Employees in all businesses train for years on ways to obtain efficiency without sacrificing accuracy. “Best practices” and standardized procedures were once the human employees’ goals. With the increasing capabilities in business intelligence technology, organizations can turn human best practices into machine-driven processes. By doing so, it is possible to harness the massive quantities of information already contained within an accounting system in a more strategic manner.
As part of the initial process to automate accounting tasks, accounting staff knowledgeable about the organization’s operations and conventional methods needed to assess which tasks could be automated and how quickly. For this assignment, you will formulate a “mapping” plan as if you were beginning the process of accounting system automation for a governmental unit. Utilizing the required reading content on process automation, assess the following and provide support for your response.
For the next 3 questions, please create a table in MS Word to summarize your responses with your written response and rationale to follow in the Word document.
1
page i
Essentials of Accounting for Governmental and Not-forProfit Organizations
Thirteenth
Edition
Paul
A.
Copley,
Ph.D.,
CPA
Professor
School of Accounting
James Madison
University
2
page ii
ESSENTIALS OF ACCOUNTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS, THIRTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright ? 2018 by McGraw-Hill Education. All rights reserved. Printed in
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Library of Congress Cataloging-in-Publication Data
Names: Copley, Paul A., author.
Title: Essentials of accounting for governmental and not-for-profit
organizations / Paul A. Copley, Ph. D., CPA, KPMG Professor, Director,
School of Accounting, James Madison University.
Description: Thirteenth Edition. | Dubuque : McGraw-Hill Education, 2017. |
Revised edition of the author’s Essentials of accounting for governmental
and not-for-profit organizations, [2015].
Identifiers: LCCN 2016041136 | ISBN 9781259741012 (paperback : alk. paper)
Subjects: LCSH: Administrative agencies—United States—Accounting. |
Nonprofit organizations—United States—Accounting. | BISAC: BUSINESS &
ECONOMICS / Accounting / Governmental.
Classification: LCC HJ9801 .H39 2017 | DDC 657/.83500973—dc23
LC record available at https://lccn.loc.gov/2016041136
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page iii
Preface
Thank you for considering the thirteenth edition of Essentials of Accounting for Governmental and Not-for-Profit Organizations. The
focus of the text is on the preparation of external financial statements. The coverage is effective in preparing candidates for the CPA
examination. I have used the text with traditional three-semester-hour classes, with half-semester GNP courses, and as a module in
advanced accounting classes. It is appropriate for accounting majors or as part of a public administration program.
The most notable change from earlier editions is in the presentation of college and university accounting. Both private sector and
public sector colleges are now presented in a single chapter, Chapter 11. Readers are taken through a representative set of transactions for
two similar-sized colleges. By examining both public and private institutions at the same time, it is easier to gain an appreciation for the
similarities and differences in these two groups.
Among other changes, the thirteenth edition is updated for recent professional pronouncements including:
GASB Statement No. 72: Fair Value Measurement and Application
GASB Statement Nos. 74 and 75: Financial Reporting for Postemployment Benefit Plans Other Than Pensions and Accounting and
Financial Reporting for Postemployment Benefits Other Than Pensions
GASB Statement No. 76: Hierarchy of Generally Accepted Accounting Principles for State and Local Governments
GASB Statement No. 81: Irrevocable Split-Interest Agreements.
Additionally, a discussion is provided in Chapter 10 of FASB Accounting Standards Update (2016-14) – Presentation of Financial
Statements of Not-for-Profit Entities. This newly issued standard becomes effective in 2018.
The text contains a discussion of the GASB Codification of Financial Reporting Standards.References are made throughout the text to
specific segments of the Codification. With the implementation of GASB 54 (Fund Balance Reporting), the last vestige of budgetary
accounting is phased out of government financial statements. The thirteenth edition continues to provide budget and encumbrance journal
entries, but presents these as distinct accounts that are not commingled with the accounts appearing in the basic financial statements. This
approach should reduce confusion sometimes experienced by students, particularly with the recording of encumbrances.
