CHAPTER ONE

OVERVIEW OF GOVERNMENTAL AND NOT FOR PROFIT ORGANIZATIONS

1.0. Learning objectives

At the end of this chapter, you should be able to:

 Identify the authoritative bodies responsible for setting financial reporting standard for state and
local governments, the federal government, and not-for-profit organizations.
 Contrast and compare the objectives of financial reporting for state and local governments,
the federal government, and not-for-profit organizations.
 Describe the elements of financial reporting of Not For Profit organizations
 Identify and explain the characteristics that distinguish governmental and not-for-profit entities
from for-profit entities.
 Explain the different objectives, measurement focus, and basis of account ing of the
government-wide financial statements and fund financial statements of state and local
governments.

1.1. Introduction

Welcome to the strange new world of accounting for governmental and not-for-profit organizations!
Initially, you may find it challenging to understand the many new terms and concepts you will need to
learn. Moreover, if you are like most readers, you will question at the outset why governmental and
not-for-profit organizations find it necessary to use accounting practices that are very different from
those used by for-profit entities.

As you read this first chapter of the module, the reasons for the marked differences between
governmental and not-for-profit accounting and for-profit accounting should become apparent.
Specifically, governmental and not-for-profit organizations serve entirely different purposes in society
than do business entities. Furthermore, because such organizations are largely financed by taxpayers,
donors, and others who do not expect benefits proportional to the resources they provide, management
has a special duty to be accountable for how those resources are used in providing services. Thus, the
need to report on management’s accountability to citizens, creditors, oversight bodies, and others has

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played a central role in shaping the accounting and reporting practices of governmental and not-for-
profit organizations.

This first chapter will give you a basic conceptual foundation for understanding the unique
characteristics of these organizations and how their accounting and financial reporting concepts and
practices differ from those of for-profit organizations.

1.2. What Are Governmental and Not-for-Profit Organizations?

Organizations do exist to serve the public through provision of goods and services. But the underline
intention of serving the public might be different from organization to organization. Some of them
embarked in such activity with the aim of making more money, whereas some are with aim of only
serving the fundamental needs of the public for free or on cost reimbursement basis. What they
emphasize is only addressing the vital needs of the society and creating conducive living environment.
Those organizations try to make more money (profit) while serving the public are called Profit Making
or For Profit Organization(FP) and their counter parts (those with no intention of making profit) are
called Non Profit Making or Non Profit Organizations (NPO). In its broad sense, the term non - profit
refers to all entities that are not in business to make a profit. Thus, the term encompasses both
governmental and other non for profit entities. NFPs can even be categorized as Government and Non
Government Organizations (NGOs).

NFPs will usually have specific purpose for their existence other than simply to increase the wealth of
their owners. NFPs have sub-purpose within their main purpose. It follows then, that the resources
obtained by NFPs will be used only for their specific purpose(s)

The major types of not for profit organizations may be classified as:

 Governmental: Federal Offices, Regional Offices, Municipalities, and other governmental

organizations
 Educational: Schools, Colleges and Universities
 Health and Welfare: hospitals, child protection agencies, clinics etc
 Religious: Associations and other religion related organizations
 Charitable organizations and agencies
 Foundations: Private trusts and corporations organized for educational, religious or charitable
purposes. Example, Clinton foundation,
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Governmental and not-for-profit organizations are vast in number and range of services provided.
In many countries, governments exist at the federal, state, and local levels and serve a wide variety of
functions.

States, counties, municipalities (for example, cities and villages), and townships are general
purpose governments -governments that provide many categories of services to their residents (such
as police and fire protection; sanitation; construction and maintenance of streets, roads, and bridges; and
health and welfare). Independent school districts, public colleges and universities, and special districts
are special purpose governments- governments that provide only a single function or a limited
number of functions (such as education, drainage and flood control, irrigation, soil and water
conservation, fire protection, and water supply).

