Government and Not-for-Profit Accounting, Binder Ready Version: Concepts and Practices

by Granof, Michael H.; Khumawala, Saleha B.; Calabrese, Thad D.; Smith, Daniel L.

• ISBN13: 9781118983270
• ISBN10: 1118983270
• Edition: 7th
• Format: Loose-leaf
• Copyright: 2016-01-11
• Publisher: John Wiley & Sons Inc

Summary

This text is an unbound, three hole punched version.

Government and Not-for-Profit Accounting, 7th Edition by Michael Granof, Saleha Khumawala, Thad Calabrese, and Daniel Smith makes students aware of the dynamism of government and not-for-profit accounting and of the intellectual challenges that it presents. Not only does the 7th edition keep students informed of current accounting and reporting standards and practices, but it also ensures that they are aware of the reasons behind them, their strengths and limitations, and possible alternatives. 

Author Biography

Michael H. Granof is an accounting professor and expert on government and not-for-profit accounting and financial reporting standards, and is an influential writer and speaker on the topic of government budget issues including social security, entitlements, tax policy, and projected budgetary concerns in the U.S., including the long-term viability of the social security program.

Table of Contents

Preface vi

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? 5

What Other Characteristics of Governments and Not]For]Profits Have Accounting Implications? 8

How Do Governments Compare With Not]For]Profits? 11

What Are the Overall Purposes of Financial Reporting? 12

Who Are the Users, and What are the Uses of Financial Reports? 13

What Are the Specific Objectives of Financial Reporting as Set Forth by The GASB and FASB? 16

Example: Clash among Reporting Objectives 17

Do Differences in Accounting Principles Really Matter? 20

In Practice: Will Accounting Changes Make a Difference? 21

Who Establishes Generally Accepted Accounting Principles? 21

In Practice: Assessing the Profitability of a Football Program 22

In Practice: Governments and Not-For-Profits May Also Be Aggressive in Their Accounting 23

Summary 26

Key Terms in This Chapter 26

Questions For Review and Discussion 26

Exercises 27

Continuing Problem 30

Problems 30

Questions For Research, Analysis, And Discussion 36

2 Fund Accounting 37

What Is a Fund? 37

What Are the Key Elements of Government Financial Statements? 38

What Characterizes Funds? 39

Example: Fund Accounting in a School District 44

How Can Funds Be Combined and Consolidated? 46

What Are the Main Types of a Government’s Funds? 57

What’s Notable about Each Type of Governmental Fund? 58

What’s Notable about Each Type of Proprietary Fund? 61

What’s Notable about Each Type of Fiduciary Fund? 63

What Is Included in a Government’s Comprehensive Annual Financial Report (CAFR)? 69

Example: Government]Wide Statement of Activities 71

How Do the Funds and Annual Reports of Not]For]Profits Differ from Those of Governments? 73

Summary 75

Key Terms in This Chapter 77

Exercise for Review and Self-Study 77

Questions for Review and Discussion 78

Exercises 79

Continuing Problem 84

Problems 84

Questions for Research, Analysis, and Discussion 93

Solution to Exercise for Review and Self-Study 93

3 Issues of Budgeting and Control 97

What Are the Key Purposes of Budgets? 98

Why Is More Than One Type of Budget Necessary? 98

How Are Expenditures and Revenues Classified? 100

Why Are Performance Budgets Necessary? 101

What Are the Key Phases for the Budget Cycle? 104

In Practice: Budgeting and Legislative Constraints 106

On What Basis of Accounting Are Budgets Prepared? 108

In Practice: States Balance Their Budgets the Painless Way 109

In Practice: The Cost of GAAP 109

In Practice: Balancing the Budget by Selling Assets to Yourself 110

What Cautions Must Be Taken in Budget]to]Actual Comparisons? 110

How Does Budgeting in Not]For]Profit Organizations Compare with That in Governments? 114