Among the more challenging aspects of state and local government reporting is the preparation of government-wide financial
statements. The approach demonstrated in the text is similar to that used in practice. Specifically, day-to-day events are recorded at the
fund level using the basis of accounting for fund financial statements. Governmental activities are recorded using the modified accrual
basis. The fund-basis statements are then used as input in the preparation of government-wide statements. The preparation of governmentwide statements is presented in an Excel worksheet. This approach has two advantages: (1) it is the approach most commonly applied in
practice, and (2) it is an approach familiar to students who have studied the process of consolidation in their advanced
page iv
accounting classes. State and local government reporting is illustrated using an ongoing example integrated throughout
Chapters 4 through 8 and 13.
Additional features of the text are available in Connect and the ebook, including:
An auto-gradable test bank and chapter-specific quizzes;
A continuous homework problem in Chapters 4 through 8 and 13, available in the instructor library in Connect;
An Instructor’s Guide;
PowerPoint slides;
Excel-based assignments; and
An additional practice set.
TestGen
TestGen is a complete, state-of-the-art test generator and editing application software that allows instructors to quickly and easily select
test items from McGraw-Hill’s TestGen testbank content and to organize, edit and customize the questions and answers to rapidly
generate paper tests. Questions can include stylized text, symbols, graphics, and equations that are inserted directly into questions using
built-in mathematical templates. With both quick-and-simple test creation and flexible and robust editing tools, TestGen is a test generator
4
system for today’s educators.
Acknowledgments
I am indebted to users of the textbook for their helpful suggestions, particularly: Susan Borkowski (La Salle University), Georgia Smedley
(University of Missouri–Kansas City) and especially to Mary Fischer (University of Texas at Tyler). I am especially appreciative of
Loretta Manktelow (James Madison University) for her thorough review and advice. Additional comments and suggestions are welcome
and may be addressed to: copleypa@JMU.edu.
Paul A. Copley
In memory of Ann Koch Copley and Joe Ernsberger.
5
page v
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8
page vii
Contents
Preface iii
Chapter One
INTRODUCTION TO ACCOUNTING AND FINANCIAL REPORTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT
ORGANIZATIONS 2
Generally Accepted Accounting Principles 4
Sources of Generally Accepted Accounting Principles 6
Definition of Government 8
Objectives of Accounting and Financial Reporting 9
Objectives of Accounting and Financial Reporting for State and Local Governmental Units 9
Objectives of Financial Reporting by the Federal Government 10
Objectives of Financial Reporting by Not-for-Profit Entities 11
State and Local Government Financial Reporting 11
Comprehensive Annual Financial Report 11
Measurement Focus and Basis of Accounting 13
Fund Structure for State and Local Government Accounting and Reporting 14
Number of Funds Required 17
Chapter Two
OVERVIEW OF FINANCIAL REPORTING FOR STATE AND LOCAL GOVERNMENTS 20
The Governmental Reporting Entity 21
Reporting by Major Funds 23
Overview of the Comprehensive Annual Financial Report (CAFR) 23
Introductory Section 24
Financial Section: Auditor’s Report 25
Management’s Discussion and Analysis (MD&A) 26
Statement of Net Position 28
Government-wide Statement of Activities 30
Governmental Funds: Balance Sheet 32
Governmental Funds: Statement of Revenues, Expenditures, and Changes in Fund Balance 34
Proprietary Funds: Statement of Net Position 36
Proprietary Funds: Statement of Revenues, Expenses, and Changes in Fund Net Position 38