1.3. Distinguishing Characteristics of Governmental and Not-for-Profit Entities

Governmental and not-for-profit organizations differ in important ways from business organizations.
Moreover, as mentioned at the beginning of this chapter, accounting and financial reporting for
governmental and not-for-profit organizations are markedly different from accounting and financial
reporting for businesses. An understanding of how these organizations differ from business
organizations is essential to understanding the unique accounting and financial reporting principles
that have evolved for governmental and not-for-profit organizations.

In its Statement of Financial Accounting Concepts No. 4, the Financial Accounting Standards Board
(FASB) noted the following characteristics that it felt distinguished governmental and not-for-profit
entities from business organizations.

a) Receipts of significant amounts of resources from resource providers who do not expect to receive
either repayment or economic benefits proportionate to the resources provided. Those
contributing financial resources to the organizations do not necessarily receive a direct or
proportionate share of those organizations‘ services or goods:
b) Operating purposes that are other than to provide goods or services at a profit or profit
equivalent.
c) Absence of defined ownership interests that can be sold, transferred, or redeemed, or that convey
entitlement to a share of a residual distribution of resources in the event of liquidation of
the organization.

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 d) Most of them are governed by elected board of directors: decisions regarding the whole
activities of service rendering and resource allocation are to be made by the elected board. There
is no individual decision.

1.3. Similarities between NFPs and For Profit Organization

NFPs are similar in many ways to profit seeking enterprises. These includes

a) Both are the integral part of an economic system and use financial, capital and human resources to
accomplish their purpose
b) Both must acquire and convert scarce resources into their respective goods and services
c) As their resources are scarce, cost analysis and other control and evaluation techniques are
essential to ensure that resources are utilized economically, effectively and efficiently
d) Both employ journals and ledgers, and then use those journals and ledgers as a basis to produce
financial reports which summarize the information in a meaningful way to guide decisions.

1.5. Sources of Financial Reporting Standards

Illustration 1-1 shows the primary sources of accounting and financial reporting standards for
business and not-for-profit organizations, state and local governments, and the federal government.
Specifically, the FASB sets standards for for-profit business organizations and nongovernmental not-
for-profit organizations; the GASB sets standards for state and local governments, including
governmental not-for-profit organizations; and the Federal Accounting Standards Advisory Board
(FASAB) sets standards for the federal government and its agencies and departments.

Authority to establish accounting and reporting standards for not-for-profit organizations is split
between the FASB and the GASB because a sizable number of not- for-profit organizations
(particularly colleges and universities, and hospitals) are governmentally owned, but most are
independent of governmental units. Accordingly, the GASB has the responsibility for establishing
accounting and financial reporting standards for not-for-profit organizations that are considered to be
governmental in character. The FASB has the responsibility for establishing accounting and financial
reporting standards for nongovernmental not-for-profit organizations.

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The GASB and the FASB are parallel bodies under the oversight of the Financial Accounting Foundation.
The Financial Accounting Foundation appoints the members and supports the operating expenses
of the two boards by obtaining contributions from business corporations; professional organizations
of accountants, financial analysts, and other groups concerned with financial reporting; CPA firms;
debt-rating agencies; and state and local governments (in the case of the GASB). Because of the
breadth of support and the lack of ties to any single organization or governmental unit, the GASB
and the FASB are referred to as “independent standards-setting boards in the private sector.”

Before the creation of the GASB and the FASB, financial reporting standards were set by groups
sponsored by professional organizations: The forerunners of the GASB (formed in 1984) were the
National Council on Governmental Accounting (1973 - 84), the National Committee on
Governmental Accounting (1948—73), and the National Committee on Municipal Accounting (1934
- 41). The forerunners of the FASB (formed in 1973) were the Accounting Principles Board (1959 - 73)

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and the Committee on Accounting Procedure (1938- 59) of the American Institute of Certified Public
Accountants.

Federal statutes assign responsibility for establishing and maintaining a sound financial structure for the
federal government to three officials: the Comptroller General, the Director of the Office of Management
and Budget, and the Secretary of the Treasury. In 1990, these three officials created the Federal
Accounting Standards Advisory Board (FASAB) to recommend accounting principles and standards for
the federal government and its agencies. It is understood that, to the maximum extent possible, federal
accounting and financial reporting standards should be consistent with those established by the GASB
and, where applicable, by the FASB.