How do Budgets Enhance Control? 114

What are the Distinctive Ways Governments Record their Budgets? 116

Example: Budgetary Entries 117

How Does Encumbrance Accounting Prevent Overspending? 119

Example: The Encumbrance Cycle—Year 1 120

Example: The Encumbrance Cycle—Year 2 122

Example: Impact of Encumbrances on Fund Balance 123

Are Budgetary and Encumbrance Entries Really Needed? 125

Summary 126

Key Terms in This Chapter 126

Exercise for Review and Self]Study 127

Questions for Review and Discussion 127

Exercises 128

Continuing Problem 134

Problems 134

Questions for Research, Analysis, and Discussion 144

Solution to Exercise for Review and Self]Study 145

4 Recognizing Revenues in Governmental Funds 147

Why and How Do Governments Use the Modified Accrual Basis? 148

What Are the Main Types of Nonexchange Revenues and the Limitations on How and When They Can Be Used? 151

How Should Property Taxes and Other Imposed Nonexchange Revenues Be Accounted For? 152

In Practice: Housing Woes Raise New Problems for Accountants and Auditors 152

Example: Property Taxes 154

Example: Fines 157

How Should Sales Taxes and Other Derived Tax Revenues Be Accounted For? 158

Example: Sales Taxes 159

Example: Sales Taxes Collected by State 160

Example: Income Taxes 161

How Should Grants and Similar Government-Mandated and Voluntary Nonexchange Revenues Be Accounted For? 163

Example: Unrestricted Grant with Time requirement 164

Example: Grant with Purpose Restriction 164

Example: Reimbursement (Eligibility Requirement) Grant 164

Example: Unrestricted Grant with Contingency Eligibility Requirement 165

Example: Endowment Gift 165

Example: Pledges 165

Example: Payments in Lieu of Taxes 165

Example: Donations of Land for Differing Purposes 166

Example: On-Behalf Payments 169

How Should Sales of Capital

Assets Be Accounted For? 169

Example: Sales of Capital Assets 170

How Should Licenses, Permits, and Other Exchange Transactions Be Accounted For? 171

Example: License Fees 171

How Should Governments Report Revenues in Their Government-Wide Statements? 172

Summary 172

Key Terms in This Chapter 174

Exercise for Review and Self-Study 174

Questions for Review and Discussion 174

Exercises 175

Continuing Problem 180

Problems 181

Questions for Research, Analysis, and Discussion 189

Solution to Exercise for Review and Self]Study 189

5 Recognizing Expenditures in Governmental Funds 192

How Is The Accrual Concept Modified for Expenditures? 193

How Should Wages and Salaries Be Accounted For? 194

In Practice: Tax Expenditures That Are Actually Reductions in Revenue 194

Example: Wages and Salaries 194

How Should Compensated Absences Be Accounted For? 195

In Practice: Changing the Pay Date by One Day 196

Example: Vacation Leave 196

Example: Sick Leave 197

Example: Sabbatical Leave 198

How Should Pensions and Other Postemployment Benefits Be Accounted for? 199

Example: Pension Expenditure 200

How Should Claims and Judgments Be Accounted For? 200

Example: Claims and Judgments 201

How Should the Acquisition and Use of Materials and Supplies Be Accounted For? 202

Example: Supplies 202

How Should Prepayments Be Accounted For? 204

Example: Prepayments 204

How Should Capital Assets Be Accounted For? 205

Example: Capital Assets 206

Example: Installment Notes 207

Example: Capital Leases 208

How Should Interest and Principal on Long-Term Debt Be Accounted For? 209

Example: Long]term Debt 209

In Practice: California Schoolchildren May Pay for Their Own Education 211

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 214

Example: Interfund Purchase/Sale 215

What Constitutes other Financing Sources and Uses? 216

How Should Revenues, Expenditures, and Other Financing Sources and Uses be Reported? 217

What Is the Significance of the Current Financial Governmental Fund Statements? An Overview 217

