Term
| Government Accounting Standards Board (GASB): |
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Definition
| sets the accounting and financial reporting standards for state and local governments |
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Term
| Financial Accounting Standards Boards (FASB): |
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Definition
| the standard-setter for all other entities except the federal government |
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| Federal Accounting Standards Advisory Board (FASAB) |
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Definition
| Federal accounting standards are set by the |
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Term
| The objectives of governments and not-for-profits cannot generally be expressed in dollars and cents and are often ambiguous. Moreover, governments and not-for-profits have relationships (and relationships that are unlike those had by businesses) with the parties providing their resources. |
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Definition
| How do governments and not-for-profits compare with businesses? |
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Term
- The main objective of a typical business is to earn a profit because net income is a measure of how well a business achieved its goals.
- The financial reports of governments and not-for-profits must augment their financial statements with nonfinancial data relating to their objectives. A school, for example, might include statistics on student test scores or graduation rates. |
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Definition
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Term
- Governments and not-for-profits are governed mainly by their budgets, not by the marketplace.
- A government’s revenues may be determined by legislative fiat, so that the government may not be subject to the forces of competition faced by businesses.
- A not-for-profit’s revenues are not established by legal mandate but may be obtained from contributions, dues, tuition, or user charges, none of which are comparable to the sales of a business. |
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Definition
| Budgets, not the marketplace, govern: |
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Term
| - Governments and many not-for-profits establish the level of services they provide, calculate costs, and then set tax rates and fees to generate the necessary revenue. |
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Definition
| Expenditures may drive revenues: |
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Term
- For businesses, the annual report is the most significant financial document. An announcement of annual earnings may make front-page news.
- A government or not-for-profit’s release of its annual report is customarily ignored. The budget takes center stage, because it is the culmination of the political process. It encapsulates almost all of the organization’s important decisions. It determines which constitutes give to the entity and which receive, which activities are supported and which are assessed. |
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Definition
| Preeminence of the budget, not the annual report: |
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Term
- Constituents want assurance that spending has not exceeded authorized amounts and that revenue and expenditure estimates are reliable.
- The budget is a control device, but it needs a complementary accounting and reporting system.
- The accounting system should be designed to facilitate these comparisons, ensuring that the organization reports and categorizes revenues and expenditures that are consistent with the budget.
- Both standard-setting authorities (the GASB and the FASB) have recognized the importance of performance measure and are taking steps to ensure that they will eventually be provided routinely. |
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Definition
| Importance of budgets in accounting and financial reporting: |
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Term
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Definition
| to emphasize that entities should not transfer costs even to future years, let alone to future generations. |
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Term
| - Most governments are required by law, and most not-for-profits are expected by policy, to balance their operating budgets. This ensures that, in any period, revenues cover expenditures and that the entity’s constituents, as a group, pay for what they receive. |
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Definition
| Need to ensure interperiod equity: |
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Term
- For competitive businesses, and if prices are held constant, the greater the revenues are, the greater demand is – and indication that the entity is meeting a societal need.
- For governments and not-for-profits, revenues may not be linked to constituent demand or satisfaction.
- An increase in tax revenues, for example, tells nothing about the amount or quality of services provided. Therefore, a conventional statement of revenues and expenditures cannot supply information about the demand for services. |
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Definition
| Revenues not indicative of demand for goods or services: |
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Term
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Definition
| business accounting’s central notion that expenditures must be paired with corresponding revenues (may have a different meaning for governments and not-for-profits than for businesses). |
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Term
- Government and not-for-profit revenues may not be related to expenditures.
- Donations to a not-for-profit may increase form one year to the next without a corresponding increase in the quantity, quality, or cost of the services provided.
- Matching concept: business accounting’s central notion that expenditures must be paired with corresponding revenues (may have a different meaning for governments and not-for-profits than for businesses).
- Businesses attempt to match the costs of specific goods or services with the revenues they generate.
- Governments and not-for-profits can sometimes associate only overall revenues with the broad categories of expenditures they are intended to cover. |
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Definition
| No direct link between revenues and expenses: |
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Term
- Unlike businesses, governments and not-for-profits make significant investments in assets that neither produce revenues nor reduce expenditures.