Unlike the FASB and the GASB, which focus their standards on external financial reporting, the FASAB
and its sponsors in the federal government are concerned with both internal and external financial
reporting. Accordingly, the FASAB has identified four major groups of users of federal financial reports:
citizens, Congress, executives, and program managers.

In Rule 203 of its Code of Professional Conduct, the American Institute of Certified Public
Accountants (AICPA) has formally designated the GASB, the FASAB, and the FASB as the
authoritative bodies to establish generally accepted accounting principles (GAAP) for state and local
governments, for the federal government, and for business organizations and nongovernmental not-
for-profit organizations, respectively. “Authority to establish accounting principles” is interpreted in
practice to mean “authority to establish accounting and financial reporting standards.”

1.6. Objectives of Financial Reporting

Every organization wants to be successful. Of course, in order to know if it is successful “success” must be
defined in terms of goal. And then the organization should measure its results against its goals.
Measuring success is often thought of in terms of effectiveness (achieving the goal at the highest
level) and efficiency (achieving the goal though using the least amount of resources). For profit-seeking
organizations, both efficiency and effectiveness can easily be measured with financial statements. The
financial statements will give answers to questions like what were the revenues and expenses? Were
those revenues sufficient to maximize profit? If the revenues are sufficient, then we can say that the
organization has met its goals? Accounting and reporting for governmental and non-profit organizations
differ markedly from that of for profit organizations. In profit making entities all the activities are to

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increase the owners‘ welfare, which is usually measured in terms of profitability. Both investors and
employees are interested in maximizing profits, there is single purpose. But judging the performance of
entities whose goal is not profit maximization is more difficult and subjective. Effectiveness and
efficiency of NFPs cannot be measured in the same way as for profits, since they do not operate for
generating profit. Evaluating performance to determine whether any service was best or at the highest
level possible is not simply an economic judgment but it is a political and social as well. So NFPs financial
reporting should address such issues via alternate mechanisms. The reporting should mainly
emphasize for assuring the efficient and effective utilization of resource by evidencing whether the
resources are spent as per the intended purpose and for attaining the maximum possible goal.

In its Concepts Statement No.1, “Objectives of Financial Reporting,” the Governmental Accounting
Standards Board stated that “Accountability is the cornerstone of all financial reporting in
government. Accountability requires governments to answer to the citizenry - to justify the raising
of public resources and the purposes for which they are used. The board elaborated: Governmental
accountability is based on the belief that the citizenry has a “right to know,” a right to receive
openly declared facts that may lead to public debate by the citizens and their elected
representatives. Financial reporting plays a major role in fulfilling government’s duty to be publicly
accountable in a democratic society. Illustration 1–2 shows several ways that state and local
governmental financial reporting is used in making economic, social, and political decisions and assessing
accountability.

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Closely related to the concept of accountability as the cornerstone of governmental financial reporting is
the concept the GASB refers to as inter period equity. The concept and its importance are explained as
follows:

The Board believes that inter period equity is a significant part of accountability and is fundamental to
public administration. It therefore needs to be considered when establishing financial reporting objectives.
In short, financial reporting should help users assess whether current-year revenues are sufficient to pay for
services provided that year and whether future taxpayers will be required to assume burdens for services
previously provided

Accountability is also the foundation for the financial reporting objectives the FASAB has established for
the federal government. Accounting and Reporting Concepts Statement No.1 identifies four objectives of
federal financial reporting (see Illustration 1–2) focused on evaluating budgetary integrity, operating
performance, stewardship, and adequacy of systems and controls.

Unlike the FASB and the GASB, which focus their standards on external financial reporting, the FASAB
and its sponsors in the federal government are concerned with both internal and external financial
reporting. Accordingly, the FASAB has identified four major groups of users of federal financial reports:
citizens, Congress, executives, and program managers. Given the broad role the FASAB has been assigned,
its standards focus on cost accounting and service efforts and accomplishment measures, as well as on
financial accounting and reporting.