Summary 218

Key Terms in This Chapter 218

Exercise for Review and Self-Study 219

Questions for Review and Discussion 220

Exercises 221

Continuing Problem 227

Problems 228

Questions for Research, Analysis, and Discussion 236

Solution to Exercise for Review and Self-Study 237

6 Accounting for Capital Projects and Debt Service 240

How do Governments Account for Capital Projects Funds? 241

Example: Bond Issue Costs 243

Example: Bond Premiums and Discounts 243

Comprehensive Example: Main Types of Transactions Accounted for in Capital Projects Funds 244

How do Governments Account for Resources Dedicated to Debt Service? 247

Comprehensive Example: Main Types of Transactions Accounted for in Debt Service Funds 249

How Do Governments Handle Special Assessments? 252

In Practice: Use and Abuse of Special Assessments 253

Accounting for Special Assessments in Proprietary Funds 255

In Practice: What We Might Learn From “Net Investment in Capital Assets” 257

How Can Governments Benefit from Debt Refundings? 258

Example: Debt Refundings 259

Example: In]Substance Defeasance 260

Summary 262

Key Terms in This Chapter 263

Exercise for Review and Self]Study 263

Questions for Review and Discussion 264

Exercises 264

Continuing Problem 270

Problems 270

Questions for Research, Analysis, and Discussion 280

Solution to Exercise for Review and Self]Study 281

7 Capital Assets and Investments in Marketable Securities 285

What Accounting Practices Do Governments Follow for General Capital Assets? 286

Example: Trade-Ins 289

Why and How Should Governments Report Infrastructure? 290

In Practice: Nation’s Infrastructure Earns a Cumulative Grade of D+ 291

In Practice: Fair Values May (Or May Not) Facilitate Sales Decisions 296

How Should Governments Account for Assets That Are Impaired? 297

Example: Restoration Approach 297

Example: Service Units approach 298

Example: Deflated Depreciated Replacement Cost Approach 299

What Issues Are the Critical Issues With Respect to Marketable Securities and Other Investments? 299

Example: Investment Income 303

In Practice: Some Governments May Make Suboptimal Investment Decisions in Order to Avoid Financial Statement Volatility 304

Example: Interest Income 304

In Practice: One Common-Type Derivative 306

In Practice: Investment Debacles 306

In Practice: Common sense Investment Practices 308

Summary 308

Key Terms in this Chapter 309

Exercise for Review and Self-Study 309

Questions for Review and Discussion 310

Exercises 310

Continuing Problem 314

Problems 315

Questions for Research, Analysis, and Discussion 324

Solution to Exercise for Review and Self-Study 324

8 Long-Term Obligations 326

Why is Information on Long-Term Debt Important to Statement Users? 327

Can Governments and Not-For-Profits Go Bankrupt? 327

In Practice: It is Not So Easy to Declare Municipal Bankruptcy 328

How Do Governments Account for Long-Term Obligations? 329

Example: Accounting for Bonds in Government-Wide Statements 331

In Practice: Valuing a Lottery Prize 332

What Constitutes A Government’s Long-Term Debt? 332

Example: Demand Bonds 334

Example: Bond Anticipation Notes 335

Example: Tax Anticipation Notes 335

Example: Capital Leases 338

Example: Overlapping Debt 341

In Practice: 49Ers Score Big in The Financial Arena 343

In Practice: Tobacco Bonds are Both Risky and Inconsistent with Government Policies 344

What Other Information Do Users Want to Know About Outstanding Debt? 344

Example: Debt Margin 346

What are Bond Ratings, and Why are They Important? 347

Summary 349

Key Terms in this Chapter 349

Exercise for Review and Self-Study 349

Questions for Review and Discussion 350

Exercises 350

Continuing Problem 356

Problems 356

Questions for Research, Analysis, and Discussion 363

Solution to Exercise for Review and Self-Study 364

9 Business-Type Activities 365

What Types of Funds Involve Business-Type Activities? 366

Why Do Governments and Not-For-Profits Engage in Business-Type Activities? 366

Should Business-Type Activities be Accounted for Differently than Governmental Activities? 367

