FAR II: governmental, not-for-profit and complex transactions

Governmental and not-for-profit accounting is a distinct part of FAR that many candidates neglect because it seems narrow. It is not small on the exam: questions on state and local governments and on not-for-profit organizations appear in both MCQs and simulations, and the rules are different enough from business accounting that guessing rarely works. This lesson reviews both, using the City of Aspen Ridge, Nebraska, and Riverbend Community Pantry from ACCT-412, and then turns to the complex business transactions that FAR tests most often: business combinations, consolidation, foreign currency and derivatives. ACCT-412 and ACCT-311 taught the details; here the focus is on what the exam asks and how to answer quickly.

Two measurement focuses

State and local governments report under standards issued by the Governmental Accounting Standards Board (GASB). The single most important idea is that governments use two measurement focuses and bases of accounting at once. Governmental funds, such as the general fund, special revenue funds, debt service funds and capital projects funds, use the current financial resources measurement focus and the modified accrual basis: revenues are recognized when measurable and available to pay current-period liabilities, and expenditures when the related liability is incurred, with exceptions such as debt service. The government-wide statements use the economic resources measurement focus and the full accrual basis, like a business. Proprietary funds, such as enterprise funds for a water utility, and fiduciary funds use full accrual in their own statements.

Because the fund statements and the government-wide statements use different bases, the financial report includes reconciliations between them. FAR questions frequently ask you to convert a governmental fund figure to its government-wide equivalent or to identify a reconciling item. The program below shows two common ones for Aspen Ridge: property tax revenue, where the fund recognizes only taxes collected within the availability period, and capital assets, where the fund records the full outlay as an expenditure while the government-wide statements capitalize and depreciate.

# FAR II: governmental funds use modified accrual; the government-wide statements use full accrual.
# Property taxes levied for FY2027 (fiscal year ends Sept 30, 2027), in thousands.
levy, collected_in_year, collected_within_60_days, later = 22000, 20400, 900, 500
fund_revenue = collected_in_year + collected_within_60_days     # measurable and available
gw_revenue = levy - 200                                          # less estimated uncollectible
print(f"General fund property tax revenue (modified accrual): {fund_revenue:,}")
print(f"Government-wide revenue (accrual, net of 200 allowance): {gw_revenue:,}")
print(f"Reconciling item, deferred inflows of resources: {gw_revenue - fund_revenue:,}")
# Capital outlay in the fund vs depreciation in the government-wide statements
outlay, depreciation = 6800, 4100
print(f"Capital outlay {outlay:,} less depreciation {depreciation:,} adds {outlay - depreciation:,} to the change in net position")
# Not-for-profit: release of donor restrictions (Riverbend Community Pantry, ACCT-412 style)
restricted_open, new_restricted, spent_for_purpose = 310, 145, 220
print(f"Net assets with donor restrictions: {restricted_open} + {new_restricted} - {spent_for_purpose} = "
      f"{restricted_open + new_restricted - spent_for_purpose}")

General fund property tax revenue (modified accrual): 21,300
Government-wide revenue (accrual, net of 200 allowance): 21,800
Reconciling item, deferred inflows of resources: 500
Capital outlay 6,800 less depreciation 4,100 adds 2,700 to the change in net position
Net assets with donor restrictions: 310 + 145 - 220 = 235

In the general fund, Aspen Ridge recognizes the 20.4 million collected during the year and the 0.9 million collected within 60 days after year end, the availability period most governments use for property taxes, for revenue of 21.3 million. The government-wide statement of activities recognizes the whole levy, net of the 0.2 million allowance for uncollectible taxes, or 21.8 million. The 0.5 million difference is reported as a deferred inflow of resources in the fund and is a reconciling item. For capital assets, the fund records 6.8 million of capital outlay as an expenditure; the government-wide statements capitalize it and record 4.1 million of depreciation, so the reconciliation adds 2.7 million to the change in net position. Know the main reconciling items: capital outlay and depreciation, long-term debt proceeds and repayments, accrued interest, compensated absences, pension and OPEB amounts, and deferred revenue.

