Reporting and Control

Transcription

1 Reporting and Control Authoritative Sources That Govern Governmental and Not-For-Profit Organizations Generally accepted accounting principles, better known as GAAP, encompass the conventions, rules, and procedures necessary to define accepted accounting practices at a particular time. The standard of GAAP includes not only broad guidelines of general application but also detailed practices and procedures (American Institute of Certified Public Accountants, 1970, para ). Furthermore, it the basis for all financial statement reporting, including that of governmental and not-for-profit organizations. The Financial Accounting Standards Board (FASB), established in 1973, oversees the standards of accounting and financial reporting. In 1984, the Governmental Accounting Standards Board (GASB) was established. It too is charged with establishing and improving standards of accounting as it relates to state and local governmental entities, including government-sponsored colleges, universities, health care providers, and utilities. Interestingly, FASB sets the standards for private, not-for-profit colleges, universities, health care providers, and all other not-for-profit entities. The Financial Accounting Foundation (FAF) was founded to operate exclusively for charitable, educational, scientific, and literary purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, is responsible for selecting the members of the FASB and its advisory council, ensuring adequate funding of their activities and for exercising general oversight with the exception of the FASB s resolution of technical issues (Facts About FASB, n.d.). The GAAP Hierarchy The Governmental Accounting Standards Board has outlined a hierarchy for GAAP detailed in Amendment to Statement on Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, for Nongovernmental Entities. In this statement, the order of importance for GASB standards are described. The following is a comparison of the hierarchy of standards for nongovernmental entities and the state, local, and federal government (Amendment to Statement, 2005): Non-Governmental Entities State & Local Government Federal Government FASB Statements & Interpretations Accounting Principles Board (APB) Opinion AICPA Research Bulletins FASB Technical Bulletins GASB Statements & Interpretations FASB & AICPA pronouncements which apply to state and local government GASB Technical Bulletins Federal Accounting Standards Advisory Board (FASAB) Statements & Interpretations FASB & AICPA pronouncements which apply to federal government FASAB Technical Bulletins AICPA Industry Audit and Accounting Guides AICPA Statements of Position AICPA Industry Audit and Accounting Guides (applying specifically to state and local government) AICPA Statements of Position AICPA Industry Audit and Accounting Guides (applying specifically to federal government) AICPA Statements of Position (applying specifically to federal

2 FASB Emerging Issues Task force positions AICPA Practice Bulletins AICPA accounting interpretations FASB Q s and A s Widely recognized industry practice Other accounting literature FASB concept statements AICPA issue papers Technical Bulletins International Accounting Standards Committee Statements All other professional guidance including but not limited to: AICPA Technical Practice Aids, accounting textbooks and handbooks (applying specifically to state and local government) GASB Emerging Issues Task force positions AICPA Practice Bulletins (applying specifically to state and local government) GASB Q s and A s Widely recognized industry practice Other accounting literature GASB concept statements FASB concept statements AICPA issue papers Technical Bulletins International Accounting Standards Committee Statements All other professional guidance including but not limited to: AICPA Technical Practice Aids, accounting textbooks and handbooks government) AICPA Accounting Standards Executive Committee (AcSEC) practice bulletins when cleared by FASAB Technical Releases of the Accounting and Auditing Policy Committee of the FASAB FASAB accounting interpretations FASB Q s and A s Widely recognized federal government practices Other accounting literature FASAB concept statements FASB Concept Statement GASB Statements AICPA issue papers Technical Bulletins International Accounting Standards Committee Statements All other professional guidance including but not limited to: AICPA Technical Practice Aids, accounting textbooks and handbooks The Reporting and Control of Governmental and Not-For-Profit Organizations There are several characteristics unique to governmental and not-for-profit organizations such as the inability to eliminate unprofitable activities. In not-for-profit organizations, this can be quite a challenge. Take for example a not-for-profit medical association whose mission is to attain optimal physical health and well-being for all children through the dissemination of medical educational materials. Many of the medical pamphlets and brochures available at free clinics are provided by the association free of charge. Although this dissemination of medical information generates no revenue for the not-for-profit medical association, they cannot simply stop providing this information because this activity aligns with their mission. The medical association must find some other way to fund this activity, either through a grant or increase of membership dues or a new revenue stream. So, if we cannot use profitability to evaluate success, how is success determined in governmental