Proprietary Funds: Statement of Cash Flows 40
Fiduciary: Statement of Fiduciary Net Position 42
Fiduciary: Statement of Changes in Fiduciary Net Position 42
Notes to the Financial Statements 44
Required Supplementary Information Other Than MD&A 46
Combining Statements 48
Statistical Information 48
Summary 49
page viii
Chapter Three
MODIFIED ACCRUAL ACCOUNTING: INCLUDING THE ROLE OF FUND BALANCES AND BUDGETARY
AUTHORITY 54
Modified Accrual Accounts 55
Balance Sheet Accounts 55
Financial Statement Activity Accounts 60
9
Budgetary Accounts 62
Expenditure Cycle 62
Revenue Recognition for Nonexchange Transactions 64
Summary 67
Appendix: Budgetary Accounting Illustrated 67
Budgets and Budgetary Accounts 67
Accounting for Revenues 69
Accounting for Encumbrances and Expenditures 70
Budget Revisions 74
Budgetary Comparison Schedule 74
Chapter Four
ACCOUNTING FOR THE GENERAL AND SPECIAL REVENUE FUNDS 83
Overview of Modified Accrual Accounting 84
Interfund Transactions 85
Interfund Loans 85
Interfund Services Provided and Used 87
Interfund Transfers 87
Interfund Reimbursements 87
Illustrative Case—General Fund 87
Use of Budgetary Accounts 88
Recording the Budget 88
Re-establishment of Encumbrances 89
Recording Prior-Year Property Taxes as Revenues 89
Tax Anticipation Notes Payable 89
Payment of Liabilities as Recorded 90
Encumbrance Entry 90
Recording Property Tax Levy 90
Collection of Delinquent Taxes 90
Collection of Current Taxes 91
Other Revenues 91
Repayment of Tax Anticipation Notes 92
Recognition of Expenditures for Encumbered Items 92
Payrolls and Payroll Taxes 92
Payment on Account and Other Items 93
Correction of Errors 93
Amendment of the Budget 94
Interfund Transactions 94
Write-off of Uncollectible Delinquent Taxes 96
Accrual of Interest and Penalties 97
Deferral of Property Tax Revenue 97
Special Item 97
Preclosing Trial Balance 97
Closing Entries 99
Year-End Financial Statements 101
Illustrative Case—Special Revenue Fund 102
Motor Fuel Tax Revenues 103
Expenditures for Road Repairs 105
Reimbursement to General Fund 105
Reimbursement Grant Accounting 105
Closing Entry 106
Year-End Financial Statements 106
Recognition of Inventories in Governmental Funds 107
Summary 108
10
Chapter Five
ACCOUNTING FOR OTHER GOVERNMENTAL FUND TYPES: CAPITAL PROJECTS, DEBT SERVICE, AND
PERMANENT 118
Capital Projects Funds 120
Illustrative Case 121
page ix
Debt Service Funds 126
The Modified Accrual Basis—As Applied to Debt Service Funds 126
Additional Uses of Debt Service Funds 127
Debt Service Accounting for Serial Bonds 127
Illustrative Case—Regular Serial Bonds 127
Other Issues Involving Payment of Long-Term Debt 130
Debt Service Accounting for Deferred Serial Bonds 130
Debt Service Accounting for Term Bonds 130
Bond Refundings 130
Permanent Funds 131
Financial Reporting for Governmental Funds 133
Financial Statements—Governmental Funds 133
Summary 137
Chapter Six
PROPRIETARY FUNDS 146
Internal Service Funds 148
Establishment and Operation of Internal Service Funds 149
Illustrative Case—Supplies Fund 149
Other Issues Involving Internal Service Funds 153
Risk Management Activities 153
Implications for Other Funds 154
Enterprise Funds 154
Illustrative Case—Water Utility Fund 156
Proprietary Fund Financial Statements 161
Statement of Net Position 162
Statement of Revenues, Expenses, and Changes in Fund Net Position 162
Statement of Cash Flows 164
Environmental Liabilities 167
Accounting for Municipal Solid Waste Landfills 167
Pollution Remediation Costs 168
Summary 168
Chapter Seven
FIDUCIARY (TRUST) FUNDS 182
Agency Funds 185
Tax Agency Funds 185
Accounting for Tax Agency Funds 186
Financial Reporting for Agency Funds 187
A Note about Escheat Property 187
Private-Purpose Trust Funds 189
Accounting for Investments 189
Illustrative Case—Private-Purpose Trust Funds 190
Investment Trust Funds 192
