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State and Local Government Accounting Principles

Chapter 2

Learning Objectives
 Discuss major aspects of government financial
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reporting model Define fund and examine broad categories Identify MFBA found in financial statements Analyze effects of transactions Discuss budgetary accounting & reporting Understand revenue, expenditure, expense and interfund activity classifications Understand basic financial reporting requirements

GASBS 34: Basis for Financial Reporting
 Issuance in 1999 marked a major

change in governmental financial reporting  Created dual perspective reporting:

Government-wide financial statements, using accrual accounting Fund financial statements, using other bases of accounting

Basic Financial Statements: Overview Fund Financial Statements 7 .8 Financial Statements Governmental Funds Proprietary Funds Fiduciary Funds Links [Worksheets] Government-wide Financial Statements 2 Financial Statements Reconciliations (Explanations) Governmental Activities Business-Type Activities Total Primary Government Notes to the Financial Statements .

Minimum Requirements for External Financial Reporting: The GASB’s View Management's discussion and analysis Government-wide financial statements Fund financial statements Notes to the financial statements Required supplementary information (other than MD&A) .

Fund accounting 3. Capital Assets & Long-term Liabilities 5.Classifications of Principles 1. GAAP & legal compliance 2. Classification & terminology 6. Annual financial reports . Measurement focus and basis of accounting (MFBA) 4.

Principle 1: Accounting & Reporting Capabilities  Present fairly and with full disclosure funds and activities in conformity with GAAP  Determine and demonstrate compliance with finance-related legal and contractual provisions .

GAAP Requirements  Trying to assure comparability among and between governments  Full disclosure may result in much more information than “adequate” disclosure required by FASB .

Compliance: With What?  With GAAP – in most basic form  With budget requirements – may be complicated if budgetary basis is different then GAAP basis  With requirements of grants received from other governments (special reports or non-GAAP basis reports) .

Budgetary Control and Budgetary Reporting  Annual budget should be adopted by every governmental unit  Accounting system should allow for budgetary control  Budgetary reporting should provide for comparisons for budget and actual information .Principle 10: Budgeting.

Adopting an Annual Budget  Not GAAP – GASB does not have authority to make this a requirement  Typically placed on cities and counties by State and on State by constitutional requirements .

Accounting system allowing for budgetary control  GASB cannot require certain accounting system designs  Still. GASB can encourage governments to use system that will allow for budgetary and financial control over revenues and expenditures or expenses .

Budgetary Reporting  This is a GAAP requirement  GASB requires reporting for General Fund and major Special Revenue Funds as part of minimum reporting requirements  Governments may elect to provide additional reports outside minimum requirements (other information) .

the differences must be explained on face of statement/schedule or elsewhere in report .Information to be provided in budgetary reporting  Original budget  Final budget for the reporting period  Actual inflows and outflows on budgetary basis – if different from GAAP basis.

Principle 2: Fund Accounting Systems  Accounting system should be organized on a fund basis  Fund defined by the GASB .

accounting system better have capabilities for accounting and reporting in this manner . if governments are to report on a fund basis. GASB cannot define capabilities of accounting system  Still.Accounting system  As in budgeting.

and for the people…”  Ordinary people have traditionally run local governments – they designed a system they understand .What is a Fund?  Abraham Lincoln once said that America is a government “…of the people. by the people.

Most people have a checkbook Cash Receipts Checkbook Cash Disbursements Balance .

A “Fund” is an adaptation of the checkbook concept Cash Receipts Fund Cash Disbursements Balance .

Other financial resources and related liabilities added to checkbook concept to get a governmental fund: Cash and Other Financial Resources Related Liabilities Fund Balance – = .

Categories and Types of Funds GOVERNMENTAL FUNDS  General Fund  Special Revenue Funds  Capital Projects Funds  Debt Service Funds  Permanent Funds PROPRIETARY FUNDS  Enterprise Funds  Internal Service Funds FIDUCIARY FUNDS Pension Trust Funds Investment Trust Funds Agency Funds Private Purpose Trust Funds     .

Governmental Funds  Most basic type of fund – use basic fund format defined earlier  Used to account for general government activities  Accounting equation does not allow for capital assets and long-term liabilities – necessitates use of nonfund accounts:   General Capital Assets General Long-Term Liabilities .

& equipment used in general operation of government  General Long-term Liabilities – debt used to finance capital assets and other long-term liabilities not recognized in the governmental funds .Nonfund accounts  General Capital Assets – property. plant.

