Government and Not-for-Profit Accounting, Binder Ready Version: Concepts and Practices, 7th Edition Solution Manual

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1-1Chapter 1The Government and Not-For-Profit EnvironmentQuestions for Review and Discussion1.The critical distinction between for-profit businesses and not-for-profits includinggovernments is that businesses have profit as their main motive whereas the othershave service. A primary purpose of financial reporting is to report on an entity’saccomplishments—how well it achieved its objectives. Accordingly, the financialstatements of businesses measure profitability, their key objective. Financial reportsof governments and other not-for-profits should not focus on profitability, since it isnot a relevant objective. Ideally, therefore, they should focus on other performanceobjectives, such as how well the organizations met their service goals. In reality,however, the goal of reporting on how well they have achieved such goals hasprovendifficulttoattainandthefinancialreportshavefocusedmainlyonfinancially-related data.2.Governments and not-for-profits are “governed” by the budget, whereas businessesare governed by the marketplace. Thebudget is the key political and fiscaldocument of governments and not-for-profits. It determines how an entity obtains itsresourcesandhowitallocatesthem.Itencapsulatesmostkeydecisionsofconsequence made by the organization. In a government the budget is not merely amanagerial document; it is the law.3.Owing to the significance of the budget, constituents want assurance that the entityachieves its revenue estimates and complies with its spending mandates. Theyexpect the financial statements to report on how the budget was administered.4.Interperiod equityis the concept that taxpayers of today pay for the services thatthey receive and not shift the payment burden to taxpayers of the future. Financialreporting must indicate the extent to which interperiod equity has been achieved.Therefore, it must determine and report upon the economic costs of the servicesperformed (not merely the cash costs) and of the taxpayers’ contribution towardcovering those costs.5.Thematching conceptmay be less relevant for governments and not-for-profits thanfor businesses because there may be no connection between revenues generated andthe quantity, quality or cost of services performed. An increase in the demand for, orcost of, services provided by a homeless shelter would not necessarily result in anincrease in the amount of donations that it receives. Of course, governments andnot-for-profits are concerned with measuring interperiod equity and for that purposethe matching concept may be very relevant.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-26.Governments must maintainan accounting systemthatassures thatrestrictedresources are not inadvertently expended for inappropriate purposes. Moreover,statement users may need separate information on the restricted resources bycategory of restriction and the unrestricted resources. In practice, these requirementshave led governments to adopt a system of “fund” accounting and reporting.7.Even governments within the same category may engage in different types ofactivities. For example, some cities operate a school system whereas others do not.Those that are not within the same category may have relatively little in common.For example, a state government shares few characteristics with a city.8.If a government has the power to tax, then it has command over, and access to,resources. Therefore, its fiscal well-being cannot be assessed merely by measuringthe assets that it “owns.” For example, the fiscal condition of a city shouldincorporate the wealth of the residents and businesses within the city, their earningcapacity, and the city’s willingness to exploit its tax base.9.Many governments budget on a cash or near-cash basis. However, the cash basis ofaccounting does not provide adequate information with which to assess interperiodequity. Financial statements that satisfy the objective of reporting oninterperiodequitymay not satisfy that of reporting onbudgetary compliance. Moreover,statements that report on either interperiod equity or budgetary compliance areunlikely to provide sufficient information with which to assessservice efforts andaccomplishments.10.Measuresofserviceeffortsandaccomplishmentsaremoresignificantingovernments and not-for-profits because their objectives are to provide service. Bycontrast, the objective of businesses is to earn a profit. Therefore, businesses canreport on their accomplishments by reporting on their profitability. Governmentsand not-for-profits must report on other measures of accomplishment.11.The FASB influences generally accepted accounting principles of governments intwo key ways. First, FASB pronouncements are included in the GASB “hierarchy”of GAAP. FASB pronouncements that the GASB has specifically made applicableto governments are included in the highest category; those that the GASB has notspecifically adopted are included in the lowest category. Second, the business-typeactivities of governments are required (with a few exceptions) to follow the businessaccounting principles as set forth by the FASB.12.It is more difficult to distinguish between internal and external users in governmentsthan in businesses because constituents, such as taxpayers, may play significantroles in establishing policies that are often considered within the realm of managers.Also, legislators are internal to the extent they set policy, but external insofar as theexecutive branch must account to the legislative branch.