Public Employee Retirement Systems (Pension Trust Funds) 193
Accounting and Reporting for Defined Benefit Pension Plans 194
11
Additional Disclosures 197
Other Postemployment Benefit Trust Funds 200
A Note about IRS 457 Deferred Compensation Plans 202
A Final Comment on Fund Accounting and Reporting 202
Chapter Eight
GOVERNMENT-WIDE STATEMENTS, CAPITAL ASSETS, LONG-TERM DEBT 213
Conversion from Fund Financial Records to Government-wide Financial Statements 214
Capital Asset–Related Entries 216
Long-Term Debt–Related Entries 221
page x
Adjusting to Convert Revenue Recognition to the Accrual Basis 222
Adjusting Expenses to the Accrual Basis 226
Adding Internal Service Funds to Governmental Activities 226
Eliminating Interfund Activities and Balances within Governmental Activities 229
Worksheet to Illustrate the Adjustments 232
Government-wide Financial Statements 232
Statement of Net Position 232
Statement of Activities 235
Required Reconciliation to Government-wide Statements 238
Summary 240
Appendix: Accounting for Capital Assets and Long-Term Debt in Governmental Activities 241
Accounting for General Capital Assets, Including Infrastructure 241
The Modified Approach for Reporting Infrastructure 242
Collections 243
Asset Impairment 244
Accounting for Long-Term Debt 244
Types of General Long-Term Debt 245
Debt Disclosures and Schedules 245
Chapter Nine
ADVANCED TOPICS FOR STATE AND LOCAL GOVERNMENTS 260
Reporting by Special-Purpose Entities 261
Special-Purpose Governments Engaged in Governmental Activities 261
Special-Purpose Governments Engaged Only in Business-type Activities 263
Special-Purpose Governments Engaged Only in Fiduciary-type Activities 265
Special Assessments 265
Acquisition of Capital Assets by Lease Agreements 266
Accounting for Equipment Acquired under Capital Leases—Governmental Activities 266
Accounting for Equipment Acquired under Capital Leases—Businesslike Activities 268
Leases: Proposed Changes 269
Employer Reporting for Pensions 269
Reporting of Pension Liabilities 269
Reporting of Pension Expenditure—Governmental Funds 270
Reporting of Pension Expense—Accrual Basis (Economic Resources Focus) Statements 270
A Final Note: Pension Discount Rates 274
Employer Reporting for Other Postemployment Benefits 274
Summary 275
Chapter Ten
ACCOUNTING FOR PRIVATE NOT-FOR-PROFIT ORGANIZATIONS 281
Organizations Covered in This Chapter 283
12
Overview of Not-for-Profit Accounting 283
Three Classes of Net Assets 283
Financial Reporting 284
Note Disclosures 285
Accounting for Contributions, Including Reclassifications of Net Assets 285
Reporting of Expenses and Assets 286
Special Topics: Accounting for Contributions 287
page xi
Illustrative Transactions and Financial Statements 289
Beginning Trial Balance 289
Transactions 290
Financial Statements 297
Alternative Procedure for Recording Fixed Assets 302
Performance Evaluation 302
Mergers and Acquisitions 304
Changes in Not-for-Profit Reporting 305
Summary of Not-for-Profit Accounting and Reporting 306
Chapter Eleven
COLLEGE AND UNIVERSITY ACCOUNTING 317
Overview of College and University Accounting 318
Financial Statements 319
Revenue and Expense Classification 319
Illustrative Case—Comparison of Public and Private Colleges 322
Illustrative Case—Journal Entries 323
Illustrative Case—Closing Entries 330
Illustrative Case—Financial Statements 331
Split-Interest Agreements 335
Summary: College and University Accounting 339
Chapter Twelve
ACCOUNTING FOR HOSPITALS AND OTHER HEALTH CARE PROVIDERS 345
Accounting and Reporting Requirements of the Health Care Guide 347
Financial Statements 347
Revenues 349
Classifications 349
Illustrative Transactions and Financial Statements 349
Beginning Trial Balance 350
Illustrative Statements for Private Sector Not-for-Profit Health Care Entities 357
Financial Reporting for Governmental Health Care Entities 358