Proprietary Funds  Used to account for business-like activities of the government:  Golf courses  Maintenance operations  Airports  Utilities  May use more “traditional” accounting equation: Current Assets + Capital Assets – Current + Long-term Liabilities = Net Assets .

Fiduciary Funds  Accounts for assets held by government in trustee or agency capacity for others  Not used to report assets held for government’s own use .

Principle 3: Types of Funds  Provides definition for each fund type  Permanent Fund is exception to rule concerning Governmental Funds – more on that later .

Principle 4: Number of Funds  Governments should use minimum number of funds in order to reduce complexity – must still comply with rules and regulations  Requires use of professional judgment .

Trick Questions: What is the minimum number of funds? One Which is it? The General Fund Some believe the answer is two: Additional fund is Debt Service Fund – used to hide money from governing council to keep them from spending it .

Principle 5: Reporting Capital Assets Must know which fund type is using capital assets:  Proprietary fund – reported at fund and government-wide level  Fiduciary fund – reported only at fund level  Governmental Fund – reported only at government-wide level and in notes to financial statements .

Principle 6: Valuation of Capital Assets  Report at historical cost (may use estimated cost of historical cost cannot be determined)  Cost of capital asset included charges to get it to intended location and ready for use  Donated capital assets reported at fair value at time of donation. plus charges to get it to intended location and ready for use .

Principle 7: Depreciation of Capital Assets  Capital assets depreciated over useful lives  Inexhaustible capital assets (land and some land improvements) should not be depreciated  Infrastructure assets may be accounted for using the “modified approach” .

Reporting depreciation depends on fund category  Proprietary fund – reported at fund and government-wide level  Fiduciary fund – reported only at fund level  Governmental Fund – reported only at government-wide level and in notes to financial statements .

Principle 8: Accounting for Long-Term Liabilities Must know type of fund incurring liability  Proprietary Fund – report at fund and government-wide level  Fiduciary Fund – report only at fund level  Governmental Fund:   Unmatured – report at government-wide level & in the notes Matured – report as fund liabilities .

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA) Government-Wide Financial Statements  Measurement focus is on economic [all] resources  Basis of accounting is accrual  Revenues. & liabilities recognition depends on transaction:   Exchange – when exchange takes place Nonexchange – according to GASBS 33 . losses. assets. expenses. gains.

except for interest on long-term debt which is recognized when due .Principle 9: Measurement Focus (MF) and Basis of Accounting (BA) Governmental Fund Financial Statements  Measurement focus is on current financial resources  Basis of accounting is modified accrual  Revenues recognized in period they become available and measurable  Expenditures recognized when liability is incurred.

gains. & liabilities recognition depends on transaction:   Exchange – when exchange takes place Nonexchange – according to GASBS 33 .Principle 9: Measurement Focus (MF) and Basis of Accounting (BA) Proprietary Fund Financial Statements  Measurement focus is on economic [all] resources  Basis of accounting is accrual  Revenues. expenses. losses. assets.

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA) Fiduciary Fund Financial Statements  Measurement focus is on economic [all] resources  Basis of accounting is accrual  Exception for certain liabilities of defined benefit pension plans and certain postemployment healthcare plans .

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA) Internal interfund transfers should be reported in the accounting period in which the [related] interfund receivable and payable arise. .

reported as deferred revenues in current period and revenues in year when they become available .Revenue Recognition Rules – Must be:  Earned or levied  Measurable  Available   Collected in current period or soon enough thereafter to pay liabilities of the current period – usually considered to be 60 days If not collected within this period.

when liabilities to be paid currently by governmental funds are incurred  For debt service (principal and interest) when payments on long-term liabilities are due .Expenditure Recognition Rules  For current operations & capital outlay.

utilities.Expenditure / Expense Comparison Expenditures Operating Capital Outlay Debt Service Expenses Salaries. supplies. utilities. supplies. etc. etc. Acquisition Principal & interest Salaries. Depreciation Interest .

Revenue.Principle 11: Transfer. [government-wide] Statement of Activities should present:  Activities accounted for in Governmental Funds by function with level of detail determined by GF operating statement  Activities accounted for in Enterprise Funds by different identifiable activities . & Expense Classification At a minimum. Expenditure.