- Conventional business practices for valuing assets, such as comparing the present values of the asset’s expected cash outflows and inflows, may not apply to governments and not-for-profits. |
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Definition
| Different role for capital assets: |
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Term
- In contrast to business resources, many government and not-for-profit assets are restricted for particular activities or purposes.
- Taxes and membership dues may also be restricted.
- Governments and not-for-profits must assure the parties that provided restricted funds that they are used properly.
- Financial reports must show that they restricted resources are unavailable for other purposes. |
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Definition
| Resources may be restricted: |
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Term
| - Unlike businesses, governments and not-for-profits typically cannot be sold or transferred. If they dissolved, there are no stockholders entitled to receive residual resources. Thus, their financial statements must be prepared for parties other than stockholders. |
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Definition
| No distinct ownership interests: |
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Term
- Although the external reports of businesses focus on profits, few organizational units are profit centers in which management controls all the key factors that affect profits. Therefore, internal reports present data on other measures of performance, such as total fixed costs or per-unit variable costs.
- For governments and not-for-profits, profit is not an appropriate performance measure for either external parties or internal departments. The relevant performance measures must stem from organizations’ unique goals and objectives are unlikely to be the same for all user groups.
- In business the budget is only an internal document. In governments and not-for-profits, the budget is the key fiscal document and is an important to taxpayers, bondholders, and other constituencies as it is to managers.
- The distinction between internal and external parties is more ambiguous in governments and not-for-profits than in businesses. |
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Definition
| Less distinction between internal and external accounting and reporting: |
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Term
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Definition
| What other characteristics of governments and not-for-profits have accounting implications? |
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Term
- The diversity of governments and not-for-profits makes it difficult to have a common accounting model (set of accounting and reporting principles) that is suitable for all governments and not-for-profits – or even for any particular type of entity.
- The GASB and FASB are heading in the direction of one set of common principles for all state and local governments and another set for all nongovernment not-for-profits. |
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Definition
| Many different types of governments and not-for-profits: |
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Term
| - The appropriate accounting and reporting practices may differ from those suitable for nonbusiness activities. Thus, the challenge of developing accounting and reporting principles for governments and not-for-profits is made more formidable by the potential need for more than one set of standards (even for a single organization). |
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Definition
| Governments and not-for-profits engage in business-type activities: |
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Term
| - Governments, unlike not-for-profits, have the authority to command resources – the power to tax, collect license and other fees, and impose charges. |
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Definition
| Differences between governments and not-for-profits: |
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Term
1. Assess financial positon and economic condition- by examining trends, users are better able to predict future financial developments and foresee the need for changes in revenue sources, resource allocations, and capital requirements.
2. Compare actual results with the budget- significant variations may signify poor management or unforeseen circumstances that require an explanation.
3. Determine compliance with laws, regulations, and restrictions on the use of the funds- users want to be assured of compliance with legal and contractual requirements, such as bond covenants, donor and grantor restrictions, taxing and debt limitations, and applicable laws.
4. Evaluate efficiency and effectiveness- users want to know whether the entity is achieving its objectives and, if so, how efficiently and effectively. |
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Definition
| What are the overall purposes of financial reporting? |
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Term
o governing boards
o investors and creditors
o taxpayers, other citizens, and organizational members
o donors and grantors
o regulatory and oversight agencies
o employees and other constituents |
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Definition
| - The main users of the financial reports of governments and not-for-profits are the parties to whom the organization are accountable. They include |
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Term
- In governments and not-for-profits, as well as businesses, the auditors’ reports on the financial statements are directed to the organizations’ governing boards.
- Governing boards cannot neatly be categorized as either internal or external users
- In most organizations, they approve budgets, major purchases, contracts, executive employment agreements, and significant operating policies, thereby not only overseeing managers, but also getting involved in their decisions. |
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Definition
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- Governments and not-for-profits use the same financial markets as businesses to satisfy their debt-financed capital requirements.
- Governments issue bonds primarily to finance long-term assets, such as buildings, roads, highways, and utility systems. Not-for-profits use bond financing for buildings and equipment.