Financial Reporting for Commercial (For-Profit) Health Care Entities 361
Summary: Health Care Accounting and Reporting 362
Chapter Thirteen
AUDITING, TAX-EXEMPT ORGANIZATIONS, AND EVALUATING PERFORMANCE 369
Governmental Auditing 370
The Single Audit Act and Amendments 376
The Sarbanes-Oxley Act 378
Tax-Exempt Organizations 379
Applying for Tax-Exempt Status 380
Federal Filing Requirements 381
State Filing Requirements 383
13
Unrelated Business Income Tax (UBIT) 383
IRS Oversight 384
Summary and Some Conclusions Related to Exempt Entities 385
Evaluating Performance 385
Analysis of Not-for-Profit Organization Financial Statements 385
Analysis of State and Local Government Financial Statements 386
Service Efforts and Accomplishments Reporting 388
page xii
Chapter Fourteen
FINANCIAL REPORTING BY THE FEDERAL GOVERNMENT 397
Federal Government Accounting Standards 398
Financial Reporting by Federal Agencies 399
Balance Sheet 400
Statement of Net Cost 400
Statement of Changes in Net Position 402
Statement of Budgetary Resources 402
Statement of Custodial Activity 402
Consolidated Financial Report of the U.S. Government 403
Budgetary and Proprietary Accounting 406
Budgetary Accounts 407
Proprietary Accounts 409
Summary of Federal Government Reporting 410
Appendix: Illustrative Example 410
Glossary: Governmental and Not-for-Profit Accounting Terminology G-1
Index I
page 1
14
page 2
Chapter One
Introduction to Accounting and Financial Reporting for Governmental and
Not-for-Profit Organizations
The truth is that all men having power ought to be mistrusted.
If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on
government would be necessary. James Madison, fourth president of the United States and principal author of the U.S. Constitution
Learning Objectives
Obtain an overview of financial reporting for nonbusiness entities.
Distinguish between private and public sector organizations.
Identify the sources of authoritative accounting standards for various public and private sector organizations.
Define the 11 fund types used by state and local governments.
I
n its relatively short existence, the United States has grown to be the largest and most successful economy in history. Why then would a
country founded on the principles of free markets and private investment rely on governments to provide many goods and services? The
answer lies in understanding the incentives of a free enterprise economy. There are many services that simply cannot be priced in a way
that naturally encourages commercial entrepreneurs to enter the marketplace. Commonly this is because the service is subject to freeriding. For example, public safety and a clean environment benefit all citizens, whether or not they contribute to its cost. In
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other instances, free market incentives do not align with public interest. For example, society finds it desirable to provide a
K–12 education to all its citizens, not just those with the ability to pay. Because there is no practical means for businesses to sell these
services, governments are called upon through the political process to provide those services that citizens demand.1
Although the majority of products and services are provided by either businesses or governments, in some circumstances private
organizations are formed to provide goods or services without the intent of earning a profit from these activities. Examples include public
charities, trade associations, and civic groups. Again, the goods or services they provide often cannot be priced in a way that encourages
commercial entrepreneurship. For example, a public radio broadcast cannot be effectively restricted to only those individuals choosing to
support the public radio station. While this explains why the services are not provided by businesses, why aren’t governments called upon
to provide them?
