Table of Contents
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