- Governments and not-for-profits also borrow routinely from banks and other financial institutions to finance new facilities or short-term imbalances between cash receipts and disbursements. |
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Definition
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- In governments, citizens are a significant group. They obtain financial data through a variety of “filters”, including civic associations, such as the League of Women Voters, political actions groups, and the media.
- How much interest the members of a not-for-profit take in their organization’s financial statements or related data depends on the organization’s size and the members’ involvement. |
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Definition
| Citizens and organizational members: |
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Term
- Major donors and grantors, such as the United Way, the Ford Foundation, and federal, state, and local governments, analyze financial reports and other financial information from supplicant associations as carefully as a banker making a loan.
- The tax returns of not-for-profit organizations are in the public domain and can be accessed from various websites. |
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Definition
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Term
- Local governments are usually required to file financial reports with state agencies; charitable organizations with state or local authorities; and religious and fraternal associations with their national organizations.
- These reports are used to ensure that the entries are spending and receiving resources in accordance with laws, regulations, or policies; to help assess management’s performance’ to allocate resources’ and to exercise general oversight. |
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Definition
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Term
| - Officers of their unions or employee associations may examine financial statements, looking for ways to free up resources for salary increases or for projects in which they have a special interest. |
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Definition
| Employees and other constituents: |
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1. Interperiod equity: Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.
2. Budgetary and fiscal compliance: financial reporting should demonstrate whether resources were obtained and used in accordance with the entity’s legally adopted budget; it should also demonstrate compliance with other finance-related legal or contractual requirements.
3. Service efforts, costs, and accomplishments: financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity. |
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Definition
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Definition
| - This requires that governments prepare two sets of financial statements (one on a full accrual basis, the other on a budget or near-budget basis). |
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Term
- FASB differs from GASB because FASB refers only obliquely to budgetary compliance. They provide that information should be useful in “assessing how managers of a nonbusiness organization have discharged their stewardship responsibilities.”
- The FASB stresses that external financial statements can “best meet that need by disclosing impinge on an organization’s financial performance or its ability to provide a satisfactory level of services.”
- By contrasts, the GASB makes budgetary and fiscal compliance a central concern of financial reporting.
- Although the FASB statement objectives, like that of the GASB, lists a wide range of potential users, in practice the FASB standards aim at the far narrower group of users --- mainly donors and other contributors of resources. |
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Definition
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- GASB and FASB objectives both endorse the notion that financial reporting encompasses information on service efforts and accomplishments.
- This information cannot easily be expressed in monetary units and has not traditionally been included in financial statements.
- Both boards emphasize that the ability to measure accomplishments is still undeveloped. They see this aspect of performance reporting as long-term goal rather than an immediate imperative. |
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Definition
| Reporting service efforts and accomplishments seen as a long-term goal: |
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Term
| The underlying accounting principles dictate how the evidence is presented. |
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Definition
| Do differences in accounting principles really matter? |
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Term
- Users of financial statements can be indifferent to how an entity’s fiscal story is told, as long as they are given adequate information to reconfigure the statements to a preferred form.
- The available evidence suggest that investors in tax-exempt bonds, like their stock market counterparts, understand the effects of differences in accounting practices. |
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Definition
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Term
- Important decisions are made based on financial data, as presented and without adjustment.
- The choice of accounting principles is critical. Whereas one set of accounting principles may result in a balanced budget, another, which includes identical revenue and expenditure proposals, may not. Most governments budget on a cash or near-cash basis. If they were required to budget on a full accrual basis, their budgets might quickly become unbalanced.
- Governments may face restrictions on the amount of debt they can incur. |
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Definition
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- The GASB and the FASB have been sanctioned by the American Institute of Certified Public Accountants (AICPA) to establish accounting principles for their respective jurisdictions pursuant to Rule 203 of the AICPA’s Code of Professional Conduct.
- The AICPA provides accounting guidance through “industry audit guides” and “statements of position” (SOPs) on issues not yet addressed by both the GASB and the FASB. |
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Definition
| The function of the GASB, FASB, and the AICPA: |
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