What are the Three Basic Statements of Proprietary Fund Accounting? 369

What Accounting Issues are Unique to Enterprise Funds of Governments? 373

Example: Revenue Bond Proceeds as Restricted Assets 377

Example: Landfill Costs in an Enterprise Fund 379

Example: Pollution Remediation Costs in an Enterprise Fund 382

What are Internal Service Funds, and How are they Accounted For? 382

Example: Internal Service Fund Accounting 385

In Practice: Full-Cost Pricing May Encourage Dysfunctional Decisions 387

What Special Problems are Created when An Internal Service Fund or the General Fund Accounts for “Self-Insurance”? 389

Example: Insurance Premiums 390

Example: Self-Insurance in a General Fund 391

How are Proprietary Funds Reported? 392

Example: Eliminating Interfund Balances and Transactions 393

In Practice: Want to Own a Bridge? 395

What do Users Want to Know about Revenue Debt? 396

Summary 397

Key Terms in this Chapter 398

Exercise for Review and Self-Study 398

Questions for Review and Discussion 399

Exercises 402

Continuing Problem 407

Problems 407

Questions for Research, Analysis, and Discussion 416

Solution to Exercise for Review and Self-Study 417

10 Pensions and Other Fiduciary Activities 419

Why is Pension Accounting so Important? 420

In Practice: Funded Status of State Defined Benefit Plans—Ten Best and Ten Worst 421

How do Defined Contribution Plans Differ From Defined Benefit Plans? 421

In Practice: Defined Benefit Plans are More Efficient than Defined Contribution Plans 422

In Practice: Can Defined Benefit Plans be Saved? 423

What are the Distinctions Among Single, Agent Multiple-Employer, and Cost-Sharing Plans? 424

What is the Relationship Between an Employer and its Pension Plan? 424

What is the Underlying Rationale for the Gasb Approach? 425

How Should the Employer Measure its Pension Obligation? 425

How is the Discount Rate Determined? 426

How Should the Pension Expense in Full Accrual Statements be Determined? 427

Example: The Pension Expense 429

How Should the Pension Expenditure in Governmental Funds be Determined? 432

What Special Problems do Multiple-Employer Cost-Sharing Plans Pose? 432

How Should the Pension Plan be Accounted For? 433

What Types of Disclosures are Required? 435

How Should Postemployment Benefits other than Pensions (Opeb) be Accounted For? 436

What are Fiduciary Funds? 437

What Is An Endowment? 437

What are Permanent Funds and How are they Distinguished from Fiduciary Funds? 438

Should Investment Income be Reported in an Expendable or A Nonexpendable Fund? 439

Example: Expendable Investment Income 440

How are The Assets Held in Fiduciary Funds Accounted For? 440

Example: Recognizing Declines in Fair Value 441

Should Investment Gains be Considered Net Additions to Principal or Expendable Income? 442

Example: Investment Gains 442

Example: Investment Losses 443

In Practice: Disconnect Between FASB and Legal Provisions 445

How can Institutions

Protect Against Inflation, Yet Reap the Benefits of Current Income? 446

Example: Fixed Rate of Return Approach 446

How are the Main Types of Transactions Recorded in Nonexpendable Trust Funds? 447

Example: Recording Transactions in a Permanent Fund 447

What Accounting Issues do Agency Funds Present? 452

Example: Agency Funds 452

What Accounting Issues do Investment Trust Funds Present? 454

Summary 456

Key Terms in this Chapter 457

Exercise for Review and Self-Study 457

Questions for Review and Discussion 459

Exercises 460

Continuing Problem 464

Problems 465

Questions for Research, Analysis, and Discussion 472

Solution to Exercise for Review and Self-Study 472

11 Issues of Reporting, Disclosure, and Financial Analysis 474

How Can a Government Prepare Government]Wide Statements from Fund Statements? 474