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-3ExercisesEX 1-11.a2.c3.c4.c5.b6.c7.d8.c9.b10.cEX 1-21.b2.b3.d4.b5.a6.c7.a8.b9.a10.bEX 1-3a.1.The Governmental Accounting Standards Board (GASB) is the independentorganizationthatestablishesandimprovesstandardsofaccountingandfinancialreporting for U.S. state and local governments. Established in 1984 by agreement of theFinancial Accounting Foundation (FAF) and 10 national associations of state and localgovernment officials, the GASB is recognized by governments, the accounting industry,and the capital markets as the official source of generally accepted accounting principles(GAAP) for state and local governments.Accounting and financial reporting standards designed for the government environmentare essential because governments are fundamentally different from for-profit businesses.Furthermore, the information needs of the users of government financial statements aredifferent from the needs of the users of private company financial statements. The GASBmembersandstaffunderstandtheuniquecharacteristicsofgovernmentsandthe

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-4environment in which they operate.The GASB is not a government entity; instead, it is an operating component of the FAF,which is a private sector not-for-profit entity. Funding for the GASB comes primarilyfrom an accounting support fee established under the Dodd-Frank Wall Street Reformand Consumer Protection Act as well as the sale of certain publications. Its standards arenot federal laws or regulations and the organization does not have enforcement authority.Compliance with GASB’s standards, however, is enforced through the laws of someindividual states and through the audit process, when auditors render opinions on thefairness of financial statement presentations in conformity with GAAP.2.The mission of GASBis:To establish and improve standards of state and local governmental accounting andfinancial reporting that will:Result in useful information for users of financial reports, andGuide and educate the public, including issuers, auditors, and users of thosefinancial reports.The mission is accomplished through a comprehensive and independent process thatencourages broad participation, objectively considers all stakeholder views, and is subjectto oversight by the Financial Accounting Foundation’s Board of Trustees.3.Based on GASB’s White Paper,Governmental Accounting and Financial ReportingisandShouldbeDifferent,duetothekeyenvironmentaldifferencesbetweengovernments and for-profit business enterprises.The differing needs of the users ofgovernmental and business enterprise financial reports reflect the different environmentsin which the organizations operate. Some of the principal environmental differences are:Organizational Purposes.The purpose of thegovernment is to enhance or maintain thewell-being of citizens by providing public services according to the established goals.Agovernment’s financial reports should give creditors, legislative and oversight officials,citizens, and other stakeholders the information necessary to make assessments anddecisions relevant to their interests in the government’s accomplishment of its objectives.In contrast, business enterprises focus on wealth creation, interacting only with thosesegmentsofsocietythatfulfilltheirmissionofgeneratingafinancialreturnoninvestment for shareholders. It's primary focus of reporting has been on earnings and itscomponents, with little or no explicit focus on nonfinancial measures of performance.Sources of Revenue.The principal source of revenue for government is taxation, whichis a legally mandated involuntary transaction between individual citizens and businessesandtheirgovernment.Theprincipalsourceofrevenueofbusinessenterprisesisvoluntaryexchange transactionsbetween willing buyers and sellers.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-5Potential for LongevityBecause of their ongoing power to tax and because of theongoingneed for public services,governments rarely liquidate. Thepossibility ofachievinglongevity,however,isnotaslikelyforbusinessenterprises.Businessenterprises will go out of existence if, for an extended period of time, they are unable tosell their products or services for more than it costs to produce them. Further, a businessmay also cease to exist if it is acquired by another entity.RelationshipwithStakeholders.Thegovernmentsshouldmeetastandardofaccountability,since thecitizens are interested in evaluating inter-period equity bydetermining whether current taxpayers and users of government services fully financedthe costs of providing