Government and Not-for-Profit Accounting

Preface vii 1 The Government and Not- for- Profit Environment 1 How Do Governments and Not- For- Profits Compare With Businesses? 2 In Practice: Why Is State And Local Government Accounting Important? 6 What Other Characteristics of Governments and Not- For- Profits Have Accounting Implications? 9 How Do Governments Compare With Not-For- Profits? 12 What Are The Overall Purposes of Financial Reporting? 14 Who are The Users, and What are The Uses of Financial Reports? 14 What are The Specific Objectives of Financial Reporting As Set Forth By The GASB and The FASB? 17 Example: Clash Among Reporting Objectives 19 Do Differences In Accounting Principles Really Matter? 22 In Practice: Will Accounting Changes Make A Difference? 24 Who Establishes Generally Accepted Accounting Principles? 24 In Practice: Assessing the Profitability of An Athletic Program 25 In Practice: Governments and Not- For- Profits May Also Be Aggressive In Their Accounting 26 Summary 29 Key Terms In This Chapter 30 Questions For Review and Discussion 30 Exercises 31 Continuing Problem 33 Problems 33 Questions For Research, Analysis, And Discussion 37 2 Fund Accounting 38 What is a Fund? 39 What are the Key Elements of Government Financial Statements? 39 What Characterizes Funds? 41 Use of Multiple Funds to Account for An Entity 44 Basis of Accounting and Measurement Focus 45 Example: Fund Accounting in a School District 46 Major VS. Nonmajor Funds 49 How Can Funds be Combined and Consolidated? 49 What are the Main Types of a Government’s Funds? 59 What’s Notable About Each Type of Governmental Fund? 61 What’s Notable About Each Type of Proprietary Fund? 64 What’s Notable About Each Type of Fiduciary Fund? 70 What is Included in a Government’s Annual Comprehensive Financial Report (ACFR)? 71 Example: Government-Wide Statement of Activities 74 How Do the Funds and Annual Reports of Not-For-Profits Differ From Those of Governments? 75 Summary 78 Key Terms In This Chapter 80 Exercise for Review and Self-Study 80 Questions for Review and Discussion 81 Exercises 82 Continuing Problem 85 Problems 86 Questions for Research, Analysis, and Discussion 91 Solution to Exercise for Review and Self-Study 92 3 Issues of Budgeting and Control 95 What are the Key Purposes of Budgets? 96 Why is More Than One Type of Budget Necessary? 96 How are Expenditures and Revenues Classified? 98 Why are Performance Budgets Necessary? 99 What are the Key Phases of the Budget Cycle? 101 In Practice: Budgeting In The Midst of a Pandemic 103 On What Basis of Accounting are Budgets Prepared? 105 In Practice: States Balance Their Budgets the Painless Way 106 In Practice: The Cost of GAAP 107 In Practice: Balancing the Budget by Selling Assets to Yourself 108 What Cautions Must be Taken in Budget-to-Actual Comparisons? 108 How Does Budgeting in Not-For-Profit Organizations Compare with that in Governments? 111 How Do Budgets Enhance Control? 112 What are the Distinctive Ways Governments Record Their Budgets? 114 Example: Budgetary Entries 115 An Alternative Method: Crediting or Debiting the Difference Between Revenues and Expenditures to “Budgetary Control” 117 How Does Encumbrance Accounting Prevent Overspending? 117 Example: The Encumbrance Cycle—Year 1 118 Example: The Encumbrance Cycle—Year 2 120 Example: Impact of Encumbrances on Fund Balance 121 Are Budgetary and Encumbrance Entries Really Needed? 124 Summary 125 Key Terms in this Chapter 125 Exercise for Review and Self-Study 126 Questions for Review and Discussion 126 Exercises 127 Continuing Problem 131 Problems 131 Questions for Research, Analysis, and Discussion 139 Solution to Exercise for Review and Self-Study 139 4 Recognizing Revenues in Governmental Funds 141 Why and How Do Governments Use the Modified Accrual Basis? 141 What are the Main Types of Nonexchange Revenues and the Limitations on How and When They Can be Used? 145 How Should Property Taxes and Other Imposed Nonexchange Revenues be Accounted for? 146 I n Practice: In Practice: Just as it did with individuals, corona viruses make some governments far more sick than others 146 Example: Property Taxes 148 Example: Fines 153 How Should Sales Taxes and Other Derived Tax Revenues be Accounted for? 154 Example: Sales Taxes 154 Example: Sales Taxes Collected by State 156 Example: Income Taxes 157 What are Tax Abatements and Why and How Must They be Disclosed? 