In some instances, obstacles exist that prevent government involvement. For example, the U.S. Constitution provides for separation of
church and state. Therefore, any group that wishes to promote religious activities must do so through private organizations rather than
through government. More commonly the reason is lack of political influence. Support for the arts may be important to a group of
individuals but unless that group is sufficiently large to influence the political process, it is unlikely that elected officials will use
government funds for that purpose. However, support for the arts could still be provided by forming a charitable foundation with no
relationship to the government and having the foundation solicit donations from that segment of the public that finds the arts important.
The organizations introduced in the preceding paragraphs are the focus of this book: governmental and not-for-profit organizations.
They are distinguished from commercial businesses by the absence of an identifiable individual or group of individuals who hold a legally
enforceable residual claim to the net resources. Throughout the text a distinction will be made between public and private organizations.
Public organizations are owned or controlled by governments. Private organizations are not owned or controlled by governments and
include businesses as well as private not-for-profit organizations. Not-for-profit organizations lack a residual ownership claim and the
organization’s purpose is something other than to provide goods and services at a profit.
Because significant resources are provided to governments and not-for-profit organizations, financial reporting by these organizations
is important. To paraphrase the James Madison quotation provided at the beginning of the chapter, because humans (not angels) operate
governments, controls are necessary. Financial reports that reflect the policies and actions of governmental managers are an effective
means to control the actions of those entrusted with public resources. To be effective, external financial reports must be guided by a set of
generally accepted accounting principles. The generally accepted accounting principles for governmental and private not-for-profit
15
organizations are the subject of this book. The first nine chapters of the text deal with public sector (state and local government)
organizations and Chapters 10, 11, and 12 deal primarily with private not-for-profit organizations. Chapter 13 discusses auditing and taxrelated issues unique to governments and private not-for-profits and also evaluates performance of these entities. Chapter
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14 describes financial reporting by the federal government.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
Biologists tell us that organisms evolve in response to characteristics of their environment. Similarly, accounting principles evolve over
time as people find certain practices useful for decision making. Further, we expect organisms in different environments to evolve
differently. Similarly, if the environments in which governments and not-for-profits operate differ in important ways from that of
commercial enterprises, we would expect the accounting practices to evolve differently. It is important to understand how governments
and not-for-profit organizations differ from commercial businesses if we are to understand why the accounting practices of these
nonbusiness organizations have evolved in the manner we will see throughout the remainder of this text.
The Governmental Accounting Standards Board published a document titled Why Governmental Accounting and Financial Reporting
Is—and Should Be—Different (http://www.gasb.org/white_paper_full.pdf). This white paper identifies five environmental differences
between governments and for-profit business enterprises and describes how those differences manifest in differences in the objectives and
practice of financial reporting.
1. Organizational Purposes. While the purpose of a commercial business is to generate a profit for the benefit of its owners,
governments exist for the well-being of citizens by providing public services—whether or not the services are profitable undertakings.
The result is that government accounting practices are not focused on the measurement of net income for the purpose of measuring return
to investors. Rather they are intended to satisfy the information needs of a variety of users.
While the purpose of government operations differs greatly from commercial businesses, the purpose of governmental accounting is
the same—to provide information that is useful to stakeholders in making decisions. However, governments have vastly different sets of
users of accounting information. Like businesses, governments have creditors who are interested in assessing the creditworthiness of the
government. Citizens and businesses, both within the government’s jurisdiction and those considering relocation to the jurisdiction, are
also stakeholders who rely on governmental reporting to make economic decisions. In addition, governments receive resources from other
governments and grantors who may require financial reports and audits as a condition of the grant. Since this diverse set of resource
providers have varying interests, the information needs of one group may not meet the needs of another. The result is that governments
report far more disaggregated information than commercial enterprises.
page 5
2. Sources of Revenues. Net income is a universally accepted measure of business performance. The calculation of net income begins
with sales. A sale occurs when an independent party perceives that the service offered both provides value and is fairly priced. Net income
then simply determines whether this measure of demand (sales) exceeds the cost of providing the service and is an accepted measure of
performance for business organizations. On the other hand, governments derive many of their resources from taxes. Individuals and
businesses pay taxes to avoid penalty, not voluntarily because they perceive government services to be of value and fairly priced. Since
taxes do not involve an earnings process, the timing of the recognition of tax revenue is not always clear.
