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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
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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
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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
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Characteristics of SLG
Accounting and Reporting
Use of fund accounting
Budgets and appropriations
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