current-period services or whether taxes and user fees from prior orfuture periods were, or will be, needed to finance the current services provided. Forbusiness, their financial reports show changes in equity of the enterprise during thecurrent period.Role of the Budget.For governments, a budget takes on a special legal significance.Governmental budgets are expressions of public policy priorities and legally authorizethe purposes for which public resources may be spent. In fact, governmental budgets canbe the primary method by which citizens and their elected representatives hold thegovernment’s management financially accountable. For business enterprises, the budgetrepresentsaninternalfinancialmanagementtoolthatiscontrolledentirelybymanagement and is considered proprietary in nature.b.1.The purpose of the Government Finance Officers Association is to enhance andpromotetheprofessionalmanagementofgovernmentsforthepublicbenefitbyidentifying and developing financial policies and best practices and promoting their usethrough education, training, facilitation of member networking, and leadership.The objectives of the GFOA are:ExpertKnowledge.Continuetoberecognizedasaleadingsourceofexpertknowledge in public financial management by exercising leadership in research,recommended practice and policy development and information dissemination.Education and Training.Enhance the expertise and professionalism of financialmanagers and policy makers and provide recognition for their achievements.Leadership Development.Engage in efforts to assist finance officers to develop theskills and capabilities necessary to enable them to become organizational leaders aswell as technical experts.Raising Public Awareness of Sound Financial Policy and Practice.Take leadership inpromoting public awareness of policies and practices that enhance sound financialmanagement of public resources.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-6Enhanced Cooperation.Cooperate with and complement the services provided byother organizations (U.S., Canadian and international) to increase the effectiveness ofGFOA.Strategic Use of Technology.Provide information and analytical tools to helpgovernments identify and apply appropriate, economical technologies to supportefficient resource allocation, quality services and effective decision-making and topromote citizen involvement.Association Operations.Conduct the operations of the Association in a manner thatexemplifies the highest standards of financial management and member service.2.The GFOA established the Certificate of Achievement for Excellence in FinancialReporting Program (CAFR Program) in 1945 to encourage and assist state and localgovernments to go beyond the minimum requirements of generally accepted accountingprinciples to prepare comprehensive annual financial reports that evidence the spirit oftransparency and full disclosure and then to recognize individual governments thatsucceed in achieving that goal.Reports submitted to the CAFR program are reviewed by selected members of the GFOAprofessional staff and the GFOA Special Review Committee (SRC), which comprisesindividuals with expertise in public-sector financial reporting and includes financialstatement preparers, independent auditors, academics, and other finance professionals.3The number of state and local governmental entities that were awarded the CAFRCertificate for the fiscal year2013are:Certificate of Achievement for Excellence in Financial Reporting 2013ProgramResults:College/University-80Municipality-1,997Council of Government-18Employee Benefit-171County-514School District-542Enterprise Fund-473State-45Other270Totalaward recipients4,110

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-7ProblemsP.1-1.a.The authority’s cash requirements in Year 1 would be as follows (in millions):Wages, salaries and other operating costs$6.0Purchase of equipment$10.0Less: Issuance of bonds10.00.0Interest on bonds0.5Purchase ofadditionalequipment0.9Total cash outlays (revenue requirements)$7.4b.In Year 2, they would be:Wages, salaries and other operating costs$6.0Interest on bonds0.5Total cash outlays (revenue requirements)$6.5c.In Year 10, they would be:Wages, salaries and other operating costs$6.0Interest on bonds0.5Repayment of bonds10.0Total cash outlays (revenue requirements)$16.5d.The budgeting and taxing policies fail to promote interperiod equity. Theeconomiccosts incurred by the authority—the wages, salaries, other operating costs, andportion of equipment consumed—were the same each year. Yet, tax payments willdepend on when the equipment was purchased and when the debt was repaid.Taxpayers of Year 10 will have to pay for equipment that provided services to thetaxpayers of the previous nine years.Interperiod equity could be achieved by budgeting on anaccrualrather than a cashbasis.Thebudgetwouldthenincludean annualchargeof$1.3 millionfordepreciation—$1 million on the ten-year equipment; $0.3 million on the three-yearequipment. Annual required revenues would be $7.8 million:Wages, salaries and other operating costs$6.0Interest on bonds0.5Depreciation on equipment1.3Total revenue requirements$7.8This practice might,however,be objectionable tosome taxpayersbecause itrequires that they contribute cash to the authority in years prior to those in which itwill actually be expended. Thus, for example, at the end of Year 1 the authority willhave a cash “reserve” of $0.4 million—the difference between the $7.8 million in