Financial reports of not-for-profit organizations—voluntary health and welfare organizations, private

colleges and universities, private health care institutions, religious organizations, and others—have
similar uses. However, as Illustration 1–2 shows, the reporting objectives for not-for-profit organizations
emphasize decision usefulness over financial accountability needs, presumably reflecting the fact that the
financial operations of not-for-profit organizations—as compared to those of governments— are
generally subject to less detailed legal restrictions.

1.7. Financial Reporting of State and Local Governments

Like the FASB, the GASB has issued concepts statements that communicate the framework within
which the Board strives to establish consistent financial reporting standards for entities within their
jurisdiction. The GASB, as well as the FASB, is concerned with establishing standards for financial
reporting to external users - those who lack the authority to prescribe the information they want and
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who must rely on the information management communicates to them. The Board does not intend to
set standards for reporting to managers and administrators or others deemed to have the ability to
enforce their demands for information.

Illustration 1-3 displays the minimum requirements for general purpose external financial reporting
under the governmental financial reporting model specified by GASB Statement No. 34. Central to the
new model is the management’s discussion and analysis (MD&A).The MD&A is Required
Supplementary Information(RSl) designed to communicate in narrative, easily readable form the
purpose of the basic financial statements and the government’s current financial position and results of
financial activities compared with those of the prior year.

As shown in Illustration 1-3, GASBS 34 prescribes two categories of basic financial statements,
government-wide and fund. Government-wide financial statements are intended to provide a highly
aggregated overview of a government’s net assets and results of financial activities. The government-
wide financial statements report on the government as a whole and assist in assessing operational
accountability- whether the government has used its resources efficiently and effectively in meeting
operating objectives. The GASB concluded that reporting on operational accountability is best
achieved by using essentially the same basis of accounting and measurement focus used by business
organizations: the accrual basis and flow of economic resources measurement focus.

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Fund financial statements, the other category of basic financial statements, assist in assessing fiscal
accountability - whether the government has raised and spent financial resources in accordance
with budget plans and in compliance with pertinent laws and regulations. Certain funds, referred to
as governmental funds, focus on the short-term flow of current financial resources rather than on the
flow of economic resources. Other funds, referred to as proprietary and fiduciary funds, account for the
business-type and certain fiduciary activities of the government. These funds follow accounting and
reporting principles similar to those of business organizations, although a number of GASB standards
applicable to these funds differ substantially from FASB standards applicable to business organizations.

As shown in Illustration 1-3, the notes to the financial statements are considered integral to the
statements. In addition, governments are required to disclose certain RSI (other than MD&A).

OVERVIEW OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR)

State and local governments are encouraged to prepare a Comprehensive Annual Financial Report
(CAFR). According to the GASB Codification Sec. 2200:

A comprehensive annual financial report should be prepared and published, covering all funds and
activities of the primary government (including its blended component units) and providing an overview
of all discretely presented component units of the reporting entity—including introductory section,
management’s discussion and analysis (MD&A), basic financial statements, required supplementary
information other than MD&A, combining and individual fund statements, schedules, narrative
explanations, and statistical section.

Serious users of governmental financial information need much more detail than is found in the MD&A,
basic financial statements, and RSI (other than MD&A). For state and local governments, much of that
detail is found in the governmental reporting entity’s comprehensive annual financial report (CAFR),
which is considered the entity’s official annual report published as a matter of public record. Standards
for the content of the CAFR are found in the GASB’s Codification of Governmental Accounting and
Financial Reporting Standards. Each CAFR should contain the following sections.

Introductory Section: Introductory material includes items such as title page and contents page, the
letter of transmittal, and other material deemed appropriate by management. The letter of
transmittal may be literally that - a letter from the chief financial officer addressed to the chief executive
and governing body of the governmental unit - or it may be a narrative over the signature of the
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chief executive. In either event, the letter or narrative material should cite legal and policy requirements
for the report. The introductory section is not audited.