159 How Should Grants and Similar Government-Mandated and Voluntary Nonexchange Revenues be Accounted For? 160 Example: Unrestricted Grant with Time Requirement 161 Example: Grant with Purpose Restriction 162 Example: Reimbursement (Eligibility Requirement) Grant 162 Example: Unrestricted Grant with Contingency Eligibility Requirement 163 Example: Endowment Gift 163 Example: Pledges 163 Example: Donations of Land for Differing Purposes 164 Example: On-Behalf Payments 167 How Should Sales of Capital Assets be Accounted For? 167 Example: Sales of Capital Assets 168 How Should Licenses, Permits, and Other Exchange Transactions be Accounted for? 169 Example: License Fees 169 How Should Governments Report Revenues in their Government-Wide Statements? 170 Summary 171 Key Terms In This Chapter 173 Exercise for Review and Self-Study 173 Questions for Review and Discussion 174 Exercises 174 Continuing Problem 178 Problems 178 Questions for Research, Analysis, and Discussion 184 Solution to Exercise for Review and Self-Study 185 5 Recognizing Expenditures in Governmental Funds 187 Hierarchical Approach to Transaction Analysis 187 How is the Accrual Concept Modified for Expenditures? 189 How Should Wages and Salaries be Accounted for? 190 Example: Wages and Salaries 190 How Should Compensated Absences Be Accounted For? 191 In Practice: Changing the Pay Date by One Day 191 Example: Vacation Leave 192 Example: Sick Leave 193 Example: Sabbatical Leave 196 How Should Pensions and Other Postemployment Benefits Be Accounted For? 197 Example: Pension Expenditure 197 How Should Claims and Judgments Be Accounted For? 198 Example: Claims and Judgments 198 How Should the Acquisition and Use of Materials and Supplies Be Accounted For? 200 Example: Supplies 200 How Should Prepayments Be Accounted For? 203 Example: Prepayments 203 How Should Capital Assets Be Accounted For? 205 Example: Capital Assets 205 Example: Installment Notes 206 Example: Capital Leases 207 How Should Interest and Principal on Long-Term Debt Be Accounted For? 208 Example: Long-term Debt 209 In Practice: California School Children May Pay for Their Own Education 210 How Should Nonexchange Expenditures be Accounted for? 212 Example: Unrestricted Grant with Time Requirement 212 Example: Grant with Purpose Restriction 213 Example: Reimbursement (Eligibility Requirement) Grant 213 How Should Interfund Transactions Be Accounted For? 214 Example: Interfund Transfer 215 Example: Interfund Purchase/Sale 215 How Should Revenues, Expenditures, and Other Financing Sources and Uses Be Reported? 218 In Practice: Is the Coronavirus Pandemic an Extraordinary or Special Event? 218 What is the Significance of the Current Financial Governmental Fund Statements? An Overview 219 Summary 220 Key Terms In This Chapter 221 Exercise for Review and Self-Study 221 Questions for Review and Discussion 222 Exercises 223 Continuing Problem 227 Problems 227 Questions for Research, Analysis, and Discussion 233 Solution to Exercise for Review and Self-Study 233 6 Accounting for Capital Projects and Debt Service 236 How do Governments Account for Capital Projects Funds? 237 Example: Bond Issue Costs 239 Example: Bond Premiums and Discounts 239 Comprehensive Example: Main Types of Transactions Accounted for in Capital Projects Funds 241 How do Governments Account for Resources Dedicated to Debt Service? 245 Comprehensive Example: Main Types of Transactions Accounted for in Debt Service Funds 246 How do Governments Handle Special Assessments? 250 In Practice: Use and Abuse of Special Assessments 252 In Practice: What We Might Learn from “Net Investment in Capital Assets” 256 Why is Arbitrage a Concern of Governments? 256 How can Governments Benefit from Debt Refundings? 258 Example: Debt Refundings 258 Example: In-Substance Defeasance 260 In Practice: Current and Advance Refundings 261 Summary 263 Key Terms in This Chapter 264 Exercise for Review and Self-Study 264 Questions for Review and Discussion 265 Exercises 265 Continuing Problem 270 Problems 270 Questions for Research, Analysis, and Discussion 277 Solution to Exercise for Review and Self-Study 278 7 Capital Assets and Investments in Marketable Securities 281 What Accounting Practices Do Governments Follow for General Capital Assets? 282 Acquiring and Placing Value on Capital Assets 285 Example: Trade-Ins 285 Why and How Should Governments Report Infrastructure? 