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Chapter 1
Michael H. Granof
Saleha B. Khumawala
Granof & Khumawala -6e
Government and Not-for-Profit
Accounting: Concepts and
Practices, 6e
Granof & Khumawala -6e
The Government and Not-for-Profit
Chapter 1
“Service to others is the rent you pay for your room
here on earth.”
Mohammed Ali
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“We make a living by what we get. We make a life by
what we give.”
Winston Churchill
Chapter 1
Thoughts to Ponder: Chapter 1
Learning Objectives
• Identify the features that distinguish governments from notfor-profits.
Granof & Khumawala -6e
• Understand the characteristics that distinguish governments
and not-for-profit organizations from businesses (for-profit
Chapter 1
After studying Chapter 1, you should be able to:
• Identify authoritative bodies responsible for setting GAAP
and financial reporting standards for different governmental
and not-for-profit entities.
(1) State and local governments
(2) Not-for-profit organizations
(3) The federal government
• Distinguish Management Discussion & Analysis
(MD&A), basic financial statements, and Required
Supplementary Information (RSI) of state and local
governments in their comprehensive annual
financial reports (CAFR).
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• Compare and contrast the objectives of financial
reporting for:
Chapter 1
Learning Objectives, continued
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• No direct and proportional relationship between
resources provided and the benefits received.
• Absence of a profit motive.
• Absence of transferable ownership rights.
• Collective ownership by constituents.
• Policy-setting process.
Chapter 1
How Do Governmental and Not-For-Profit
Organizations differ from Business
How Do Governmental and Not-For-Profit
Organizations differ from Business
Organizations? – Cont’d
• Ensure inter-period equity for most GNPs.
• Revenues may not be linked to constituent demand or
• No direct link between revenues and expenses.
• The matching concept has different meaning for
governments and not-for-profits.
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o Budget is the culmination of the political process.
o The budget is the key fiscal document.
Chapter 1
• For GNP entities, budget is very important.
How Do Governmental and Not-For-Profit
Organizations differ from Business
Organizations? –Cont’d
• No distinguished ownership interests.
• Less distinction between internal and external accounting
and reporting.
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o Example: Federal government grants for low-income
housing; a state’s gasoline tax may be targeted by law at
highway construction and maintenance.
Chapter 1
• Restriction on assets for particular activities and
Power ultimately rests in the hands of the people.
Citizens vote and delegate that power to elected officials.
Different mission.
Exercise their sovereign power to collect taxes.
Created by and accountable to a higher level
• Different reporting objectives.
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Chapter 1
How Do Governmental and Not-For-Profit
Organizations differ from Business
Organizations? –Cont’d
Objectives of Financial Reporting State and
Local Governments (SLGs)
• Remember:
o Financial statements are a report of the past; your focus
must be on the future.
o One main objective of financial analysis is to derive the
economic substance of a transaction from the data provided
in the financial statements. Then, it is up to you to recast
the data in a form that best facilitates the decisions that you
must make.
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o Compare actual results with the budget.
o Assist in determining compliance.
o Assist in evaluating efficiency & effectiveness.
o Assess financial condition and results of operations .
Chapter 1
• Financial reports are used primarily to:
o What do we mean by accountability?
o How does “interperiod equity” relate
to accountability?
These questions are very important!
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• “ACCOUNTABILITY is the cornerstone of all financial
reporting in government,” (GASB Concepts Statement
No. 1, par. 56).
• Please see the summary of Concepts Statement 1.
Chapter 1
Objectives of Financial Reporting State
and Local Governments (SLGs)
Objectives of Financial Reporting State
and Local Governments (SLGs)
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• Accountability arises from the citizens’ “right to know.”
• It imposes a duty on public officials to be accountable to
citizens for raising public monies and how they are spent.
Chapter 1
What is accountability?
Objectives of Financial Reporting State and
Local Governments (SLGs)
• It is important to understand this concept of “interperiod
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o Interperiod equity is a government’s obligation to disclose
whether current-year revenues were sufficient to pay for
current-year benefits—or did current citizens defer
payments to future taxpayers?
Chapter 1
• How does “interperiod equity” relate to accountability?
Objectives of Financial Reporting State
and Local Governments (SLGs)
o Internal users (management), and
o External users
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• Federal Accounting Standards Advisory Board (FASAB)’s
standards are targeted at both:
Chapter 1
• Accountability is also the foundation of Federal
government financial reporting
Composition of the Local U.S.