Financial Section: The financial section of a comprehensive annual financial report should include (
1 ) an auditor’s report, (2) management’s discussion and analysis (MD&A), (3) basic financial statements,
(4) required supplementary information (other than MD&A), and (5) other supplementary information,
such as combining statements and individual fund statements and schedules.

The auditor’s report, placed at the beginning of the financial section, normally expresses an opinion on
the basic financial statements. Like other audits, CPAs are required to conduct government audits
according to auditing standards issued by the American Institute of Certified Public Accountants. In
addition, specialized governmental auditing standards must be followed.

Management’s Discussion and Analysis (MD&A)

The MD&A (Illustration 1–4) provides an opportunity for the government to provide, in plain terms, an
overview of the government’s financial activities. This section is considered Required Supplementary
Information, which means that it is required and entails some auditor responsibility, but not as much as
the basic financial statements. Auditors review the material to establish that it is not misleading in
relation to the basic statements but do not include the MD&A in the scope of the audit. A number of
specific items must be included:

1) A brief discussion of the financial statements.

2) Condensed financial information derived from the government-wide financial statements,
comparing the current year with the prior year.
3) An analysis of the government’s overall financial position and results of operations to assist users
in assessing whether financial position has improved or deteriorated as a result of the year’s
operations.
4) An analysis of balances and transactions of individual funds.
5) An analysis of significant variations between original and final budget amounts and between final
budget amounts and actual results for the General Fund.
6) A description of significant capital asset and long-term debt activity during the year.
7) A discussion by governments that use the modified approach to report infra- structure assets, that
includes: discussion of changes in the condition of infrastructure assets, comparison of assessed

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 condition with the condition level established by the government, and disclosure of the difference
between the amounts needed to maintain infrastructure assets and the amount actually expended.
8) A description of any known facts, decisions, or conditions that would have a significant effect on
the government’s financial position or results of operations.
Illustration 1-3: Management’s Discussion and Analysis

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Government-wide Financial Statements

1) Statement of net assets (see Illustration 1.5).

2) Statement of activities (see Illustration 1.6).

Fund Financial Statements

1) Balance sheet—governmental funds (see Illustration 1.7b).

2) Statement of revenues, expenditures, and changes in fund balances—governmental funds (see
Illustration 1.8b).
3) Statement of net assets—proprietary funds
4) Statement of revenues, expenses, and changes in fund net assets—proprietary funds
5) Statement of cash flows—proprietary funds
6) Statement of fiduciary net assets (see Illustration 1.9).
7) Statement of changes in fiduciary net assets (see Illustration 1.10)

Statement of Net Assets

The Statement of Net Assets (Illustration 1–5) presents the asset, liability, and net asset balances
(measured on the accrual basis and economic resources measurement focus) for the entity’s
governmental and business-type activities. Together, the governmental and business activities comprise
the primary government. Similar information is presented in a separate column for the government’s
discretely presented component units. Fiduciary activities, however, are not included in the government
wide statements. Prior year balances may be presented, but are not required.

Assets are generally reported in order of liquidity. A classified approach (presenting separate totals for
current and noncurrent items) may be used, but is not required. Note in particular that capital assets
(property and equipment) are presented in the governmental activities column. This will not be the case
when we examine the governmental fund basis financial statements. The capital assets include
infrastructure and are reported net of accumulated depreciation. Similarly, long-term debt is presented
in the governmental activities column of the government-wide Statement of Activities, but is not
presented for governmental funds in the fund basis balance sheet. The difference between assets and
liabilities is called net assets and is reported in three categories. Invested in capital assets, net of related
debt is computed by taking the capital assets, less accumulated depreciation, and deducting outstanding
debt that is related to the financing of capital assets. Liabilities incurred to finance operations would not
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be deducted. Restricted net assets include resources that are restricted by ( a) external parties,
including creditors, grantors, contributors, or by laws or regulations of other governments; or ( b) laws
or constitutional provisions of the reporting government. The remaining amount, unrestricted net
assets, is a “plug” figure that is determined by deducting the balances of the other two categories from
the overall excess of assets over liabilities.