3 and not-for-profit organizations? Clearly, success cannot be based on profitability, nor can success be compared to another company offering similar services because the services provided by governmental and not-for-profit organizations can be unique. The answer lies in the perception of those served by the organization as well as those who financially support the organization. The stakeholders may not know all the good works of the organization until the annual reports are published. These are generally not the annual reports one is used to seeing in the public corporation arena, but these annual reports showcase how the entity achieved its mission, furthered its purpose, and maintained stewardship of its resources (in other words, how it handled the money). Financial reports in governmental and not-for-profit organizations are subject to, perhaps, more intense scrutiny and regulation than those in for-profit organizations. Financial reports in governmental and not-for-profit organizations are critical as these reports are used to make resource allocation decisions, set goals and objectives, and report on resource custodianship. Most annual financial statements generated by governmental and not-for-profit organizations are required to be audited by external audit firms, and projects funded by governmental or private granting agencies may require individual audits specifically focusing on the grant-funded project. In the case of governmental entities, there may be federal or state statutes and laws that regulate how the financial records are handled. In the case of not-for-profit organizations charters, by-laws and trust and donor agreements may dictate how funds are to be used. Sources of Revenue in Governmental and Not-For-Profit Organizations Revenue in governmental and not-for-profit organizations is often generated very differently than in for-profit organizations. The government can fund its operations through the levying of taxes, while capital expenditures may be funded through grants or debt financing. Not-for-profit entities fund their operations through donations, dues, tuition, endowments, as well as sales from products and services provided. Much like their governmental counterparts, not-for-profit entities fund their capital expenditures through grants or debt financing. Often revenue in both governmental and not-for-profit organizations is restricted to be used for a specific purpose and therefore requires a special fund to be established to ensure that the funds are used in the manner for which they are designated. Fund Accounting in Governmental and Not-For-Profit Organizations Although not-for-profit organizations often use fund accounting to restrict the usage of donated monies, it is federal, state, and local governmental entities that extensively use fund accounting. In fund accounting, funds are a basic control mechanism to ensure compliance with legal restrictions on governmental resources. For example, revenue generated by tolls may be earmarked to fund highway improvements. There are three major fund categories: governmental, proprietary, and fiduciary. Governmental funds are generally used by state and local government for day-to-day operations of services such as the police department, fire department, and village services. The governmental fund can also be used for capital assets such as the construction of police stations and firehouses. Governmental type funds use a modified accrual basis of accounting. Modified

4 accrual accounting introduces exceptions to accrual accounting rules. In the modified accrual basis of accounting, revenues are recognized when the underlying exchange has occurred and the resources are available. An example of this is property taxes. Property taxes are recognized when they are measurable and available. Measurable refers to the ability to state the amount of revenue in terms of dollars. Available means collectible within the current period or soon enough thereafter so it can be used to pay the bills of the current period in generally no more than 60 days (Ives, Razek, Hosch, & Johnson, 2009). Under accrual basis accounting, expenses and liabilities are recorded when the service is provided or products are used. Under the modified accrual basis of accounting, expenses and liabilities are recorded when these items come due. In the case of an employee's accrued vacation pay, under modified accrual basis of accounting, accrued vacation pay is not recorded on a monthly or annual basis as it is earned by the employee, rather it is recorded at the point the employee retires or resigns, and the accrued vacation pay is due to that employee. Proprietary funds are used to account for those governmental activities, which are similar to the business sector such as hospitals or utilities. Fiduciary funds are funds held in trust or agency capacity for a specified group of people (employee pension benefits, for example) or a specific entity (sales taxes which are collected on behalf of another government agency, for example). Governmental funds are generally controlled by a budget. Annually, the executive branch of the government decides how the funds allocated are to be spent. This is called an appropriation and is associated with fixed-dollar budgets. Fixed-dollar budgets are prepared for most governmental (expendable) funds such as supplies, equipment, salaries, and so forth. The fixed-dollar budget limits the amount that can be expended for each specified purpose. Flexible budgets are prepared for proprietary funds and fluctuate with revenues. An important point to note is the difference between governmental expenditures and expenses as defined in the for-profit sector. Expenditures are the amount of net financial resources expended during the period for current operations (like salaries), capital outlay (like the purchase of fire truck), and long-term debt principal retirement and interest (like tax-exempt bonds). Another unique characteristic of governmental accounting is that budgets figure prominently in controlling the accounts. Governmental entities therefore maintain two sets of books, one based on GAAP and the other based on budget (dual) basis of accounting. The budget (dual) basis of accounting provides a standard against which actual results can be measured (Ives, Razek, Hosch, & Johnson, 2009). Accounts are maintained on a budgetary basis during the year so that interim and annual financial reports can be prepared on the budgetary basis. This allows government managers and officials the ability to track expenditures as they relate to the budget and ensure that budgets are adhered to. Adjustments are made at year-end to convert the budgetary basis data in the accounts to the GAAP basis so that GAAP basis annual statements may be prepared. The differences between the budgetary basis and the GAAP basis statements are reconciled in the annual financial report of the governmental entity. The reconciliations are explained in the footnotes to the financial statements. The budgetary basis of accounting is based on modified accrual accounting. Users and Uses of Governmental and Not-For-Profit Financial Reports

