NFP Acctg. Concepts - 1 NOT-for-PROFIT ACCOUNTING Basic Concepts.

NFP Acctg. Concepts - 1

NOT-for-PROFIT ACCOUNTINGBasic Concepts


NOT-FOR-PROFITACCOUNTING

Governmental units (state & local) Colleges and Universities Hospitals Voluntary Health and Welfare Organizations Others

– Trade & Professional associations– Performing arts associations– Religious organizations – Museums and art districts– Research & Scientific organizations


Why study NFP Accounting?

Emphasis on CPA Exam May audit an NFP Entity Employment by NFP Entity Voluntary service to an NFP Entity


Importance of Governmental Accounting

Absence of profit removes an important internal control Allocation of limited resources to unlimited needs

creates public debate Focus on methods used to generate financial sources

and the uses made of those funds Need to keep public informed (Stewardship) Massive

– Federal government– 50 State governments– Thousands of local governmental units

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1. Governmental entities collect resources and make expenditures to fulfill societal needs.

2. Generally, governmental entities do not have a profit motive.

3. Government entities have legal authority for their existence, revenue raising powers through taxation, and mandated expenditures to provide services.

ContinuedContinuedContinuedContinued

GOVERNMENTAL VS.

FOR-PROFIT ENTITIES


4. Governmental entities use comprehensive budgetary accounting and fund accounting (significant control mechanisms).

5. Primary emphasis in governmental accounting is to measure and report on management’s stewardship.

6. Governmental entities typically are required to establish separate funds to carry out their various missions.

7. Many fund entities do not record fixed assets or long-term debt in their funds.

GOVERNMENTAL VS.

FOR-PROFIT ENTITIES


GOVERNMENT ACCOUNTING STANDARDS

Municipal Finance Officers Association (1951)– National Committee on Governmental Accounting

• (1968) “Governmental Accounting, Auditing, and Financial Reporting,” GAAFR

• Periodic updates - latest in 1994

AICPA– (1974) Industry Audit Guide - “Audits of State and Local Government

Units”– (1979) National Council on Governmental Accounting (NCGA) -

Statement No. 1– (1986) Audit and Accounting Guide - “Audits of State and Local

Government Units”

GASB (1984)– Created by FASB– Responsible for maintaining and developing accounting and reporting

standards for state and local governmental entities – Issues GASB Statements which are authoritative source of GAAP


FINANCIAL REPORTING BY GOVERNMENT ENTITIES

Definition of government entity (GASB No. 14 - 1991)– Appoints majority of organization’s

governing body– Ability to impose its will on an

organization– Posseses financial benefit or assumes

financial burden from organization


FINANCIAL REPORTING BY GOVERNMENT ENTITIES

(GASB NO. 34 1999-2003)

MD&A Basic financial statements

– Government-wide financial statements– Fund financial statements– Notes to financial statements

Other supplementary information


GOVERNMENT-WIDE

FINANCIAL STATEMENTS

GOVERNMENT-WIDE

FINANCIAL STATEMENTS

1) Statement of Net Assets2) Statement of Activities3) Reconciliation Schedules4) Budgetary Comparison Schedules5) Other Required Supplementary

Information (RSI)a) Management’s Discussion and Analysis

(MDA)b) Information about Infrastructure Assets c) Footnotes


FUND ACCOUNTING CONCEPTS

Fund = “A fiscal and accounting entity with a self-balancing set of accounts”

Unique nature of operations

Legal requirements or limitations

Distinct funding sources and/or activities or objectives

Emphasis on financial controls

Records cash and other resources, related liabilities, and residual balances


Fund-Based Financial Statements Seek to Answer

Three Questions

How did the government generate its

current financial resources?

How did the government generate its

current financial resources?

Where did those financial resources go?

Where did those financial resources go?

What amount of financial resources is presently held?

What amount of financial resources is presently held?

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1. General fund2. Special revenue funds3. Capital projects funds4. Debt service funds5. Permanent funds

Governmental Funds

6. Enterprise funds7. Internal service

funds

Proprietary Funds

8. Pension funds and other employee benefit trust funds

9. Investment trust funds

10. Private-purpose trust funds

11. Agency funds

Fiduciary Funds and Similar Component Units

FUNDS & ACCOUNT GROUPS


Coverage of Fund Accounting Procedures

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GOVERNMENTAL FUNDS

General Fund– Routine operations– Not accounted for elsewhere

Special Revenue Funds– Specific revenue sources– Expenditures restricted to a

purpose Restricted activities such as maintenance of

public parks


GOVERNMENTAL FUNDS Capital Projects Funds

Debt Service Funds– Accumulation of resources for, and

payment of principal and interest on long-term general obligation debt

Account for the acquisition or construction of major

capital facilities or improvements that benefit

the public.

Account for the acquisition or construction of major

capital facilities or improvements that benefit

the public.


