Essentials of Accounting for Governmental and Not-for-Profit Organizations Tenth Edition Paul A. Copley, Ph. D., CPA KPMG Professor Director, School of Accounting James Madison University Me Graw Hill McGraw-Hill Irwin
Contents Preface iii Chapter One INTRODUCTION TO ACCOUNTING AND FINANCIAL REPORTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS 1 Generally Accepted Accounting Principles 3 Objectives of Accounting and Financial Reporting 6 Objectives of Accounting and Financial Reporting for the Federal Government 8 Objectives of Financial Reporting by Not-for-Profit Entities 8 Objectives of Accounting and Financial Reporting for State and Local Governmental Units 9 State and Local Government Financial Reporting 10 Comprehensive Annual Financial Report 10 Measurement Focus and Basis of Accounting 12 Fund Structure for State and Local Government Accounting and Reporting 13 Number of Funds Required 16 Budgetary Accounting 16 Additional Resources 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 Assets 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 Assets 36 Proprietary Funds: Statement of Revenues, Expenses, and Changes in Fund Net Assets 38 Proprietary Funds: Statement of Cash Flows 40 Fiduciary: Statement of Fiduciary Net Assets 42 Fiduciary: Statement of Changes in Fiduciary Net Assets 42 Notes to the Financial Statements 44 Required Supplementary Information Other than MD&A 46 Combining Statements 48 Statistical Information 48 Special-Purpose Governments 49
vi Contents Public Colleges and Universities 49 Other Governmental Not-for-Profit Organizations 50 Chapter Three MODIFIED ACCRUAL ACCOUNTING: INCLUDING THE ROLE OF FUND BALANCES AND BUDGETARY AUTHORITY 55 Modified Accrual Accounts 56 Balance Sheet Accounts 56 Financial Statement Activity Accounts 61 Budgetary Accounts 63 Expenditure Cycle 63 Revenue Recognition for Nonexchange Transactions 65 Summary 68 Appendix: Budgetary Accounting Illustrated 69 Budgets and Budgetary Accounts 69 Recording the Budget 70 Accounting for Revenues 71 Accounting for Encumbrances and Expenditures 73 Budget Revisions 76 Budgetary Comparison Schedule 76 Classification of Estimated Revenues and Revenues 77 Classification of Appropriations and Expenditures 78 Chapter Four ACCOUNTING FOR THE GENERAL AND SPECIAL REVENUE FUNDS 87 Overview of Modified Accrual Accounting 88 Interfund Transactions 89 Interfund Loans 89 Interfund Services Provided and Used 91 Interfund Transfers 91 Interfund Reimbursements 91 Illustrative Case General Fund 91 Recording the Budget 92 Re-establishment of Encumbrances 92 Recording Prior-Year Property Taxes as Revenues. 92 Tax Anticipation Notes Payable 93 Payment of Liabilities as Recorded 93 Encumbrance Entry 93 Recording Property Tax Levy 94 Collection of Delinquent Taxes 94 Collection of Current Taxes 94 Other Revenues 95 Repayment of Tax Anticipation Notes 95 Recognition of Expenditures for Encumbered Items 95 Payrolls and Payroll Taxes 96 Payment on Account and Other Items 97 Correction of Errors 97 Amendment of the Budget 97 Interfund Transactions 98 Write-off of Uncollectible Delinquent Taxes 100 Reclassification of Current Taxes 100 Accrual of Interest and Penalties 101 Deferral of Property Tax Revenue 101 Special Item 101 Preclosing Trial Balance 101 Closing Entries 103 Year-End Financial Statements 105 Illustrative Case Special Revenue Fund 108 Motor Fuel Tax Revenues 108 Expenditures for Road Repairs 108 Reimbursement to General Fund 109 Reimbursement Grant Accounting 109 - Closing Entry 109 Year-End Financial Statements 110 Recognition of Inventories in Governmental Funds 111
