Environment and Characteristics

Chapter 1

Welcome
Contrary to what you may have heard, governmental and nonprofit accounting is not a whole new ball game However, it is a game played by slightly different rules The purpose of this chapter is to lay the groundwork for those rules The rest of the chapters will examine those rules more closely
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Learning Objectives
Unique characteristics Major types of G&NP organizations Similarities and differences between profitseeking and G&NP organizations Characteristics, concepts, and objectives of GNP accounting and financial reporting Users and uses of financial information Determining what GAAP to apply GAAP hierarchy
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Characteristics of G&NP Organizations

Absence of profit motive Owned by constituentsno stock Contributors of resources do not receive proportional share of benefits Decisions madedirectly or indirectlyby voters Meetings where decisions are made usually open to the public
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Types of G&NP Organizations

Governments: Federal, state, county, city, township, village, and special districts Education: kindergartens, elementary and secondary schools, vocational and technical schools, and colleges and universities Health and welfare: hospitals, nursing homes, American Red Cross, and United Service Organizations (USO) Religious: YMCA, YWCA, Salvation Army, and churchrelated organizations Charities: United Way, Community Chest, and other fund-raising organizations Foundations: Private trust organized for religious, educational, or charitable purposes
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Similarities to the Private Sector

Operate in the same economy and compete for same resources: financial, capital, and human Acquire and convert scarce resources into goods and services Use of accounting and other information systems Need to operate economically, effectively, and efficiently Provide goods and services, many of which may be similar
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Differences from the Private Sector

Organizational objectives Sources of financial resources Methods of evaluating performance and operating results

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Organizational Objectives
Businesses Operating Motive: maximize income from revenues and other resources Operational Focus: report quarterly but look to the long-term as well G&NPs Operating Motive: maximize services provided from revenues and other resources Operational Focus: operate on annual budget, so current year is of primary importance
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Sources of Financial Resources

Businesses raise resources from sales or from capital stock and debt transactions must account for different sources separately Governments raise resources from sales or debt transactionstypically no distinction made in sources

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Unique G&NP Sources

Involuntary contributionstaxes! Donations Appropriations and grants from other governmental entities

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Evaluating Performance and Operating Results

In business, continuing a product or service determined by success in marketplace In G&NP organizations:
Profit not a motive and frequently cannot be measured Services not found elsewhere so there is no competition Face rules and regulations not found in private sector
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Special Regulations and Controls Applied to Governments

Organization structureform; board composition; number & duties of personnel Personnel policies and procedureswho has power to appoint or hire personnel; tenure; termination policies; promotion policies Sources of financial resourcestypes and amounts of taxes, licenses, fines or fees; procedure for setting user charges
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Special Regulations (continued)

Use of financial resourcespurposes, including legal restrictions; purchasing procedures; budgeting methods Accounting Financial reportingtype and frequency of reports; format; recipients Auditingfrequency; who performs; scope and type; time and place; who receives report
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Development of GAAP
Private Sector Committee on Accounting Procedure 1934 Public Sector National Committee on Municipal Accounting

1951 Accounting Principles Board

National Committee on Governmental Accounting 1959

FASB 1975 1984

1973

National Council on Governmental Accounting

GASB
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Other Organizations That Assisted in G&NP GAAP Development

Municipal Finance Officers Association (MFOA) / Government Finance Officers Association (GFOA) American Institute of CPAs (AICPA) and Auditing Standards Board (ASB) National Association of State Auditors, Controllers, and Treasurers (NASACT) National Association of College and University Business Officers (NACUBO) American Hospital Association (AHA) and Healthcare Financial Management Association (HFMA)
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Defining a Government
Overall characteristics: Public corporationsan instrumentality of the state, founded and owned in the public interest, supported by public funds, and governed by those deriving their authority from the state Bodies corporate and political

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Other Characteristics of a Government

Popular election of officers or appointment (or approval) of a controlling majority of members of governing body by one or more SLGs Potential for unilateral dissolution by a government with net assets reverting to government Power to enact and enforce a tax levy Ability to issue tax exempt debt
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Financial Reporting Standards-Setting Structure

Financial Accounting Foundation (FAF)

Financial Accounting Standards Advisory Council (FASAC)

Financial Accounting Standards Board (FASB)

Governmetntal Accounting Standards Board (GASB)

Governmental Accounting Standards Advisory Council (GASAC)

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SLG GAAP Hierarchy

A. GASB Statements and Interpretations, which

are periodically incorporated into the Codification B. GASB Technical Bulletins and AICPA Audit Guides and SOPs if made applicable to SLGs and cleared by GASB C. AICPA Practice Bulletins if made applicable to SLGs and cleared by GASB, and positions of GASB EITF (does not currently exist) D. GASB staff Implementation Guides (Q&As) and widely accepted practice
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Other Accounting Literature

Nonauthoritative

GASB Concepts Statements FASB Concepts Statements FASAB Statements, Interpretations, TBs, and Concepts Statements AICPA Issues Papers IPSASB Standards or IFRS Accounting textbooks, handbooks, and articles
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Typical Activities of a SLG

Governmental activitiesunique to SLGs
Police and fire protection Education Social Services Courts

Business-type activitiessimilar to private sector operations

Utilities Golf Courses Airports
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Purpose of Governmental Activities

Provide goods and services that all constituents need regardless of ability to pay for goods and services

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Sources of Financial Resources

(not found in private sector)

Taxes: property taxes, sales taxes, and income taxes Intergovernmental revenues: from other governments Licenses and permits Fines and forfeitures Debt proceeds (typically not used for operations)
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Resource Allocation Mechanisms

Restrictions placed by providers: typical of grantors, taxes for specific purposes, and debt proceeds Budgetallocates resources to functions Holding public officials accountable for actions

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Reporting Issues and Problems

Demonstrate compliance with restrictions on use of financial resources Budgetary reporting Impact of restrictions on revenue recognition Difficulty in measuring effectiveness and efficiency of operations Opportunity to hide or disguise availability of resources Lack of comparability between financial reports Tax and debt limits Impact of materiality of reporting certain actions
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Financial Report Users

The citizenry Legislative and oversight bodies Investors and creditors

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Financial Report Uses

Comparing results with legally adopted budgets Assessing financial condition and results of operations Assisting in determining compliance with finance-related laws, rules and regulations Assisting in evaluating efficiency and effectiveness
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Purposes of Business-Type Activities

Provide same types of services as found in private sector Charge fee for services received Separate, self-sufficient operations

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Issues in Business-Type Activities

Relationship between services received and resources provided by consumer Revenue-producing capital assets Similarly designated activities Nature of political process Budgets and fund accounting

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Financial Reporting Objectives of Business-Type Activities

Enable users to assess accountability Provide information about operating results for the period Provide information to assess level of services provided

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Characteristics of SLG Accounting and Reporting

Use of fund accounting Budgets and appropriations

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