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-8taxes collected and the $7.4 million in cash outlays.The authority could alsoachieve interperiod equity by issuing serial bonds (those in which a portion of theprincipal matures each year over the life of the issue) or by establishing andcontributing to a debt service “sinking fund.” By taking either of these approaches,the authority would, in effect, be repaying the bonds over the period in which theequipment is used and thereby matching equipment costs with equipment benefits.P.1-21.The information provided should, by itself, pose no obstacle to approving the loan.For sure, revenues just cover expenditures, allowing for no excess to cover the debtservice on the loan and the additional operating expenditures that will be incurredwhen the classroom building is put into use. The key issue facing a loan officer,however, is whether the churchmembersare both willing and fiscally able to payfor the new facility and to cover the additional operating costs. The fiscal capacityof the church cannot be assessed independently of that of its members.The financial statements reveal that the church’s assets will have a market value of$7.2 million (new and old facilities plus cash and investments) when the classroombuilding is complete. If some or all of these assets are used to secure the loan, thenthe bank may have a reasonable cushion against default. However, market values ofchurches or other special-purpose facilities are notoriously unreliable. Moreover, forobvious reasons, banks are reluctant to foreclose on local churches.2.The loan officer may wish to review the financial statements for “smoking guns”such as contingent liabilities, litigation, or unusual transactions. However, assumingthat none are found, there is likely to be little in the financial statements to providethe basis for a loan decision.3.If the loan officer were to approve the loan, he would likely do so in large measurebecause he has had a business relationship with members of the church and hasconfidence in their ability to manage the church and assure that the loan is repaid.Accordingly, he would probably want to review whatever information is availableas to the character and credit worthiness of key church members and officers.4.As implied in parta, as a matter of policy the church, like many not-for-profitorganizations, generates only enough revenues to meet its expenditures. If themembers opt to enhance the level of services provided by the church by building anew facility—and thereby increase expenditures—then presumably they will alsoincrease their dues and contributions.Financialstatementsofmanynot-for-profitsareinadequateformakingloandecisions because they report only on the entities themselves. However, the entities’true fiscal condition cannot be determined apart from that of their constituents.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-9P.1-3The objective of budgetary compliance can best be served by recording each transactionon the same basis as it is budgeted—in this case, on amodified cashbasis. That ofinterperiod equity can best be achieved by identifying the economic substance of eachtransaction and recording it when it has its substantive economic impact—that is, on anaccrualbasis.1.Budgetary compliance: No expenditure recognized in 2017. Recognize the $128,000in wages and salaries as an expenditure entirely when paid in 2018.Interperiod equity: Recognize the amounts when earned, entirely in 2017.2.Budgetarycompliance:Recognizecostofthepensioncontributionwhenthe$170,000 payment was made in 2018.Interperiod equity:Recognizethe actuarially requiredpensioncontributionof$225,000 in 2017, the year the employees earned the benefits, irrespective of thecity’s actual cash contribution.3.Budgetary compliance: Recognize the vehicle costwhen the cars were paid for,$105,000 in 2017.Interperiod equity: Recognize the vehicle costover the three-year period in whichthe vehicles will be used, $35,000 per year.4.Budgetary compliance: Recognize the $1,000 in interest revenue when received in2018, inasmuch as the interest revenue would increase the value of the marketablesecurities and marketable securities are included within the government’s definitionof cash.Interperiod equity: Recognize the interest when earned, in 2017.5.Budgetary compliance: Recognize the expenditure for use of the building as thebuilding is paid for, $400,000 per year for 25 years.Interperiod equity: Recognize the cost of the building as it is used, irrespective ofwhen it is paid for; in this case $400,000 per year for 25 years.6.Budgetary compliance:Recognize the issuance of the bonds and the purchase of thebuilding in 2017.Recognize the expenditure for use of the building when it is paidfor, $10 million in 2042.Interperiod equity: As previously stated, recognize the cost of the building as it isused, irrespective of when it is paid for, in this case $400,000 per year for 25 years.7.Budgetary compliance: Recognize the entire $120,000 in license fee revenue in2017as cash is received.