Government Entities
Based on 2012 Census
Special districts,
Towns/ townships,
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Chapter 1
Counties, 3,031
School districts,
Importance of the NFP Sector
Giving 2011:
Individuals contribution (73%)
Charitable bequests (8%)
Foundations (14%)
Corporate (5%)
211.77 billion
22.83 billion
41 billion
15.29 billion
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Number of not-for-profit organizations
2.2 million
Total nonprofit sector revenues (2009)
$1.87 trillion
Annual contributions from private sources (2011)
$347 billion
Percentage of wages and salaries paid in the US(2010)
Chapter 1
Size and Scope 2009-2011:
Sources of GAAP and Authoritative Bodies
Authoritative Bodies:
• GASB – Governmental Accounting Standards Board
o Governmental entities: ex. New York City, Atlanta, Harris
o Governmental not-for-profits: ex. University of Houston
• FASAB – Federal Accounting Standards Advisory Board
o Federal Government and its agencies:
o Ex. Department of Defense, Department of Transportation,
Department of Energy, Department of Education, Department
of Agriculture, HUD, HHS and others.
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o Business organizations: ex. Wal-Mart, Exxon
o Nongovernmental not-for-profits: ex. Rice University,
o American Cancer Society
Chapter 1
• FASB – Financial Accounting Standards Board
Who are the users of financial
Investors and creditors
Citizens and organizational members
Donors and Grantors
Regulatory Agencies
Employees and other constituents
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o The prime recipients of the report, because they approve
budgets, major purchases, contracts and significant
operating policies.
Chapter 1
• Governing Boards
Paper generated text financial statements
Internet- HTML or PDF
XBRL (eXtensible Business Reporting Language)
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Chapter 1
Several forms of Financial Reporting
General Purpose External Financial
Reports (SLGs)
Fund financial
Required supplementary information (other
than MD&A)
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financial statements
Chapter 1
Management's discussion and analysis
Notes to the financial statements
Source: GASB Statement 34
Basic Financial
Notes to
Summary <------------------------------> Detail
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Discussion and
Chapter 1
Components of the Annual Financial
Comprehensive Annual Financial Report
• Recommended, but not mandatory
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• Introductory section
• Financial section
• Statistical section
Chapter 1
• Three Sections:
Title page
Contents page
Letter of transmittal
Other (as desired by management)
• You can view online the City of Houston’s Annual
Reports for the years 2012, 2011, and other years at the
following link:
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Chapter 1
CAFR - Introductory Section
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• The Government Finance Officers Association (GFOA) of
the United States and Canada awarded a Certificate of
Achievement for Excellence in Financial Reporting
Program (CAFR Program) to the City of Houston for its
CAFR for the fiscal year ended June 30, 2011.
• The Certificate of Achievement is a prestigious national
award-recognizing conformance with the highest
standards for preparation of state and local government
financial reports.
Chapter 1
Award from the GFOA
Auditor’s report
Basic Financial Statements
Required Supplementary Information
RSI (Other than MD&A)
• Combining the individual fund
statements and schedules
• Remember GASB Statement No. 34 is the Reporting
Model that SLGs have to follow.
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Chapter 1
CAFR—Financial Section
(GASB Statement No. 34)
Brief objective narrative providing management’s
analysis of the government’s financial performance
This is basically “Tell it like it is.”
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Chapter 1
Management’s Discussion and Analysis
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• Government-wide Financial Statements
o Statement of Net Position
o Statement of Activities
• Fund Financial Statements (see next slide)
• Notes to the Financial Statements
• The Government-wide Financial Statements are
the TWO additional F/S required under GASB 34.
Chapter 1
Basic Financial Statements
Fund Financial Statements
• Proprietary-type Funds
o Statement of Net Position
o Statement of Revenues, Expenses, and Changes in Fund
Net Position
o Statement of Cash Flows
• Fiduciary-type Funds
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o Balance Sheet
o Statement of Revenues, Expenditures, and Changes in
Fund Balances - Governmental Funds and a schedule of
Chapter 1
• Governmental-type Funds
o Statement of Fiduciary Net Position
o Statement of Changes in Fiduciary Net Position
CAFR – Statistical Section
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Chapter 1
Tables and charts showing multiple-year trends in financial
and socioeconomic information
• Chapter 2 explains the concept of fund accounting.
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• Fund accounting reports financial information for
separate self-balancing sets of accounts, segregated for
separate purposes or to account for resources restricted
as to use by donors or grantors
• Funds are separate accounting and fiscal entities
Chapter 1
Fund Accounting
In this course you will become familiar with current
GASB, FASB, and FASAB standards related to
governmental and not-for-profit organizations.
Accounting and reporting for governmental and notfor-profit entities differ from those of for-profit
entities because each type of entity has a different
mission and reporting objectives.
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Chapter 1