GOVERNMENTAL FUNDSPermanent Funds

Established in those cases in which the fund principal must be preserved but that the income from the permanent funds is required to be used for the benefit of the government’s programs or

its general citizenry.


Governments sometimes offer goods or services for sale to the public. Such operations are

accounted for in an enterprise fund.

sports arenas

airports

utilities

busses

PROPRIETARY FUNDS ENTERPRISE FUNDS

–Same GAAP as –commercial entities


Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies, on a

cost reimbursement basis.

Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies, on a

cost reimbursement basis.

centralized centralized purchasingpurchasingcentralized centralized purchasingpurchasing

vehicle vehicle poolspools

vehicle vehicle poolspools

supplies supplies inventoryinventorysupplies supplies

inventoryinventory

PROPRIETARY FUNDS INTERNAL SERVICE FUNDS


1. Balance sheet

2. Statement of revenue, expenditures and changes in fund balance

FINANCIAL STATEMENTSGovernment Funds


Statement of Net Assets

Note that we Note that we keep the keep the

Governmental Governmental Activities Activities

separate from separate from the Business-the Business-

Type Activities.Type Activities.

Note that we Note that we keep the keep the

Governmental Governmental Activities Activities

separate from separate from the Business-the Business-

Type Activities.Type Activities.

Exh.16-1

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Statement of Net Assets

Also note that Also note that this statement this statement does not give does not give information information

about about Fiduciary Fiduciary

FundsFunds

Also note that Also note that this statement this statement does not give does not give information information

about about Fiduciary Fiduciary

FundsFundsThis is consistent with the This is consistent with the

economic resources economic resources management focus which only management focus which only includes assets and liabilities includes assets and liabilities

that are available to use for that are available to use for governmental purposes.governmental purposes.

This is consistent with the This is consistent with the economic resources economic resources

management focus which only management focus which only includes assets and liabilities includes assets and liabilities

that are available to use for that are available to use for governmental purposes.governmental purposes.

Exh.16-1

16-22


Statement of Activities

The net for a given function is determined horizontally, while the

totals for expenses and revenues are

determined vertically.

The net for a given function is determined horizontally, while the

totals for expenses and revenues are

determined vertically.

Exh.16-2

16-23


BASIS OF ACCOUNTINGGovernmental Funds

Modified Accrual

Applications of modified accrual– Revenues recorded when measurable

and available to finance expenditures in current period

– Expenditures recorded in period when liabilities are measurable and incurred


BUDGETARY ACCOUNTING

Formally recorded in accounts– Operating budget– Capital budget

Legal basis for action

Emphasis on control


EXPENDITURE PROCESS

Appropriation– Legal authority to expend resources– Recorded as part of budget

Encumbrance– Recorded when order is placed for goods or services– Control function

Expenditure– Recorded when goods or services are received– Voucher system

Disbursement


ENCUMBRANCES

Reservation of appropriations Outstanding at fiscal year end

– Lapsing = authority expires and must be re-established in following

year– Non-lapsing = spending authority carries over to the following year

Final result of either method is identical


REVENUE CATEGORIES

Derived tax revenues

Imposed nonexchange revenues

Government-mandated nonexchange transactions

Voluntary nonexchange transactions


RECOGNITION OF REVENUE Property taxes

– Accrued when levied and available (often basis for ST financing)– Current year and collected within 60 days – Net of estimated uncollectibles– Maintain current/deliquent classification

Interest on investments & deliquent taxes– Accrued when earned available

Income and sales taxes– When subject to acrual (measurable and available)

Miscellaneous revenues (fees, fines, licenses)– Cash receipt

Grants, entitlements, shared revenue– When local government has the right to receive (meets eligibility

requirements


RECOGNITION OF EXPENDITURES

Personal services & normal operating items– Cash payment

Goods & services– When received

Capital outlays for long-term facilities– In the period of acquisition

Interest on long-term debt– Period when payable


INVENTORY EXPENDITURES

Purchase method– Acquisition = Expenditure

Consumption method– Use of inventory = Expenditure

Material amount of inventory• Recognition as an asset• Reservation of fund balance


INTERFUND TRANSFERS & TRANSACTIONS

Interfund loans– Usually short-term (rec. or pay. on balance sheet)

Interfund services provided and used– Formally called “quasi-external transactions– Would be revenue or expenditure with external parties

Interfund transfers– To be used by receiving fund for operations– Not expected to be repaid– Not revenue for receiving fund (already shown in transferring fund) –

avoids “double counting”

Interfund reimbursements– Initially made from fund– Properly chargeable to another fund

NFP Acctg. Concepts - 1 NOT-for-PROFIT ACCOUNTING Basic Concepts.

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Transcript of NFP Acctg. Concepts - 1 NOT-for-PROFIT ACCOUNTING Basic Concepts.