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-10Interperiod equity: Recognize the license fee revenue over the period covered by thelicense and in which the related inspections will be carried out, thus $60,000 for thehalf-year of 2017and $60,000 for 2018.8.Budgetary compliance: Recognize the $300,000 borrowed as a revenue whenreceived in 2017, and then as an expenditure when repaid in 2018. Note that in thisexample, the increase in cash may be considered “other sources of funds” ratherthan as revenue. The impact on fund balance is the same, however.Interperiod equity: This transaction would result in an increase in cash and anoffsetting increasing in a payable. No recognition would be given as a revenue or anexpendituretoeitherthereceiptoftheamountborrowedoritssubsequentrepayment.P.1-41.a.The statements are clearly silent as to the accomplishments of the university.Indeed, they give no indication either as to what the university’s objectives areor whether they have been met.b.Efficiency is a ratio of inputs to outputs (resources to results). Inasmuch as thestatements do not report on results, the user can make no assessments as toefficiency.c.The statements give no information as to the nature, condition or market valueof the university’s physical properties. Equally significant they give no clues asto what the university’s plant requirements are for the present, let alone whatthey will be in the future.d.Thestatementsprovidenoindicationastowhattheuniversity’sfiscalrequirements will be in the future. They say nothing, for example, aboutanticipated student enrollments, state appropriations, research grants, programrequirements, etc. Accordingly, no comparison can be made between 2017and2018.e.The statements indicate that the ratio of cash to both short and long-termobligations is approximately the same in 2018as it was in 2017. Assuming thatthe cash balance was adequate for 2018it appears that it will be adequate for2019. However, the statements give no indication as to whether cash inflowscan be expected to be the same in the future as they were in the past or whetherthere will be new demands for cash (e.g., for maintenance and repairs or fornew facilities or programs).2.Each of the questions is consistent with the objectives. They demonstrate that thefinancial statements of not-for-profits, if limited to the types of data included inbusiness-type statements, cannot possibly fulfill all the GASB or FASB objectives.These statements provide insufficient information to assess past performance or the

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-11adequacy of current resources to meet future requirements. At the very least theywould have to contain information on the entity’s goals and accomplishments.P.1-51.Among governments that should be considered are towns, townships, cities, schooldistricts, utility districts, road districts, library districts, hospital districts, communitycollege districts, airport authoritiesand transportation districts.2.The overlapping governments may rely on the same property or citizens for their taxrevenues. Thus, to determine the “fiscal capacity” of one government it may benecessary to assess that of the others. For example, the outstanding debt of theschool district must be taken into account in evaluating the borrowing capacity ofthe overlapping city, because the debt of both governments will have to be repaidfrom taxes on the same property.P.1-6a.(1)Inasmuch as the city budgets on a cash basis, delaying the payment of bills byone week would reducethe budget deficit, shifting cost to the next year. Itwould have no impact on the accrual-based financial statements and only avery minordirectimpact on the city’s substantive economic well-being (i.e.,the city would have the use of the required cash for an additional few days).(2)Speeding-up recognition of property taxes would also reduce the budget deficitbut have no impact on the financial statementsand would shift revenue fromone year to another. It would have no direct impact on the city’s substantiveeconomicwell-beingasitwouldnotaffectthetimingofactualcashcollections.(3)Delaying the recognition of expenditures would also reduce the budget deficit,have no impact on the financial statements and have no impact on the city’ssubstantive economic well-being. Like speeding-up recognition of propertytaxes, it would not affect the timing of actual cash collections.