Illustration 1–5: Statement of Net Assets

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Government-wide Statement of Activities

Note the general format of the Statement of Activities (Illustration 1–6). Expenses are measured on the
accrual basis and reported first. Expenses for governmental activities are reported initially, followed by
the business-type activities and the component units (reading from top to bottom). Direct expenses,
including depreciation, are required to be reported by function (General Government, Judicial
Administration, etc.). Interest on long-term debt would be included in direct expenses if the interest
related to a single function. Most interest, however, cannot be identified with a single function and should
be shown separately. Interest incurred during construction of capital projects is capitalized and included
in the capital asset on the Statement of Net Assets.

Revenues that can be directly associated with functions are deducted, and a net expense or revenue is
presented. General revenues are presented in the lower right hand section of the statement, and the
change in net assets is computed. General revenues include tax revenues and those revenues that are not
associated directly with a particular function or program. Program revenues include charges for services,
operating grants, taxes levied by a state and shared with the local government, and capital grants and
contributions. Charges for services include charges by enterprise funds as well as fines and forfeits.
Grants and contributions are typically resources provided by other governments.

The Statement of Activities is a consolidated statement within columns (governmental activities,

business-type activities, and component units), which means that inter fund services provided and used
and transfers between two governmental funds are eliminated. Transfers between governmental and
business-type activities are displayed in the general revenues section and offset.

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Illustration 1–6: Statement of Activities

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Governmental Funds: Balance Sheet

Illustration 1–7b presents a Balance Sheet for the governmental funds, including the General, special
revenue, capital projects, and debt service funds. The City of Salem does not have a permanent fund or it
would be presented here as well. Each of the city’s governmental funds is considered a major fund and
presented separately. If the city had multiple smaller funds, they would be aggregated and reported in a
single column labeled non major funds. The governmental fund statements are prepared using the
current financial resources focus and the modified accrual basis of accounting. For this reason, capital
assets and long-term debt do not appear on the balance sheet. The excess of assets over liabilities is
labeled fund balance, an account title used only in the governmental funds. All other funds and the
government-wide statements label the difference between assets and liabilities as net assets.

Several features of the Balance Sheet should be noted. First, a total column is required. Secondly, fund
balance is displayed within the categories of nonspendable, restricted, committed, assigned and
unassigned. These will be more fully described in later chapters, but represent varying degrees of
constraint placed on the use of the (net) resources of governmental funds.

Finally, total fund balances reported in the total column ($12,922,626) must be reconciled to total net
assets ($38,410,768) presented in the governmental activities column of the government-wide Statement
of Net Assets. The reconciliation is presented separately in Illustration 1–7a (below). These amounts
differ because the two statements have different bases of accounting and because most internal service
funds are included in the governmental activities column on the government-wide statements

Illustration 1–7a: Reconciliation to (Government-wide) Statement of Net Asset

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ILLUSTRATION 1–7b: Governmental Funds Balance Sheet

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Governmental Funds: Statement of Revenues, Expenditures, and Changes in Fund Balance

Illustration 2–8b presents the operating statement for the same governmental funds appearing in the
balance sheet. Again, the statement is prepared using the current financial resources measurement focus
and the modified accrual basis of accounting. Revenues are reported by source and expenditures (not
expenses) are reported by character: current, debt service, and capital outlay. Within the current
category, expenditures are presented by function: general government, judicial administration, public
safety, and so on. Within the debt service category, expenditures are displayed as interest or principal.

Following revenues and expenditures, other financing sources and uses are displayed. These reflect inter
fund transfers and the proceeds of issuing debt. Most of the items appearing in this section are eliminated
when preparing the government-wide financial statements. Like all operating statements, reconciliations
to the balance sheet are required. In this case, the operating statement is reconciled to total fund balances
by adding the beginning of year fund balance.

The excess of revenues and other sources over expenditure and other uses ($1,485,357) is reconciled to
the change in net assets ($3,250,795) for the governmental activities column in the government-wide
statement of activities. This reconciliation would normally appear at the bottom of the statement of
revenues, expenditures, and changes in fund balance, but is presented in Illustration 1–8a due to space
considerations.

