capital and human resources to reach purpose. 2. Acquire and convert scarce resources into products or services. 3. Have viable information systems. ( Example: Accounting systems to assure managers, governing body and organizations receive relevant and timely information for planning, directing, controlling, and evaluating the sources and uses of resources; decision making.) 4. Cost analysis and other control and evaluation techniques are essential to ensure resources are utilized economically, effectively and efficiently. 5. In some cases, both produce similar products. ( Transportation systems, Sanitation services and electric utilities. Contrast: 1. Organizations Objectives: 2. Sources of Financial Resources 3. Methods of Evaluation

FASB VS GASB

FASB deals with establishing accounting and financial reporting standards for all other organizations, including non governmental non profit. GASB deals with establishing accounting and Financial reporting standards for activities and transactions of state and local governments.

Financial Reporting Objectives

GASB has concluded that government financial reporting should provide information to assist users in (1) assessing accountability and (2)making economic, social, and political decisions. So SLG financial reporting should provide. 1. Means of demonstrating SLG accountability: Permit users to determine if current year revenues can pay for current year services or will future citizens be burdened with cost. Demonstrate budget accountability and compliance with legal and contract requirements Help users assess SLG service efforts, cost and accomplishments. 2. Information needed to evaluate the SLG operating results for the period. Including information: About sources and uses of financial resources. ON how SLG financed its activities and met its cash requirements. If SLG financial position has gone up or down this period. 3. Information needed to assess the level of SLG services and its ability to continue to finance activities and meet obligations, including: Information about the SLG Financial Position and Condition. Information about the SLG's physical and other non-financial resources having useful lives that extend beyond current year, including information to assess their service potential Disclosure of Legal and contract restriction on resources and risk of potential loss of resources.

Governmental Type Activities

Governmental Type activities- Fire and Police Protection, the courts, streets and traffic control, health and welfare, executive and legislative offices and other general activities. Business Type: Public Utilities ( Water and electricity) and other activities for which user fees are charged and that are operated similarly to private businesses.

Define State and Local Government

Governmental organizations include (1) public corporations and bodies corporate and politic and (2) other organizations that have one or more of the following traits: 1. Popular election of officers or appointment of a controlling majority of the members of the organizations governing body by officials of one or more state or local government. 2. The potential for unilateral dissolution by government with net assets reverting to a government. 3. The power to enact and enforce taxes 4. The ability to issue directly debt that pays interest exempt from federal taxation

Major Types of Government and Non-Profit

Governmental: Federal, State, County, Municipal, Township, village and other local government. Educational: Kindergartens, elementary and secondary schools; Vocational and technical schools; college Health and Welfare: Hospitals, nursing homes, child protection agencies, the American Red Cross and etc.. Religious: YMCA, YWCA, Salvation Army and other church related organizations Charitable: United Way, Community Chest, and similar fund-raising agencies; related charitable agencies and etc. Foundations: Private Trusts and corporations organized for educational, religious or charitable purposes

GASB Levels of Authoritative Pronouncements

Level A: GASB Statements of Governmental accounting standards and Interpretations. Level B: GASB Technical Bulletins and implementation guides, comprehensive implementation guide, AICPA Industry Audit and Accounting guides and AICPA Statements of Position. Then guidance still not available in Levels A and B then may use non-authoritative: GASB Concepts statements, GASB pronouncements, AICPA literature nit in Level B, Predominant practices in industry, literature of other professional associations, accounting textbooks and handbook and articles.

Sources of Financial Resources

No distinction is generally made between Invested capital and net income. Sources of Financial Resources: 1. Government Taxation- Forced involuntary financial resource contribution through taxation on property, sales and income. Grants and shared revenues from other governments are also important state and local government revenue sources. 2. Religious groups and charity organizations- donations 3. Colleges and universities- Donations, income from trust funds, state appropriations, federal and state grants, and/or tuition and fees. 4. Hospitals- charge their clientele, although many do not admit based on patient ability to pay. Gifts, federal and state grants and bequests.

Recent Growth in G&NP

Now accounts for more than 1/3 of all expenditures in the US Economy

Challenges for Evaluation of Performance and Operating Results:

Profitable of a product or service does not decide if product or service will be continued or dis continued and evaluation is difficult because: 1. No open market or supply and demand system to place value of product or service. 2. The relationship, if any, between resource contributors and the recipients of the services is remote and indirect. 3. Not profit Focused and thus profit measures do not apply. 4. Governments an force financial resource contributions through funding so organization will at least continue to exist because they will receive these funds yearly and not expected to make profit. Thus G&NP Organizations follow more stringent legal, regulatory and other controls than private businesses.

Business Type Activities

Provide same types of services as private sector businesses. Involves exchange relationship- Customer is charged based according to product of service used or received Often separate legally constituted, self sufficient organizations, although some resemble governmental activities because receive subsidiary income from SLG or are operated as departments of SLG.

Governmental Type Activities

Sources of Resources: 1. Taxation 2. Intergovernmental revenues - Grants and subsidies from higher level governments . Financial Resource Allocation Mechanism: 1. Restrictions on Resource use- Restrictions placed on resource by resource providers or their representatives (EX: Intergovernmental grantors requiring resources provided be used for particular reason. Taxes being levied for specific purpose. The Budget process: The amount and uses of financial resources that governments are upheld to and is created yearly. 1. Executive branch prepares a proposed budget and submits to legislative branch 2. The Legislative branch has the power to approve those requests, thus executive must pretty a budget that will pass and make appropriations within limits of appropriations 3. The Executive Branch is accountable to the legislative branch for operating withing those appropriations and laws and both branches are accountable to the public. This process both Authorizes amounts and purpose resources can be used for and Limits the amount that can be used. Accountability: To whom accountable- 1. SLG-Public: Public empowers governments and elect officials and voting may be based on fiscal and budgetary performance, as well as seen efficiency and effectiveness government is operated. 2. SLG and other governments: Senior level government have power or regulation over lower governments. Or provide grands and intergovernmental subs. 3. SLG's own legislative and executives bodies- Demonstrating the fund restrictions and budget contract. Fiscal Accountability: 1. Use resources with accordance with restrictions of use 2. Compliance with fund and budget restrictions. Operational Accountability: 1. Measure of cost to provide services 2. Assessment of whether government raises revenues each period to cover cost of providing services 3. assessment of whether service or product provided were economical and efficient

Governmental (Expendable) Funds

To account for financial assets, related liabilities, changes in net assets and balances that may be expended in its non business type activities.

Proprietary (Non-expendable) Funds

To account for the revenues, expenses, assets, liabilities, and net position of its business-type activities.

Authoritative sources of G&NP:

Unique principles and standards evolved separately for each of the major types of G&NP organizations: 1. The National Council on Governmental Accounting (NCGA) 2. The American Hospital Association and the Healthcare Financial Management association 3. The American Council on Education and the National Association of College and University Business officers 4. Committees of t he American Institute of Certified Public Accountants (AICPA) 5.Federal Accounting Standards Advisory Board (FASAB) In addition, each G&NP field has its own Journals, newsletter, and professional societies. Both FASB and GASB have overseen FAF.

Exchange Relationship

User Fee is charged for a specific service provided. ( Ex. Toll Roads, A charge for water, bus fare)

Financial Management in G&NP?

Usually focuses on acquiring and using financial resources on sources and uses of expendable financial resources, budget status and cash flow- rather than net income.

Appropriations

when fixed dollar budget is approved and gives both authorization and limits amounts that an be expended for specified purpose. Controls: which fund and purpose of expenditure max amount period