287 In Practice: Nation’s Infrastructure Earns a Cumulative Grade of C-287 In Practice: Fair Values May (Or May not) Facilitate Sales Decisions 292 How Should Governments Account for Assets that Are Impaired? 294 Example: Restoration Approach 294 Example: Service Units Approach 295 Example: Deflated Depreciated Replacement Cost Approach 296 What Are the Critical Issues with Respect To Marketable Securities And Other Investments? 297 Investments Should Be Reported at Fair Values 297 Example: Investment Income 300 I n Practice: Some Governments May Make Suboptimal Investment Decisions in Order to Avoid Financial Statement Volatility 301 Example: Interest Income 303 In Practice: One Common-Type Derivative 305 In Practice: Investment Debacles 305 In Practice: Common Sense Investment Practices 307 Summary 307 Key Terms In This Chapter 308 Exercise for Review and Self-Study 308 Questions for Review and Discussion 309 Exercises 309 Continuing Problem 312 Problems 313 Questions for Research, Analysis, and Discussion 320 Solution to Exercise for Review and Self-Study 320 8 Long-Term Obligations 321 Why is Information on Long-Term Debt Important to Statement Users? 322 Can Governments and Not-For-Profits Go Bankrupt? 322 In Practice: It is not So Easy to Declare Municipal Bankruptcy 323 How Do Governments Account for Long-Term Obligations? 325 Example: Accounting for Bonds in Government-Wide Statements 327 In Practice: Valuing a Lottery Prize 328 What Constitutes a Government’s Long-Term Debt? 329 Example: Demand Bonds 331 Example: Bond Anticipation Notes 332 Example: Tax Anticipation Notes 333 Example: Lessee Accounting 335 Example: Lessor Accounting 336 Example: Overlapping Debt 343 In Practice: 49Ers Score Big in the Financial Arena 346 I n Practice: Tobacco Bonds Are Both Risky and Inconsistent with Government Policies 347 What Other Information Do Users Want to Know About Outstanding Debt? 347 Example: Debt Margin 349 What are Bond Ratings, and Why are They Important? 351 In Practice: Bond Ratings 352 Summary 352 Key Terms in This Chapter 354 Exercise for Review and Self-Study 354 Questions for Review and Discussion 354 Exercises 355 Continuing Problem 359 Problems 359 Questions for Research, Analysis, and Discussion 365 Solution to Exercise for Review and Self-Study 366 9 Business-Type Activities 367 What Types of Funds Involve Business-Type Activities? 368 Why Do Governments and Not-For-Profits Engage in Business-Type Activities? 368 Should Business-Type Activities be Accounted for Differently than Governmental Activities? 369 What are the Three Basic Statements of Proprietary Fund Accounting? 371 What Accounting Issues are Unique to Enterprise Funds of Governments? 377 Example: Revenue Bond Proceeds as Restricted Assets 380 Example: Landfill Costs in an Enterprise Fund 382 Example: Pollution Remediation Costs in an Enterprise Fund 385 What are Internal Service Funds, and How are they Accounted For? 386 Example: Internal Service Fund Accounting 390 In Practice: Full-Cost Pricing May Encourage Dysfunctional Decisions 392 Accounting for Insurance Premiums 394 Example: Insurance Premiums 395 Example: Self-Insurance in a General Fund 396 How are Proprietary Funds Reported? 397 Example: Eliminating Interfund Balances and Transactions 399 PPPs and APAs 403 Example: Public-Private Partnership (PPP) 404 Example: PPP But Not a SCA 406 In Practice: Want to Own a Bridge? 409 What Do Users Want to Know About Revenue Debt? 409 Summary 411 Key Terms in This Chapter 412 Exercise for Review and Self-Study 413 Questions for Review and Discussion 413 Exercises 414 Continuing Problem 418 Problems 418 Questions for Research, Analysis, and Discussion 424 Solution to Exercise for Review and Self-Study 425 10 Pensions and Other Fiduciary Activities 426 Why is Pension Accounting so Important? 426 In Practice 428 How Do Defined Contribution Plans Differ from Defined Benefit Plans? 429 In Practice: Defined Benefit Plans Are More Efficient Than Defined Contribution Plans 430 In Practice: Can Defined Benefit Plans Be Saved? 431 What is the Relationship Between An Employer and its Pension Plan? 432 How Should the Pension Expense in Full Accrual Statements be Determined? 435 Example: The Pension Expense 437 How Should the Pension Expenditure In Governmental Funds be Determined? 441 What Special Problems Do Multiple-Employer Cost-Sharing Plans Pose? 441 How Should The Pension Plan be Accounted for? 442 What Types of Disclosures are Required? 