Chapter 1

Chapter 1: Governmental and Nonprofit Accounting Environment and Characteristics

Learning Objective 1: Understanding the Differences

  • Distinction between governmental and nonprofit entities vs commercial businesses.

Governmental Entities

  • Types of Governmental Entities:

    • Federal government

    • General-purpose political subdivisions (e.g., states, counties, cities, towns)

    • Special-purpose political subdivisions (e.g., school districts)

    • Public corporations and bodies (e.g., toll roads, toll bridges)

    • Entities created statutorily with governmental characteristics.

Governmental Characteristics

  • Criteria to Determine Governmental Status:

    1. Officers are popularly elected or majority appointed by governmental officials.

    2. Authority to enact/enforce tax levies.

    3. Power to issue "tax-exempt" debt directly.

    4. Ability for another government to dissolve and take control of the entity's assets and liabilities.

Nonprofit Characteristics

  • Key Features:

    • Receives contributions without expectation of equivalent return.

    • Operates with a purpose beyond profit.

    • Lacks business-type ownership interests (no stock or dividends).

Operating Environment of Government and Nonprofits

  • Comparison with Businesses:

    • Businesses aim to increase owner wealth; focus on earnings.

    • Governments and nonprofits provide services and aim for surpluses while maintaining accountability for resources.

Sources of Revenue

  • Revenue Streams:

    • Businesses: Revenue from product/service exchanges.

    • Governments: Funded through taxes (no direct correlation between taxes paid and services provided).

    • Nonprofits: Primarily funded via donor contributions, which may include restrictions.

Longevity Considerations

  • Permanence of Governments vs. Businesses/Nonprofits:

    • General governments tend to have longer life spans due to taxing power.

    • Businesses and nonprofits have a higher tendency to fail.

Budget Role and Legal Requirements

  • Budgeting Differences:

    • Businesses: Use budgets for internal planning; focus on profits.

    • Governments: Budgets enforceable by law; limited to appropriated amounts; required to provide certain services.

    • Nonprofits: Must adhere to donor restrictions on budgeting and spending.

Learning Objective: Financial Reporting for Governments and Nonprofits

  • Understanding the objectives and characteristics unique to financial reporting in these sectors.

Users and Uses of Financial Information

  • Internal Users: (managers) can specify needed information.

  • External Users: (resource providers, oversight bodies, service recipients) depend on financial reporting for various purposes.

Objectives of Financial Reporting

  • For State and Local Governments:

    • Assess revenue sufficiency, operating performance, and budget integrity.

  • For Federal Government:

    • Similar objectives focused on performance and stewardship.

  • For Nonprofits:

    • Evaluate services provided and resource management compared to budget.

Distinctive Financial Reporting Characteristics

  • Overview of unique characteristics for different types of entities (detailed in further sections).

Learning Objective: Sources of GAAP for Government and Nonprofit Entities

  • Understanding where accounting principles originate.

Accounting Principles and Standards

  • GAAP Establishments:

    • FASB: 1973

    • GASB: 1984

    • FASAB: 1999

    • IASB: 2008

Relationship Between FASB, GASB, and FAF

  • Financial Accounting Foundation (FAF): Appoints board members for both FASB and GASB.

GAAP Hierarchy

  • GASB: Establishes GAAP for state/local governments with:

    • Category A: Most authoritative (GASB Statements).

    • Category B: Less authoritative (Technical Bulletins, Implementation Guides).

    • Generally look for analogous principles if neither category provides guidance.

  • FASB: Governs GAAP for nonprofits through its Codification, the sole source of GAAP here.