3. Potential for Longevity. Because the U.S. and state constitutions grant state and local governments the ability to tax, governments
very rarely go out of business. This long-term view of operations changes the focus of accounting from one of near-term recovery of
amounts invested in assets to a longer-term focus on the sustainability of services and the ability to meet future demand. As a result,
governments may elect not to depreciate some capital assets but expense improvements that extend an asset’s useful life.
4. Relationship with Stakeholders. Taxes are levied through the legislative process by officials elected by the citizens. Because
citizens and businesses are then required to pay these taxes, governments have an obligation to demonstrate accountability for these public
funds. Whereas a business can use its resources as it deems appropriate, governments frequently receive resources that are restricted to a
particular purpose. For example, a city may collect a telephone excise tax legally restricted to operating a 911 emergency service. In an
effort to provide assurance that resources are used according to legal or donor restrictions, governments use fund accounting. A fund
represents part of the activities of an organization that is separated from other activities in the accounting records to more easily
demonstrate compliance with legal restrictions or limitations.
4. Role of the Budget. Many businesses prepare budgets, but these are for planning and control purposes and are rarely made
available to creditors or investors. In contrast, government budgets are expressions of public policy and often carry the authority of law,
preventing public officials from spending outside their budgetary authority. The increased importance of budgets is reflected in
government financial reports by a required report comparing budgeted and actual amounts.
For these and other reasons, the accounting practices of governmental organizations evolved differently from those of businesses. As
you will see in later chapters, the accounting practices of not-for-profit organizations more closely resemble those of commercial
businesses. However, the not-for-profit environment shares some important characteristics with governments. Similar to governments,
not-for-profits do not have residual owners. “Investors” in not-for-profits are diverse and include donors, volunteers, and members. In
addition, as with governments, the excess of revenues over expenses is not an effective measure of organizational performance. Finally,
like governments, not-for-profits receive resources with donor-imposed restrictions.
page 6
16
Sources of Generally Accepted Accounting Principles
Further complicating accounting issues is the fact that we have three levels of government (federal, state, and local) and not-for-profits
may be either publicly or privately owned. This is important because different standards-setting bodies have authority for establishing
reporting standards for these groups. Illustration 1-1 summarizes the various organizational types and the bodies with primary standardsetting authority.
Accounting and financial reporting standards for the federal government are published by the Federal Accounting Standards
Advisory Board (FASAB). The standards are technically “recommendations” since, as a sovereign nation, the federal government cannot
relegate authority to an independent board. Recommendations of the FASAB are reviewed and become effective unless objected to by one
of the principals, the U.S. Government Accountability Office (GAO), the U.S. Department of the Treasury, or the U.S. Office of
Management and Budget. These standards apply to financial reports issued by federal agencies and to the Consolidated Financial Report
of the United States Government. Accounting and financial reporting standards for the federal government are illustrated in Chapter 14.
Accounting and financial reporting standards for state and local governments in the United States are set by the Governmental
Accounting Standards Board (GASB). The GASB also sets accounting and financial reporting standards for governmentally related notfor-profit organizations, such as colleges and universities, health care entities, museums, libraries, and performing arts organizations that
are owned or controlled by governments. Accounting and financial reporting standards for profit-seeking businesses and for
nongovernmental not-for-profit organizations are set by the Financial Accounting Standards Board (FASB).
