chapter 01 environment and characteristics

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Environment and

Characteristics

Chapter 1


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Welcome

Contrary to what you may have heard,governmental and nonprofit accounting isnot a whole new ball game

However, it is a game played by slightlydifferent rules

The purpose of this chapter is to lay the

groundwork for those rulesThe rest of the chapters will examinethose rules more closely

2013 Pearson Education, Inc. All rights reserved. 2


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Learning Objectives

Unique characteristics

Major types of G&NP organizations

Similarities and differences between profit-

seeking and G&NP organizations

Characteristics, concepts, and objectives of

GNP accounting and financial reporting

Users and uses of financial informationDetermining 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 receiveproportional share of benefits

Decisions madedirectly or indirectlybyvoters

Meetings where decisions are madeusually 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 secondaryschools, vocational and technical schools, and collegesand universities

Health and welfare: hospitals, nursing homes, AmericanRed Cross, and United Service Organizations (USO)

Religious: YMCA, YWCA, Salvation Army, and church-related organizations

Charities: United Way, Community Chest, and otherfund-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 forsame resources: financial, capital, and human

Acquire and convert scarce resources into

goods and servicesUse of accounting and other informationsystems

Need to operate economically, effectively, and

efficientlyProvide goods and services, many of which maybe similar



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Differences from the Private Sector

Organizational objectives

Sources of financial resources

Methods of evaluating performance andoperating results



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Organizational Objectives

Businesses

Operating Motive:maximize income

from revenues andother resources

Operational Focus:

report quarterly butlook to the long-termas well

G&NPs

Operating Motive:maximize services

provided fromrevenues and otherresources

Operational Focus:

operate on annualbudget, so currentyear is of primaryimportance



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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 othergovernmental entities



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Evaluating Performance and

Operating Results

In business, continuing a product orservice determined by success inmarketplace

In G&NP organizations: Profit not a motive and frequently cannot be

measured

Services not found elsewhere so there is nocompetition

Face rules and regulations not found inprivate 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 2013 Pearson Education, Inc. All rights reserved. 13


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Development of GAAP

Committee onAccounting

Procedure

Accounting PrinciplesBoard

FASB

National Committeeon MunicipalAccounting

National Council onGovernmentalAccounting

GASB

1934

National Committee onGovernmental Accounting

1951

1959

19731975

1984

Private Sector Public Sector



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Other Organizations That Assisted

in G&NP GAAP DevelopmentMunicipal 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) andHealthcare 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 GovernmentPopular election of officers or appointment(or approval) of a controlling majority ofmembers of governing body by one or

more SLGsPotential for unilateral dissolution by agovernment with net assets reverting togovernment

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 Board

(FASB)

FinancialAccounting

Standards AdvisoryCouncil

(FASAC)

Governmetntal

Accounting

Standards Board

(GASB)

GovernmentalAccounting

Standards AdvisoryCouncil

(GASAC)



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SLG GAAP Hierarchy

A. GASB Statements and Interpretations, whichare periodically incorporated into theCodification

B. GASB Technical Bulletins and AICPA AuditGuides and SOPs if made applicable to SLGsand cleared by GASB

C. AICPA Practice Bulletins if made applicable to

SLGs and cleared by GASB, and positions ofGASB EITF (does not currently exist)

D. GASB staff Implementation Guides (Q&As) andwidely accepted practice



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Other Accounting LiteratureNonauthoritative

GASB Concepts Statements

FASB Concepts Statements

FASAB Statements, Interpretations, TBs,and Concepts Statements

AICPA Issues Papers

IPSASB Standards or IFRSAccounting 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 notused 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 offinancial resources

Budgetary reporting

Impact of restrictions on revenue recognition

Difficulty in measuring effectiveness and efficiencyof operations

Opportunity to hide or disguise availability ofresources

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


chapter 01 environment and characteristics

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