(4)Deferringmaintenancewouldreducethebudgetdeficitandreducetheexpenditures reported in the accrual-based financial statements. Assuming thatthe initially planned maintenance expenditures were necessary (and that thecity’s maintenance schedule was optimal), the change would have a negativeeffect on the city’s substantive well-being. It would likely result in increasedexpenditures in the future.Each of these proposals may substantively affect the city’s financial well-beingindirectlyin that they would enable the city to legally balance its budget and therebyavoid the adverse consequences of a deficit. Of course, sophisticated analysts mightrecognize the city’s measures as gimmicks and “one-shots” that would create fiscalpressures in the future. They might thereby downgrade the city’s credit rating ortake other actions that would have a negative impact on the city’s fiscal well-being.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-12b.Accounting principles donotdirectlyaffectan entity’seconomic well-being.However, if they change the data presented in budgets or other financial reports thatare relied upon to make legal determinations, credit assessments, or other decisions,theirindirectimpact can be profound. As a consequence of those decisions the citycan be denied loans or grants(or have to incur higher interest costs)or alter theallocation of its resources.P.1-7There are no clear-cut answers to these questions. It addresses an issue that has been onthe GASB’s agenda since the board was first established and will be dealt with in greaterdepth later in the text in the chapter on business-type activities.1.In a broad sense, the financial reporting objectives of the private company are likelyto be similar to those of the government. Financial reporting should provideinformationonthepastperformanceandcurrentfinancialconditionofthedepartment. To be sure, the owners of the private company measure performance interms of profitability, whereas the citizens of the town are concerned mainly with“service” (subject to the constraint that costs are covered by fees). This differencealone may have important implications as to the types of data that are collected andhow they are reported. From a practical perspective, however, the “traditional”information requirements—data on revenues, expenditures, assets and liabilities—are likely to be the same.2.In light of the requirement that the department was expected to break-even, there arelikelytobe fewoperatingdifferences betweenthe informationneeds ofthemanagers of the department as owned and operated by the private company asopposed to the town.P.1-81.Assuming that the PAC is profit oriented and is thereby interested in maximizingthe present value of incremental cash flows, the decision is straight-forward:Additional annual net cash flows: 20 students x50 weeks x incremental revenues of $30($130less $100)$30,000Present value of an annuity of $1 for 3 periods at 10 percent2.4869Present value of net cash flows$74,607Because the present value of the incremental cash inflows exceeds the asset cost of$60,000, the PAC should acquire the asset.2.The CYA, by contrast has no such convenient algorithm to rely upon. The keyquestion faced by the CYA is whether alternative uses of the $60,000 would betterenable it to fulfill its mission. The limited information provided is inadequate tomake a decision.

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-133.The objective of not-for-profits such as the CYA is to serve their communities, notto earn profits or maximize cash flows. Hence, the conventional discounted cashflow capital budgeting model is not appropriate because it focuses on cash flows. Tobe appropriate for a not-for-profit, a capital budgeting model would have to takeintoaccountthe benefitsthat relatespecificallytotheorganizations’ uniqueobjectives.Nevertheless, for some capital budgeting decisions, the conventional discountedcash flow approaches may be appropriate. These would include purchase decisions,for example, when the benefits to be derived from the asset under consideration arecash savings rather than enhanced service.P.1-91.Were the city to accept the offer, its total savings would be only $8.1 million.Wages and salaries$4.0Supplies2.6Other cash expenditures1.3Rent0.2Total savings$8.1The cost of obtaining the service from the private company would be $8.5 million.Hence the offer should be rejected.For purposes of this decision, the cost of $8.9 million used to establish billing ratesis not relevant. It includes allocated overhead costs, some of which could not bereduced were the city to accept the offer.2.The total savings to the city would be unaffected by its allocation policy. Theywould remain at $8.1 million. Therefore, if the offer were rejected when costs wereallocated, it should also be rejected when costs were not allocated. The $7.9 millionis no more relevant than the $8.9 million. The relevant amount is still the $8.1million in expected savings.There may be sound reasons for the city to allocate overhead costs for purposes ofestablishing billing rates. However, the allocated costs are not relevant for thedecision whether to perform a service internally or acquire it externally.P.1-10a.1.Thereportedpensioncostshouldbebasedontheactuariallyrequiredcontribution, not on the actual cash contribution.2.The contribution to the rainy-day reserve should be accounted for as aninternal designation of resources. The accounting should make clear that total