The GASB and the FASB are parallel bodies under the oversight of the Financial Accounting Foundation (FAF). The FAF appoints
the members of the two boards and provides financial support to the boards by obtaining contributions from business corporations;
professional organizations of accountants and financial analysts; CPA firms; debt-rating agencies; and state and local governments.
Because of the breadth of support and the lack of ties to any single organization or government, the GASB and the FASB are referred to
as “independent standards-setting bodies.” Standards set by the FASAB, GASB, and FASB are the primary sources of generally accepted
accounting principles (GAAP) as the term is used in accounting and auditing literature.
ILLUSTRATION 1-1 Summary of Standards-Setting Organizations
Reporting Organization
Federal government
State and local governments
Public not-for-profits
Private not-for-profits
Investor-owned businesses
Standards-Setting Board
Federal Accounting Standards Advisory Board (FASAB)
Governmental Accounting Standards Board (GASB)
Governmental Accounting Standards Board (GASB)
Financial Accounting Standards Board (FASB)
Financial Accounting Standards Board (FASB)
page 7
GASB standards are set forth in documents called Statements of Financial Accounting Standards. Although no longer used, in the
past the GASB also issued Interpretations that provided guidance on previously issued statements. From time to time, the Board finds it
necessary to expand on standards in Technical Bulletins and Implementation Guides. The sources of authoritative GAAP for state and
local governments therefore are:
Category A: GASB Statements (and Interpretations)
Category B: GASB Implementation Guides, GASB Technical Bulletins, and literature of the American Institute of Certified Public
Accountants (AICPA) specifically cleared by the GASB
If the accounting treatment for a given transaction is not specified by a statement in Category A, a state and local government should
consider whether it is covered by one of the sources identified in Category B. If the accounting treatment is not specified within one of
these authoritative sources, the government should consider whether the transaction is sufficiently similar to ones covered by one of the
authoritative sources that a similar accounting treatment can be applied. If not, the government may use non-authoritative sources for
guidance, including:
GASB Concept Statements,
FASB, FASAB, or International Standards Board pronouncements,
AICPA literature not specifically cleared by the GASB,
Other sources provided by professional organizations, regulatory agencies, textbooks, and published articles, or
Prevalent practices that evolved among governments without specific authoritative action.
Both the FASB and FASAB have similar hierarchies of GAAP for entities falling within their jurisdictions. The GASB, FASB, and
FASAB publish codifications (organized versions) of accounting standards. The GASB also publishes a comprehensive collection of its
implementation guides. The advantage of using the codified versions of standards is that all relevant standards for a particular topic are
presented together and any superseded segments of standards have been removed. Codification references are presented in two parts: the
first (section) identifies a topic and the second identifies a paragraph within the codification. Letters typically give a clue as to the topic
(e.g., L for leases and Ho for hospitals). Paragraph numbers may be used to determine the level of authority within the GAAP Hierarchy.
These are summarized as follows:
17
Section #s
1000–1900
2000–2900
Letters (A-Z)
Double letters
Topics
General Principles
Broad Financial Reporting Requirements
Specific Balance Sheet or Operating Accounts
Specialized Industries or Reporting Units
page 8
Paragraph
#s
100–499
500–599
600–699
700–799
900–999
Level of Authority
GASB Standards
Definitions
GASB Technical Bulletins and AICPA Audit and Accounting
Guides and Statements of Position
AICPA Practice Bulletins
Non-authoritative discussions
For example:
Codification
Reference
1000.101
1700.601
F60.101
Co5.902
Section
Paragraph
Section 1000
indicates this
pertains to general
principles (in this
case GAAP
Hierarchy).
Section 1700
indicates this
pertains to
reporting of
budgetary
information.
The single letter
(F) identifies a
specific account
(in this case Food
stamps).
The double letters
(Co) identify a
specialized
industry (Colleges
and universities).
Paragraphs 101–104 present the
GAAP Hierarchy and since the
paragraph number is
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