Introduction to Governmental and

Not-for-Profit Accounting, 7e
Chapter 1: Governmental and
Not-for-Profit Accounting Environment
and Characteristics

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Chapter 1 Objectives

G & NFP* Organizations

The Operating Environment
Users and Uses
Objectives of Financial Reporting
Distinctive Accounting and Financial
Reporting Characteristics
Accounting Principles and Standards
* Governmental and Not-for-Profit
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Size of Government Sector

Government expenditures account for
20% of GDP
$2.9 trillion in 2009
If include payments to individuals (Social
Security, etc.)
State and local government expenditures > $2
trillion in 2008
Federal government expenditures almost $3 trillion
in 2008
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What is a Governmental Entity?

Federal Government
General-Purpose Political Subdivisions
States, counties, cities, towns

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What is a Governmental Entity?

Special-Purpose Political Subdivisions
School districts

Public Corporations and Bodies

Toll roads, toll bridges

Other Statutorily-Created Entities

If they possess governmental characteristics
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What is a Governmental Entity?

Elected officers OR
controlling majority appointed or approved
May create and enforce a tax

OR

May issue tax-exempt debt

Government may dissolve, assume balance sheet
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What is a Not-for-Profit?
Receives contributions without expectation
of return
Purpose other than profit
Ownership interests different than
business enterprises
No stock or dividend transactions

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Governmental and NFP

Environment: Purpose
Business

To increase wealth of
owners

Reporting needs: Income, sources of income

G & NFP

To provide services

With a reasonable surplus

Reporting needs: Inflows v. outflows,
accountability
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Governmental and NFP

Environment: Sources of Revenue
Business:
Voluntary exchanges between buyers, sellers

Governments:
Involuntary taxes
For individual taxpayers, no direct relation
between taxes paid and services provided

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Governmental and NFP

Environment: Sources of Revenue
NFPs:
Voluntary donations often significant
Donors expect no pecuniary return

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Governmental and NFP Environment:

Relationship with Stakeholders
Businesses:
Dissatisfied investors/customers may
discontinue investing/purchasing

CONVERSELY . . .
Governmental:
Dissatisfied taxpayers must continue to pay
May not be able to relocate
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Governmental and NFP Environment:

Relationship with Stakeholders
NFPs:
Donors may not see the results

THEREFORE,
Accountability reporting particularly
important for G & NFPs

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Governmental and NFP

Environment: Longevity
Business:
Risk of going out of business
Risk of being bought out

NFP: Similar risks

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Governmental and NFP

Environment: Longevity
Governmental:
Rarely go out of business
Not bought and sold

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Governmental and NFP Environment:

Legal Requirements & Role of Budget
Business:
May exit a market and cease providing goods
and services, if unprofitable
Simple budgeting process, not legally binding

NFPs:
Legally bound to donor restrictions

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Governmental and NFP Environment:

Legal Requirements & Role of Budget
Governmental
Required by laws to provide services
Budgets are legally binding
Additional spending requires approval
Use of resources highly restricted

G & NFP accounting: Focus on legal

compliance with laws and donor
restrictions
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Users and Uses of Accounting

Information
Internal users (managers)
Can specify kind of information needed from
accounting system

External users
Not directly involved in operations of entity

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Accounting Standard Setters

Governmental Accounting Standards
Board (GASB)
State and local governments

Federal Accounting Standards Advisory

Board (FASAB)
Federal government

Financial Accounting Standards Board

(FASB)
Not-for-profit entities
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Objectives of Financial Reporting

Concepts Statements:
Issued by all 3 standard setters
Not standards that must be followed
Explains how they develop standards

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Objectives of Financial Reporting

GASBs State/Local Reporting Objectives:
Help assess governments duty of
accountability
Whether revenues pay for services
Were resources obtained/used according to
budget
Measure of service efforts, costs,
accomplishments
Ability to meet obligations
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Objectives of Financial Reporting

Federal Government Financial Reporting
Evaluate service efforts, costs,
accomplishments
Evaluate management of assets and liabilities
Help assess effect on the nation of the
governments operations
Understand whether financial management
systems, internal accounting and
administrative controls are adequate
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Objectives of Financial Reporting

FASBs Not-for Profit Reporting
Assess services provided by entity and its
ability to continue to provide them
Assess how an entitys managers discharged
their stewardship responsibilities
Assess an entitys performanceincluding
service efforts and accomplishments

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Distinctive Reporting
Characteristics: Fund Accounting
Resources are divided into separate funds
Help ensure resources spent as intended
Set of self-balancing accounts
(Like: Assets = Liabilities + Equity)
Entities usually maintain a
general/unrestricted fund for any purpose
Facilitates reporting restricted resources
by state and local governments (SLGs)
Not required for NFPs
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Distinctive Reporting
Characteristics: Basis of Accounting
Basis of accounting = timing of recognition
Businesses/NFPs/Federal use accrual
basis
Accrual:
Recognize revenues when earned
Expenses when incurred
Regardless of when cash received or paid

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Distinctive Reporting
Characteristics: Basis of Accounting
State/local: Modified accrual basis of
accounting
Hybrid-type basis of accounting
Inflows/outflows of current financial resources
only

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Distinctive Reporting
Characteristics
Incorporation of budgets into accounting
system
Government-wide and fund-level reporting
Fund-level reporting
Government-wide reporting
Distinguishes only governmental and businesstype activities
Accrual basis

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Accounting Principles and

Standards

GAAP: The standards

Business and NFP standard setter: FASB
State/local standard setter: GASB
Federal standard setter: FASAB
Lacking standards? Hierarchy of
accounting principles

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GASB GAAP Hierarchy

Level 1
GASB Statements and Interpretations

Level 2
GASB Technical Bulletins
AICPA Industry Audit Guides and Statements
of Position
Only if made specifically applicable to SLGs by
AICPA and GASB

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GAAP Hierarchy
Level 3
AICPA Practice Bulletins
If specifically made applicable to SLGs by
GASB

Consensus positions of a group of

accountants organized by GASB

Level 4
Implementation Guides
Widely-recognized and prevalent practices
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