ILLUSTRATION 1–8a Reconciliation to Statement of Activities

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ILLUSTRATION 1–8b Governmental Funds Statement of Revenues, Expenditures, and Changes in
Fund Balance

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Fiduciary: Statement of Changes in Fiduciary Net Assets

Illustration –9 presents a Statement of Changes in Fiduciary Net Assets. Note that the agency fund does
not appear in this statement. That is because assets equal liabilities in agency funds (zero net assets).
Although fiduciary funds use accrual accounting, the activity accounts are not labeled Revenues and
Expenses. Rather the terms additions and deductions are used to reflect the fact that the government has
only custody of the resources. Recall also that fiduciary funds are not included in the government-wide
financial statements.

Trust funds frequently have substantial investments activities. GASB requires that investments be
reported at fair market value. Changes in the value of investments are reflected in the Statement of
Changes in Fiduciary Net Assets as increase (decrease) in the fair value of investments. In the case of the
City of Salem, this totals $163,050.

ILLUSTRATION 2–9: Statement of Fiduciary Net Assets

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ILLUSTRATION 2–10 Statement of Changes in Fiduciary Net Assets

Notes to the Financial Statements

The notes to the financial statements are an integral part of the basic financial statements. As presented
in Illustration 1–11, the first note is a summary of the significant accounting policies and the first of these
is generally a description of the reporting entity. Any event significant to understanding and interpreting
the financial statements should be described in the notes, whether or not it is specifically required by
GASB standards.

Following is a description of typical contents to the notes:

1) Summary of significant accounting policies, including:

 A brief description of the component units and their relationship to the reporting entity.

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  A description of the activities reported in each of the following columns presented in the basic
financial statements: major funds, internal service funds, and fiduciary fund types.
 A description of the government-wide statements and the measurement focus and basis of
accounting used in the government-wide statements.
 The revenue recognition policies used in the fund financial statements, including the length of
time used to define available for purposes of revenue recognition in the governmental fund
financial statements.
 The policy for eliminating internal activity in the government-wide statement of activities.
 The policy for capitalizing assets and for estimating the useful lives of those assets.
 The policy for defining operating and nonoperating revenues of proprietary funds.
2) Description of cash deposits with financial institutions.
3) Investments.
4) Contingent liabilities.
5) Encumbrances outstanding.

Required Supplementary Information Other than MD&A

Recall that required supplementary information appears in two parts of the financial section: the MD&A
precedes the basic financial statements and certain required supplementary information (RSI) schedules
follow the notes. Among the required schedules are the following: information required when using the
modified approach to infrastructure, budgetary comparison schedule, pension schedules, and schedules
of risk management activities.

Modified Approach for Reporting Infrastructure As an alternative to depreciating infrastructure assets,

governments may choose to use a modified approach. Governments that choose to use the modified
approach must present a schedule of the assessed condition of infrastructure assets and a schedule
comparing the estimated cost to maintain infrastructure assets with the amounts actually expended.

Statistical Information

Governments wishing to present the more complete comprehensive annual financial report (CAFR) will
include a statistical section. This section is not part of the CAFR’s financial section and, like the
introductory section, is not audited. Governments typically present 10 years of information in each table
or schedule. The purpose of the statistical section is to provide historical (trend) information and

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additional detail to help the financial statement user better understand and assess a government’s
economic condition. Failure to include the statistical section will not result in a qualified or adverse audit
opinion.

Statistical information, when presented, should be presented in five categories.

1) Financial trends information assists users in understanding how a government’s financial position
has changed over time.
2) Revenue capacity information is used to assess the government’s ability to generate revenue from
its own sources (i.e., taxes, service charges, and investments).
3) Debt capacity information is used to assess a government’s debt burden and ability to take on
more debt.
4) Demographic and economic information describes a government’s socioeconomic environment
and is used to interpret comparisons across time and between governments.
5) Operating information provides contextual information about a government’s operations such as
number of government employees, volume and usage of capital assets, and indicators of the
demand for government services.

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