Contents vii Chapter Five ACCOUNTING FOR OTHER GOVERNMENTAL FUND TYPES: CAPITAL PROJECTS, DEBT SERVICE, AND PERMANENT 122 Capital Projects Funds 124 Illustrative Case 125 Other Issues Involving Acquisition of Capital Assets 130 Acquisition of General Fixed Assets by Lease Agreements 130 Construction of General Fixed Assets Financed by Special Assessment Debt 131 Debt Service Funds 132 The Modified Accrual Basis As Applied to Debt Service Funds 132 Additional Uses of Debt Service Funds 133 Debt Service Accounting for Serial Bonds 133 Illustrative Case Regular Serial Bonds 134 Other Issues Involving Payment of Long-Term Debt 136 Debt Service Accounting for Deferred Serial Bonds 136 Debt Service Accounting for Term Bonds 136 Debt Service Accounting for Capital Lease Payments 137 Bond Refundings 137 Permanent Funds 138 Financial Reporting for Governmental Funds 140 Balance Sheet Governmental Funds 140 Statement of Revenues, Expenditures, and Changes in Fund Balances Governmental Funds 144 Summary 144 Chapter Six PROPRIETARY FUNDS 154 Internal Service Funds 156 Establishment and Operation of Internal Service Funds 157 Illustrative Case Supplies Fund 157 Other Issues Involving Internal Service Funds 161 Risk Management Activities 161 Implications for Other Funds 162 Enterprise Funds 162 Illustrative Case Water Utility Fund 164 Proprietary Fund Financial Statements 168 Statement of Net Assets 170 Statement of Revenues, Expenses, and Changes in Fund Net Assets 170 Statement of Cash Flows 170 Accounting for Municipal Solid Waste Landfills 174 Pollution Remediation Costs 175 Summary 176 Chapter Seven FIDUCIARY (TRUST) FUNDS 189 Agency Funds 190 Tax Agency Funds 192 Accounting for Tax Agency Funds 192 Financial Reporting for Agency Funds 194 Private-Purpose Trust Funds 194 Accounting for Investments 194 Illustrative Case Private-Purpose Trust Funds 197 A Note about Escheat Properly 199 Investment Trust Funds 199 Public Employee Retirement Systems (Pension Trust Funds) 200 Accounting and Reporting for Defined Benefit Pension Plans 201
viii Contents A Note about Other Postemployment Benefits 205 Summary of Employer Reporting 206 A Note about IRS 457 Deferred Compensation Plans 209 A Final Comment on Fund Accounting and Reporting 209 Chapter Eight GOVERNMENT-WIDE STATEMENTS, FIXED ASSETS, LONG-TERM DEBT 220 Conversion from Fund Financial Records to Government-wide Financial Statements 221 Capital Asset-Related Entries 223 Long-Term Debt-Related Entries 228 Adjusting to Convert Revenue Recognition to the Accrual Basis 229 Adjusting Expenses to the Accrual Basis 231 Adding Internal Service Funds to Governmental Activities 231 Eliminating Interfund Activities and Balances within Governmental Activities 236 Worksheet to Illustrate the Adjustments 237 Government-wide Financial Statements 237 Statement of Net Assets 237 Statement of Activities 241 Required Reconciliation to Government-wide Statements 244 Summary 247 Appendix: Accounting for Capital Assets and Long-Term Debt in Governmental Activities 248 Accounting for General Capital Assets, Including Infrastructure 248 The Modified Approach for Reporting Infrastructure 249 Collections 250 Asset Impairment 251 Accounting for Long-Term Debt 251 Types of General Long-Term Debt 252 Debt Disclosures and Schedules 252 Chapter Nine ACCOUNTING FOR SPECIAL-PURPOSE ENTITIES, INCLUDING PUBLIC COLLEGES AND UNIVERSITIES 267 Gasb Statement 34 Reporting Rules for Special-Purpose Entities 267 Reporting by Special-Purpose Local Governments Engaged in Governmental Activities 268 Reporting by Special-purpose Local Governments Engaged Only in Business-type Activities 270 Reporting by Special-purpose Local Governments Engaged Only in Fiduciary-type Activities 273 Accounting and Financial Reporting for public Colleges and Universities 274 The Environment of Public Higher Education 274 Accounting and Financial Reporting for Public Institutions of Higher Education 275 Illustrative Case Northern State University Beginning Trial Balance 276 Illustrative Case Journal Entries 278 Illustrative Case Closing Entries 284 Illustrative Case Financial Statements 286 Summary 291
