governmental-and-not-for-profit-accounting-5th-cha

1-1Chapter1TheGovernmentandNot-For-ProfitEnvironmentQuestionsforReviewandDiscussion1.Thecriticaldistinctionbetweenfor-profitbusinessesandnot-for-profitsincludinggovernmentsisthatbusinesseshaveprofitastheirmainmotivewhereastheothershaveservice.Aprimarypurposeoffinancialreportingistoreportonanentity’saccomplishments—howwellitachieveditsobjectives.Accordingly,thefinancialstatementsofbusinessesmeasureprofitability,theirkeyobjective.Financialreportsofgovernmentsandothernot-for-profitsshouldnotfocusonprofitability,sinceitisnotarelevantobjective.Ideally,therefore,theyshouldfocusonotherperformanceobjectives,suchashowwelltheorganizationsmettheirservicegoals.Inreality,however,thegoalofreportingonhowwelltheyhaveachievedsuchgoalshasprovendifficulttoattainandthefinancialreportshavefocusedmainlyonfinancially-relateddata.2.Governmentsandnot-for-profitsare“governed”bythebudget,whereasbusinessesaregovernedbythemarketplace.Thebudgetisthekeypoliticalandfiscaldocumentofgovernmentsandnot-for-profits.Itdetermineshowanentityobtainsitsresourcesandhowitallocatesthem.Itencapsulatesmostkeydecisionsofconsequencemadebytheorganization.Inagovernmentthebudgetisnotmerelyamanagerialdocument;itisthelaw.3.Owingtothesignificanceofthebudget,constituentswantassurancethattheentityachievesitsrevenueestimatesandcomplieswithitsspendingmandates.Theyexpectthefinancialstatementstoreportonhowthebudgetwasadministered.4.Interperiodequityistheconceptthattaxpayersoftodaypayfortheservicesthattheyreceiveandnotshiftthepaymentburdentotaxpayersofthefuture.Financialreportingmustindicatetheextenttowhichinterperiodequityhasbeenachieved.Therefore,itmustdetermineandreportupontheeconomiccostsoftheservicesperformed(notmerelythecashcosts)andofthetaxpayers’contributiontowardcoveringthosecosts.5.Thematchingconceptmaybelessrelevantforgovernmentsandnot-for-profitsthanforbusinessesbecausetheremaybenoconnectionbetweenrevenuesgeneratedandthequantity,qualityorcostofservicesperformed.Anincreaseinthedemandfor,orcostof,servicesprovidedbyahomelessshelterwouldnotnecessarilyresultinanincreaseintheamountofdonationsthatitreceives.Ofcourse,governmentsandnot-for-profitsareconcernedwithmeasuringinterperiodequityandforthatpurposethematchingconceptmaybeveryrelevant.Granof&Khumawala5e,GovernmentandNot-for-ProfitAccounting1-26.Governmentsmustmaintainanaccountingsystemthatassuresthatrestrictedresourcesarenotinadvertentlyexpendedforinappropriatepurposes.Moreover,statementusersmayneedseparateinformationontherestrictedresourcesbycategoryofrestrictionandtheunrestrictedresources.Inpractice,theserequirementshaveledgovernmentstoadoptasystemof“fund”accountingandreporting.7.Evengovernmentswithinthesamecategorymayengageindifferenttypesofactivities.Forexample,somecitiesoperateaschoolsystemwhereasothersdonot.Thosethatarenotwithinthesamecategorymayhaverelativelylittleincommon.Forexample,astategovernmentsharesfewcharacteristicswithacity.8.Ifagovernmenthasthepowertotax,thenithascommandover,andaccessto,resources.Therefore,itsfiscalwell-beingcannotbeassessedmerelybymeasuringtheassetsthatit“owns.”Forexample,thefiscalconditionofacityshouldincorporatethewealthoftheresidentsandbusinesseswithinthecity,theirearningcapacity,andthecity’swillingnesstoexploititstaxbase.9.Manygovernmentsbudgetonacashornear-cashbasis.However,thecashbasisofaccountingdoesnotprovideadequateinformationwithwhichtoassessinterperiodequity.Financialstatementsthatsatisfytheobjectiveofreportingoninterperiodequitymaynotsatisfythatofreportingonbudgetarycompliance.Moreover,statementsthatreportoneitherinterperiodequityorbudgetarycomplianceareunlikelytoprovidesufficientinformationwithwhichtoassessserviceeffortsandaccomplishments.10.Measuresofserviceeffortsandaccomplishmentsaremoresignificantingovernmentsandnot-for-profitsbecausetheirobjectivesaretoprovideservice.Bycontrast,theobjectiveofbusinessesistoearnaprofit.Therefore,businessescanreportontheiraccomplishmentsbyreportingontheirprofitability.Governmentsandnot-for-profitsmustreportonothermeasuresofaccomplishment.11.TheFASBinfluencesgenerallyacceptedaccountingprinciplesofgovernmentsintwokeyways.First,FASBpronouncementsareincludedintheGASB“hierarchy”ofGAAP.FASBpronouncementsthattheGASBhasspecificallymadeapplicabletogovernmentsareincludedinthehighestcategory;thosethattheGASBhasnotspecificallyadoptedareincludedinthelowestcategory.Second,thebusiness-typeactivitiesofgovernmentsarerequired(withafewexceptions)tofollowthebusinessaccountingprinciplesassetforthbytheFASB.12.Itismoredifficulttodistinguishbetweeninternalandexternalusersingovernmentsthaninbusinessesbecauseconstituents,suchastaxpayers,mayplaysignificantrolesinestablishingpoliciesthatareoftenconsideredwithintherealmofmanagers.Also,legislatorsareinternaltotheextenttheysetpolicy,butexternalinsofarastheexecutivebranchmustaccounttothelegislativebranch.Granof&Khumawala5e,GovernmentandNot-for-ProfitAccounting1-3ExercisesEX1-11.a2.c3.c4.c5.b6.c7.d8.c9.b10.cEX1-21.b2.b3.d4.b5.a6.c7.a8.b9.a10.bProblemsP.1-1.a.Theauthority’scashrequirementsinYear1wouldbeasfollow