5 GASB has identified three groups as the primary users of external state and local governmental financial reports: the citizenry, legislative and oversight bodies, and investors and creditors (Ives, Razek, Hosch, & Johnson, 2009). Financial reporting is an important part of transparency in the activities of governmental entities and not-for-profit organizations. Regardless of whether governmental and not-for-profit organizations are using appropriated funds or funds generated from the sale of a product or services, these organizations must be publicly accountable for all fiscal activity. Financial reports demonstrate how effective these entities are in handling the monies they have been entrusted with. Financial reports also serve to ensure the compliance with finance-related laws, rules, and regulations. Because of the wide range of constituencies that governmental and not-for-profit organizations serve, it is important that these financial reports be understandable, timely, and materially accurate, as well as being consistent so that financial activity can be compared from one year to the next. GASB believes that financial reporting should provide information to assist users in assessing interim equity by showing whether current-year revenues are sufficient to pay for current-year services or whether future taxpayers will be required to assume burdens for services previously provided (Ives, Razek, Hosch, & Johnson, 2009). Accounting for governmental and not-for-profit organizations is similar in many ways to forprofit accounting. Accounting for governmental and not-for-profit organizations can also be profoundly different from accounting for for-profit entities. There is an inherent stewardship for the funds that governmental and not-for-profit organizations have been entrusted with. Even though the profitability measure has limited emphasis for governmental and not-for-profit organizations, success is determined by how well these organizations fulfill the needs of the communities they service. Consequently, there is a heightened need for transparency in the fiscal reporting of these organizations. The use of special funds (governmental, proprietary, and fiduciary) is employed to facilitate the tracking of expenditures. Budgets and budgetary reporting in governmental entities is not only an important internal control but critical in ensuring that funds are used in accordance with federal and state statutes and laws. The arena of governmental and not-for-profit accounting is exciting and fascinating for today s accountants. For those accountants seeking a higher sense of purpose and maximizing service to the community as opposed to maximizing shareholder wealth, the world of governmental and not-for-profit accounting may be a viable option. References Amendment to statement on standards no. 69, the meaning of present fairly in conformity with generally accepted accounting principles, for nongovernmental entities. (2005). Retrieved March 13, 2009 from AICPA Web site: est+standards/exposure+drafts+of+proposed+statements/ Amend_Stmt_Stds_No_69.htm American Institute of Certified Public Accountants. Statement no. 4: Basic concepts and accounting principles underlying financial statements of business enterprises. (1970). New York: Author.

6 Facts about FASB. (n.d.). Retrieved March 6, 2009, from Financial Accounting Standards Board Web site: Ives, M., Razek, J. R., Hosch, G. A., & Johnson, L. A. (2009). Introduction to governmental and not-for-profit accounting (6th ed.). Upper Saddle River, NJ: Prentice Hall.