Fund types, statements and other GASB topics

Know the fund categories and the statements each uses. Governmental funds present a balance sheet and a statement of revenues, expenditures and changes in fund balances; fund balance is classified as nonspendable, restricted, committed, assigned or unassigned under GASB 54. Proprietary funds present a statement of net position, a statement of revenues, expenses and changes in net position, and a statement of cash flows that uses the direct method and four categories, including noncapital and capital and related financing. Fiduciary funds present a statement of fiduciary net position and changes. The government-wide statements are the statement of net position and the statement of activities, which presents net expense or revenue by function. GASB 103, effective for fiscal years beginning after June 15, 2025, changed parts of the reporting model, including the presentation of proprietary fund statements and the management's discussion and analysis; check which version your exam tests.

Other GASB topics that appear on FAR include the classification of nonexchange revenues under GASB 33 (derived tax revenues such as sales taxes, imposed revenues such as property taxes, government-mandated and voluntary nonexchange transactions), budgetary accounting and encumbrances, interfund transactions and transfers, the infrastructure modified approach, leases under GASB 87 and subscription-based IT arrangements under GASB 96. Do not try to learn every GASB statement; focus on the reporting model, the two bases, revenue recognition and the reconciliation.

Not-for-profit organizations

Private not-for-profit organizations follow FASB standards in ASC 958, not GASB. Their statements are a statement of financial position, a statement of activities, a statement of cash flows and, for all not-for-profits under ASU 2016-14, an analysis of expenses by both nature and function. Net assets are classified in two categories: with donor restrictions and without donor restrictions. When a restriction is satisfied, by spending for the specified purpose or by the passage of time, the amount is reclassified from net assets with donor restrictions to net assets without donor restrictions as a release, shown in the statement of activities. The program's final line shows Riverbend's restricted net assets after receiving 145 thousand of new restricted gifts and spending 220 thousand for restricted purposes.

Contributions are another heavily tested area. Unconditional promises to give are recognized as revenue when made, measured at the present value of expected cash flows if payable later. Conditional promises, which have both a barrier and a right of return or release, are not recognized until the condition is met, under ASU 2018-08. Contributed services are recognized only if they create or enhance a nonfinancial asset or require specialized skills that would otherwise be purchased. Gifts in kind are recognized at fair value and, under ASU 2020-07, presented separately with disclosure of how they are used. Exchange transactions, such as fees for services, are revenue under ASC 606 rather than contributions.

Budgetary accounting and encumbrances

Governments adopt legally binding budgets, and FAR tests how they are recorded and reported. Many governments record the budget in the accounts: estimated revenues and appropriations are entered at the start of the year, so that actual revenues and expenditures can be compared with them throughout the year. When the government places a purchase order, it records an encumbrance to reserve part of the appropriation, so that it cannot be spent twice. When the goods arrive, the encumbrance is reversed and the actual expenditure is recorded, often at a slightly different amount. Encumbrances outstanding at year end are not expenditures or liabilities; they are reported as restricted, committed or assigned fund balance depending on the constraint. A budgetary comparison schedule, usually presented as required supplementary information for the general fund and major special revenue funds, shows the original budget, the final budget, actual amounts on the budgetary basis and the variance. Questions often ask which column a figure belongs in or whether an encumbrance affects fund balance classification, so learn the sequence of entries for a purchase order from appropriation to payment.

Complex business transactions

FAR's remaining heavy topics are business combinations and consolidation, foreign currency, and derivatives and hedging. For business combinations, know that the acquirer measures identifiable assets and liabilities at acquisition-date fair value, recognizes goodwill or a bargain purchase gain, measures noncontrolling interest at fair value, expenses acquisition costs and recognizes contingent consideration at fair value. Consolidation questions test intercompany eliminations: intercompany sales and unrealized profit in inventory, intercompany loans and interest, and the allocation of income to the noncontrolling interest. Variable interest entities appear occasionally; know that the primary beneficiary consolidates.

Foreign currency has two parts. Transactions denominated in a foreign currency, such as a purchase from a supplier in euros, are remeasured at each balance sheet date, with gains and losses in income. Financial statements of a foreign subsidiary are translated into the parent's reporting currency using the current rate method if the subsidiary's functional currency is its local currency, with translation adjustments in other comprehensive income, or remeasured using the temporal method if its functional currency is the parent's currency, with gains and losses in income. Derivatives are measured at fair value; hedge accounting under ASC 815 matches the timing of gains and losses on the derivative with the hedged item, through income for fair value hedges and through other comprehensive income for cash flow hedges. Expect conceptual MCQs and at least one calculation on these topics.