Why is the Reporting Entity an Issue for Governments? 476

Example: The Reporting Entity 476

What Criteria Have Been Established for Government Reporting Entities? 477

Example: Financially Accountable Component Units 478

Example: Fiscal Dependency 479

Example: Blended Component Units 480

Example: A Closely Affiliated Organization 484

Example: Application of Current Standards 484

What Other Elements Make Up the Comprehensive Annual Financial Report? 486

What Are the Reporting Requirements for Special]Purpose Governments? 490

How Can A Government’s Fiscal Condition be Assessed? 492

In Practice: Balanced Budget Requirements Don’t Always Result in Balanced Budgets 501

Drawing Conclusions 510

Summary 510

Key Terms in This Chapter 511

Exercise for Review and Self]Study 511

Questions for Review and Discussion 512

Exercises 513

Continuing Problem 519

Problems 519

Questions for Research, Analysis, and Discussion 525

Solution to Exercise for Review and Self-Study 525

12 Not-for-Profit Organizations 528

Who’s In Charge? 528

What Should be the Form and Content of Financial Statements? 529

Example: Reporting Revenues and Expenses 533

What Are the Main Types of Contributions, and How Should Pledges be Accounted for? 539

In Practice: Even the Very Wealthy Sometimes Renege on their Contributions 543

Example: Pledges 543

When Should Use-Restricted (Purpose-Restricted) Contributions Be Recognized? 545

Example: Use-Restricted Contributions 545

In Practice: A Gift With Strings Attached 546

Should Contributions of Services be Recognized? 546

Example: Service Contributions 547

Should Receipts of Collection Items Be Recognized As Revenues? 547

In Practice: Examples of Contributed Services 548

When Should Conditional Promises be Recognized? 548

In Practice: When a Contribution is Not A Contribution 549

Example: Conditional Promises 549

How Should “Pass-Through” Contributions be Accounted for? 550

Example: A Federated Fund-Raising Organization 550

Example: A Foundation That Transfers Assets to a Specified Organization 550

Example: A Foundation That Supports a Related Organization 550

When Should Gains and Losses on Investments be Recognized? 552

Example: Investment Gains 552

What Are Split Interest Agreements, And How Should They Be Accounted For? 553

How Should Depreciation be Reported? 554

Example: Depreciation 554

What Issues Does a Not]For]Profit Face in Establishing its Reporting Entity? 555

Comprehensive Example: Museum of American Culture 556

How Should the Costs of Fund-Raising Activities be Determined? 564

Example: Allocating Charitable Costs 565

How can a Not-For-Profit’s Fiscal Condition be Assessed? 567

In Practice: Not-For Profits, Like Corporations, Tainted by Scandals 569

Summary 570

Key Terms in this Chapter 571

Exercise for Review and Self-Study 571

Questions for Review and Discussion 575

Exercises 575

Problems 581

Solution to Exercise for Review and Self-Study 586

13 Colleges and Universities 587

What Unique Issues do Colleges and Universities Face? 587

Accounting for Revenues and Expenses 596

In Practice: Which Set of Standards Do We Follow? 597

In Practice: Trying to Go Private 598

In Practice: How Should a University Classify a Gift that May Not Be a Gift? 598

Example: Tuition and Fee Revenues 599

Other Issues 600

Example: Grants 601

Example: Student Loans 602

In Practice: How Auxiliary Enterprises Can Be Misused 603

Comprehensive Example: Mars University 603

Evaluating the Fiscal Wherewithal of Colleges and Universities 608

Summary 610

Key Terms in this Chapter 610

Exercise for Review and Self-Study 610

Questions for Review and Discussion 613

Exercises 614

Problems 618

Solution to Exercise for Review and Self-Study 624

14 Health Care Providers 626

In Practice: Hospitals Face Economic Challenges While Also Implementing Policy Changes 627