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-14assetsofthegovernmentarenotaffectedbythearbitrary,nonbindingmanagement decision to set aside cash for a particular purpose. Thus, thetransfer should affect only asset accounts, not revenues or expenditures.3.The securities should be accounted for at market value. In that way the gainwould not be recognized entirely in the year of sale—a year in which increasein market price did not necessarily take place—and management could notpick the year to enhance its revenues.4.The city could automatically report an annual maintenance expenditure equalto some predetermined amount (perhaps an average of expenditures over theprevious five years.) The charge would be offset by a liability (e.g., “deferredmaintenance”), which would be reduced only by actual maintenance outlays.b.A fundamental objective of financial reporting is to report on budgetary compliance.To the extent that the financial reports are on an accrual basis whereas the budget ison a cash basis, they would not achieve this objective. Moreover, the reportedexpenditures, for both maintenance and (though to a lesser extent) pensions could beconsidered arbitrary—that is, not based on specific transactions.P.1-111.Per capita debt (before change) = debt/population $1,200,000,000/800,000 = $1,5002.Per capita debt (after change) = $1,800,000,000/800,000 = $2,2503.a).The change in the accounting principle will increase the reported liability, butit will have no direct impact on the city’s fiscal condition.The promises toemployees and retirees will remain the same; hence future cash flows will alsoremain the same. Only the way “the story” is told will change.b).Assumingthatthenotestothefinancialstatementsprovidedthesameinformation that would now be reported on the balance sheet, there is no reason whythe analyst should change the city’s bond rating.The analyst would have been (ormost certainly should have been) aware of the existence, as well as the magnitude, ofthe pension obligation.If, however, the new rules required that the liability becomputeddifferentlyandtherebybettercaptureditstrueeconomicvaluethefinancial statementswould have provided the analyst with improved information.This newinformation might give the analyst reason to change the rating.Questions for Research, Analysis and Discussion1.The GASB in 2006 issued a “white paper,” “Why Governmental Accounting andFinancial Reporting Is—and Should Be—Different,” which as implied by the titlesets forth numerous reasons as to why governments are unique and therefore justifytheir own standard-setting organization.The characteristics identified include:

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Granof,Khumawala, Calabrese & Smith7e, Government and Not-for-Profit Accounting1-15Organizational purposesSources of revenueRelations with stakeholdersPotential for longevityRole of the budgetIn addition the report points to several other differences in how governmentalaccounting differs from business accounting:The reporting model has several unique features.There are special issues of how to define the reporting entity.Long-lived assets have different purposes (e.g., in governments they are notintended to generate cash flows).They engage in numerous types of nonexchange transactions.The GASB white paper is available on the organization’s web site.Not-for-profitentities,obviouslyhavemanyofthecharacteristicsofbothgovernments and businesses.Some, like agricultural cooperatives, country clubs orhospitals, are virtually the same as businesses.Others, such as health and welfareorganizations have more of the characteristics of governments.In reality, not-for-profitentitiescould legitimatelybeplaced withinthe purview of either the GASB orthe FASB. The decision to place not-for-profits withinthe purview of the FASB wasinfluenced more by “political” considerations than by any fundamental organizationalcharacteristics.2.The GASB in its Concepts Statement No. 1,Objectives of Financial Reporting,explicitly recognizes that “Financial reporting should provide information to assistusers in assessing the service efforts, costs, and accomplishments of the governmentalentity.”Moreover, it had devotedConcepts Statement No. 2,Service Efforts andAccomplishments(SEA)Reportingentirely to this objective.After 20 years ofconducting research and constituent outreach on SEA reporting, GASB issued in2009 the revised and updated version of its Concepts Statement No. 2,Service Effortsand Accomplishments Reporting As Amended by GASB Concepts Statements No. 3and No. 5and offers the strongest endorsement to date of enhanced SEA reporting.Ithas long been the position of many GASB members and constituents that informationon service efforts and accomplishments (SEA) should indeed be incorporated intocomprehensive annual financial reports. Nevertheless, many other constituents of theGASB believe that, even though, information on SEA is important, it does not relatedirectlytofinancialreportingandshouldbereportedinseparatestatements.Accordingly,theGASBhasnotyetformallyproposedincorporatingSEAinformation in the Comprehensive Annual Financial Report (CAFR).

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