444 How Should Post-Employment Benefits Other Than Pensions (OPEB) be Accounted for? 445 What Are Fiduciary Funds? 446 I n Practice: Difficulty of Determining Whether an Activity is Fiduciary or Governmental 451 Should Investment Income of A Permanent Fund be Reported in the Permanent Fund Itself or The Beneficiary Fund? 454 Example: Expendable Investment Income 455 Summary 455 Key Terms in This Chapter 457 Exercise for Review and Self-Study 457 Questions for Review and Discussion 458 Exercises 458 Continuing Problem 461 Problems 461 Questions for Research, Analysis, and Discussion 466 Solution to Exercise for Review and Self-Study 467 11 Issues of Reporting, Disclosure, and Financial Analysis 469 How Can a Government Prepare Government-Wide Statements from Fund Statements? 469 Why is the Reporting Entity an Issue for Governments and Not-For-Profits? 471 Example: The Reporting Entity 472 What Criteria Have Been Established for Government Reporting Entities? 473 Example: Financially Accountable Component Units 474 Example: Fiscal Dependency 475 Example: Blended Component Units 476 Example: A Closely Affiliated Organization 479 Example: Application of Current Standards 480 What Other Elements Make Up the Annual Comprehensive Financial Report? 482 What are the Reporting Requirements for Special-Purpose Governments? 487 How Can A Government’s Fiscal Condition be Assessed? 488 I n Practice: Balanced Budget Requirements Don’t Always Result in Balanced Budgets 497 Drawing Conclusions 504 Summary 509 Key Terms in This Chapter 511 Exercise for Review and Self-Study 511 Questions for Review and Discussion 512 Exercises 512 Continuing Problem 516 Problems 516 Questions for Research, Analysis, and Discussion 520 Solution to Exercise for Review and Self-Study 521 12 Not-for-Profit Organizations 523 Who’s in Charge? 523 What Should be The Form And Content of Financial Statements? 524 In Practice 526 What Is An Endowment? 527 Reporting Revenues and Expenses 529 Example: Reporting Revenues and Expenses 530 Reporting Cash Flows 535 What are The Main Types of Contributions, and How Should Pledges Be Accounted For? 538 In Practice: Even the Very Wealthy Sometimes Renege on Their Contributions 539 Example: Pledges 540 When Should Use-Restricted (Purpose-Restricted) Contributions Be Recognized? 542 Example: Use-Restricted Contributions 542 In Practice: A Gift with Strings Attached 543 Should Noncash Contributions be Recognized? 544 Example: Noncash Contributions 545 Example 545 Example: Examples of Contributed Services 546 In Practice 546 Should Receipts of Collection Items be Recognized As Revenues? 547 When Should Conditional Promises be Recognized? 547 Example: Conditional Promises 548 How Should “Pass-Through” Contributions Be Accounted For? 548 Example: A Federated Fund-Raising Organization 549 Example: A Foundation That Transfers Assets to a Specified Organization 549 Example: A Foundation That Supports a Related Organization 549 When Should Gains and Losses On Investments be Recognized? 551 Example: Investment Gains 551 Should Endowment Gains Be Considered Net Additions To Principal Or Expendable Income? 552 Example: Investment Gains 553 What Are Split Interest Agreements, and How Should They be Accounted For? 554 How Should Depreciation Be Reported? 555 Example: Depreciation 555 What Issues Does A Not-For-Profit Face In Establishing Its Reporting Entity? 556 Comprehensive Example: Museum of American Culture 558 How Should The Costs of Fund-Raising Activities Be Determined? 566 Criteria for Allocating A Portion of Costs To Program or Management Functions 566 Example: Allocating Charitable Costs 568 How Can A Not-For-Profit’s Fiscal Condition Be Assessed? 569 In Practice: Not-For-Profits, Like Corporations, Tainted by Scandals 571 Summary 573 Key Terms In This Chapter 574 Exercise for Review and Self-Study 574 Questions for Review and Discussion 577 Exercises 578 Problems 582 Solution to Exercise for Review and Self-Study 586 13 Colleges and Universities 587 What Unique Issues do Colleges and Universities Face? 587 Standards for Public Colleges and Universities 589 Standards for Private Not-For-Profit Colleges and Universities 590 Accounting for Revenues and Expenses 597 In Practice: Which Set of Standards Do We Follow? 