What Unique Issues do Health Care Providers Face? 628

What are the Key Differences Between Private Not-For-Profit and Government Health Care Providers? 629

What Are The Basic Financial Statements? 629

How Are Key Revenues and Expenses Recognized? 634

Example: Patient Care Revenues 634

Example: Capitation Fee Revenues 635

Example: Charity Care 636

Example: Malpractice Claims 637

Example: Retrospective Premiums 638

Comprehensive Example: Medical Center Hospital 638

How can The Fiscal Wherewithal of Health care Organizations be Evaluated? 643

In Practice: Financial Problems Not Caused By Single Issue 645

Possible Future Changes 645

Summary 646

Key Terms in this Chapter 646

Exercise for Review and Self-Study 646

Questions for Review and Discussion 647

Exercises 648

Problems 654

Solution to Exercise for Review and Self-Study 660

15 Managing for Results 661

What Role do Accountants Play in the Management Cycle of Governments and Not]For]Profits? 662

How Can the Limits of Traditional Budgets Be Overcome? 663

What are the Characteristics of Sound Operational Objectives? 665

What are the Perils of Establishing Operational Objectives? 667

In Practice: A Classic Case of Reliance on Misspecified Objectives (Two Perspectives of the Vietnam War) 668

How Do Program Budgets Relate Expenditures to Operational Objectives? 669

How Should Service Efforts and Accomplishments Be Reported? 675

How Are Capital Expenditures Planned and Budgeted Within A Framework of Operational Objectives? 681

Example: Benefits Are Cash Savings 683

Example: Choosing among Options with Similar Benefits 684

In Practice: September 11 Victim Compensation Fund 686

Summary 688

Key Terms in this Chapter 688

Exercise for Review and Self]Study 689

Questions for Review and Discussion 689

Exercises 690

Problems 693

Solution to Exercise for Review and Self]Study 700

16 Auditing Governments and Not]for]Profit Organizations 702

How do Audits of Governments and Not]For]Profits Differ from Those of Businesses? 703

How has the Yellow Book Influenced Governmental and Not]For]Profit Auditing? 703

What Types Of Audits Do Governments Conduct? 704

What Levels of Standards are Applicable to all Engagements? 705

What are the Key Differences Between Government and Nongovernment Financial Audit Standards? 708

In Practice: To Whom Should a City Auditor Report? 708

In Practice: The Auditors’ Dilemma 710

How Have the Single]Audit Act and other Pronouncements Influenced Auditing? 711

What Approach do Auditors Take in Performing Single Audits? 712

What Reports Result from Single Audits? 716

What are Performance Audits? 718

In Practice: Targeting Seemingly Trivial Activities 721

Example: Evidence Gathering 724

In Practice: Findings Must Relate to Program Objectives 725

Example: Ethical Dilemma 728

Summary 729

Key Terms in this Chapter 730

Exercise for Review and Self]Study 731

Questions for Review and Discussion 731

Exercises 732

Problems 735

Cases in Ethics 740

Solution to Exercise for Review and Self-Study 742

17 Federal Government Accounting 744

Which Agencies Are Responsible For Federal Accounting And Reporting? 746

What Constitutes The Federal Budget? 751

What Constitutes the Federal Government Reporting Entity? 752

What are the Form and Content of Government]Wide Federal Statements? 754

What Types of Accounts are Maintained by Federal Entities? 759

What Statements are Required of Federal Agencies? 762

What are other key Features of the FASAB Model? 770

Example: Subsidized loan 777

Example: loan Guarantees 778

What Additional Steps Has The Federal Government Taken To Improve Its Fiscal Management? 779

What are the key International Trends in Governmental Accounting? 779

Summary 781

Key Terms in this Chapter 782

Exercise For Review And Self]Study 783

Questions for Review and Discussion 783

Exercises 784

Problems 788

Solution to Exercise for Review and Self-Study 796

Glossary 797

Value Tables 816

Index 825