Contents ix Chapter Ten ACCOUNTING FOR PRIVATE NOT-FOR-PROFIT ORGANIZATIONS 300 Organizations Covered in this Chapter 302 Overview of Not-for-Profit Accounting 302 Three Classes of Net Assets 302 Financial Reporting 303 Note Disclosures 304 Accounting for Contributions, Including Reclassifications of Net Assets 304 Reporting of Expenses and Assets 305 Special Topics: Accounting for Contributions 306 Illustrative Transactions and Financial Statements 308 Beginning Trial Balance 308 Transactions '309 Financial Statements 315 Alternative Procedure for Recording Fixed Assets 320 Performance Evaluation 320 Mergers and Acquisitions 321 Summary of Not-for-Profit Accounting and Reporting 323 Chapter Eleven COLLEGE AND UNIVERSITY ACCOUNTING PRIVATE INSTITUTIONS 335 Overview of Private College and University Accounting 337 Financial Statements 337 Net Asset Classification 338 Revenue Reduction versus Expenses 339 Academic Terms Encompassing More Than One Fiscal Year 339 Expenses 339 Other Accounting Guidance 340 Illustrative Transactions and Financial Statements 341 Illustrative Transactions 341 Illustrative Financial Statements for Private Colleges and Universities 348 Split-Interest Agreements 348 Summary Private College and University Reporting 353 Chapter Twelve ACCOUNTING FOR HOSPITALS AND OTHER HEALTH CARE PROVIDERS 362 Accounting and Reporting Requirements of the Health Care Guide 364 Financial Statements 364 Revenues 366 Classifications 366 Illustrative Transactions and Financial Statements 367 Beginning Trial Balance 367 Illustrative Statements for Private-Sector Not-for-Profit Health Care Entities 373 Financial Reporting for Governmental Health Care Entities 375 Financial Reporting for Commercial (For-Profit) Health Care Entities 378 Summary and Conclusions Regarding Health Care Accounting and Reporting 378 Chapter Thirteen AUDITING, TAX-EXEMPT ORGANIZATIONS, AND EVALUATING PERFORMANCE 386 Governmental Auditing 387 The Single Audit Act and Amendments 393 The Sarbanes-Oxley Act 396 Tax-Exempt Organizations 397 Applying for Tax-Exempt Status 398 Federal Filing Requirements 398
x Contents State Filing Requirements 401 Unrelated Business Income Tax (UBIT) 401 IRS Oversight 403 Summary and Some Conclusions Related to Exempt Entities 403 Evaluating Performance 404 Analysis of Not-for-Profit Organization Financial Statements 404 Analysis of State and Local Government Financial Statements 405 Service Efforts and Accomplishments Reporting 410 Chapter Fourteen FINANCIAL REPORTING BY THE FEDERAL GOVERNMENT 420 Federal Government Accounting Standards 421 Financial Reporting by Federal Agencies 422 Balance Sheet 423 Statement of Net Cost 423 Statement of Changes in Net Position 423 Statement of Budgetary Resources 424 Statement of Custodial Activity 425 Consolidated Financial Report of the U.S. Government 425 Budgetary and Proprietary Accounting 429 Budgetary Accounts 429 Proprietary Accounts 432 Summary of Federal Government Reporting 432 Appendix: Illustrative Example 433 Glossary: Governmental and Not-for-Profit Accounting Terminology G-l Index 1-1