598 In Practice: From Public to Private 599 In Practice: How Should a University Classify a Gift that May not Be a Gift? 600 Example: Tuition and Fee Revenues 600 Other Issues 602 Example: Grants 603 Example: Student Loans 604 In Practice: How Auxiliary Enterprises Can Be Misused 605 Comprehensive Example: Mars University 606 Evaluating The Fiscal Wherewithal of Colleges And Universities 610 In Practice: Colleges on the Brink 612 Summary 613 Key Terms In This Chapter 613 Exercise for Review and Self-Study 613 Questions for Review and Discussion 616 Exercises 616 Problems 619 Solution to Exercise for Review and Self-Study 623 14 Health-care Providers 625 In Practice: Hospitals Face Economic Challenges While Also Implementing Policy Changes 626 What Unique Issues do Health-Care Providers Face? 627 What are the Basic Financial Statements? 628 How are Key Revenues and Expenses Recognized? 633 Example: Patient Care Revenues 634 Example: Implicit Price Concessions 635 Example: Capitation Fee Revenues 636 Example: Charity Care 637 Example: Malpractice Claims 638 Example: Retrospective Premiums 639 Comprehensive Example: Medical Center Hospital 639 How can the Fiscal Wherewithal of Health-Care Organizations be Evaluated? 645 In Practice: Financial Problems not Caused by Single Issue 646 Summary 648 Key Terms in This Chapter 649 Exercise for Review and Self-Study 649 Questions for Review and Discussion 649 Exercises 650 Problems 654 Solution to Exercise for Review and Self-Study 658 15 Auditing Governments and Not-for-Profit Organizations 659 How Do Audits Of Governments and Not-For-Profits Differ from Those of Businesses? 660 How Has The Yellow Book Influenced Governmental and Not-For-Profit Auditing? 660 What Types of Audits Do Governments Conduct? 662 What Levels of Standards are Applicable To All Engagements? 662 In Practice: To Whom Should a City Auditor Report? 663 What are Performance Audits? 667 Key Differences Between Financial And Performance Audits 667 In Practice: Targeting Seemingly Trivial Activities 670 Example: Evidence Gathering 673 In Practice: Findings Must Relate to Program Objectives 674 How Have The Single Audit Act and Other Pronouncements Influenced Auditing? 675 What Approach Do Auditors Take In Performing Single Audits? 676 What Reports Result From Single Audits? 679 What Unique Ethical Issues Do Governmental and Not-For-Profit Accounting and Auditing Present? 682 Example: Ethical Dilemma 684 Summary 686 Key Terms In This Chapter 687 Exercise for Review and Self-Study 687 Questions for Review and Discussion 688 Exercises 688 Problems 690 Cases in Ethics 694 Solution to Exercise for Review and Self-Study 696 16 Federal Government Accounting 697 Which Agencies are Responsible for Federal Accounting and Reporting? 700 What Constitutes the Federal Budget? 703 What Constitutes the Federal Government Reporting Entity? 705 What are the Form and Content of Government-Wide Federal Statements? 707 What Types of Accounts are Maintained by Federal Entities? 709 What Statements are Required of Federal Agencies? 710 What are Other Key Features of the FASAB Model? 712 Example: Subsidized Loan 721 Example: Loan Guarantees 722 What Else Constitutes the Federal Government’s Reporting System 724 What are the Key International Trends in Governmental Accounting? 725 An International Standard-Setting Agency 726 Summary 727 Key Terms in This Chapter 728 Exercise for Review and Self-Study 728 Questions for Review and Discussion 729 Exercises 730 Problems 733 Solution to Exercise for Review and Self-Study 737 17 Managing for Results 739 What Role Do Accountants Play in the Management Cycle of Governments and Not-For-Profits? 740 How Can the Limits of Traditional Budgets Be Overcome? 741 What are the Characteristics of Sound Operational Objectives? 743 What are the Perils of Establishing Operational Objectives? 746 I n Practice: A Classic Case of Reliance on Misspecified Objectives (Two Perspectives of the Vietnam War) 747 How Do Program Budgets Relate Expenditures to Operational Objectives? 748 Advantages and Disadvantages of Program Budgets 753 How Should Service Efforts and Accomplishments Be Reported? 755 How are Capital Expenditures Planned and Budgeted Within a Framework of Operational Objectives? 762 Example: Benefits Are Cash Savings 764 Example: Choosing among Options with Similar Benefits 765 In Practice: September 11 Victim Compensation Fund 767 Summary 769 Key Terms in This Chapter 770 Exercise for Review and Self-Study 770 Questions for Review and Discussion 770 Exercises 771 Problem 774 Solution to Exercise for Review and Self-Study 778 Glossary G-1 Value Tables VT-1 Index I-1