& Expense Classification Governmental Funds  Revenues reported by fund & major sources  Expenditures reported by fund. character. organizational unit. Expenditure. function (or program). Revenue. or principal classes of objects . activity.Principle 11: Transfer.

Expenditure.Principle 11: Transfer. & Expense Classification Proprietary Funds  Revenues reported by major source  Expenses should be classified in same manner as a similar private sector business  Both revenues and expenses should be reported as either operating or nonoperating . Revenue.

extraordinary items. & Expense Classification  Proceeds of general long-term debt issues should be reported separately from revenues and expenditures in the governmental fund financial statements  Contributions. Expenditure. Revenue.Principle 11: Transfer. special items. & transfers should be reported separately from revenues and expenditures/expenses .

Reporting Interfund Activity: Reciprocal interfund activity  Interfund loans (asset / liability)   Short-term (due from / due to) Long-term (advance to / advance from)  Interfund services provided and used – recognized as revenue in providing fund and expenditure/expense in using fund .

Reporting Interfund Activity: Nonreciprocal interfund activity  Interfund transfers   Reported in governmental funds as Other Financing Sources / Uses Reported in proprietary funds after nonoperating revenues and expenses Repayment from one fund to another – increases expenditures / expenses in paying fund while decreases them in receiving fund Not separately reported in financial statements  Interfund reimbursements   .

Like. what else would you do? . the accounts.Principle 12: Common Terminology & Classification A common terminology and classification should be used consistently throughout the budget. and the financial reports of each fund or activity.

Principle 13: Annual Financial Reports  Appropriate interim reports should be prepared to facilitate management control  One problem – no GAAP for this requirement  Some governments have very formal process – most don’t .

Principle 13: Annual Financial Reports Comprehensive Annual Financial Report (CAFR)  Should be prepared for all governmental entities  Sections include:    Introductory – little GAAP for this section Financial – most GASB standards apply to this section Statistical – see recently issued GASBS 44 .

Robert Smith. G.Principle 13: Annual Financial Reports MD&A FR ME GovernmentWide Financial Statements S BF CA FR Major Fund & CU Financial Statements Notes Other RSI Nonmajor Fund Combining Financial Statements Individual Fund Financial Statements & Schedules Transaction Data (the accounting system) CAFR--Comprehensive Annual Financial Report BFS--Basic Financial Statements MEFR--Minimum External Financial Reporting C Copyright 2001. . Jr.

Principle 13: Annual Financial Reports Minimum reporting requirements  Management’s Discussion & Analysis  Basic Financial Statements    Government-wide financial statements Fund financial statements Notes to the financial statements  Required supplementary information other than MD&A .

Principle 13: Annual Financial Reports Financial Reporting Entity consists of  Primary government (PG)  Organizations for which the PG is financially accountable  Other organizations whose omission would cause financial statements to be misleading or incomplete .

Principle 13: Annual Financial Reports
Government-wide financial statements should include separate columns for Governmental Activities, Business-Type Activities, Total column for PG, and discretely presented component units

Principle 13: Annual Financial Reports
Management’s Discussion & Analysis  Brief discussion of financial statements  Condensed government-wide financial information  Analysis of position & results of operations  Analysis of individual funds  Budget analysis  Significant capital assets and LTL events  Modified approach  Description of currently known facts

Principle 13: Annual Financial Reports
Fund Financial Statements include major funds individually and nonmajor funds in the aggregate. Fiduciary fund statements are not included in the basic financial statements.

Principle 13: Annual Financial Reports Financial Reporting Entity  Nucleus is the PG  Other activities include:      Discretely presented component units Blended component units Joint ventures Jointly governed organizations Related organizations .

Principle 13: Annual Financial Reports Government-wide Financial Statements  Statement of Net Assets  Statement of Activities .

Expenditures.Principle 13: Annual Financial Reports Governmental Fund Statements (Schedules)  Balance Sheet  Statement or Revenues. Expenditures. & Changes in Fund Balance – Budget-toActual (may be either BFS or RSI) . & Changes in Fund Balance  Statement or Revenues.

& Changes in Net Assets  Statement of Cash Flows .Principle 13: Annual Financial Reports Proprietary Fund Statements  Statement of Net Assets / Balance Sheet  Statement of Revenues. Expenses.

Principle 13: Annual Financial Reports Fiduciary Fund Financial Statements  Statement of Fiduciary Fund Net Assets  Statement of Changes in Fiduciary Fund Net Assets .

.Preparation Process: Step 1 Transaction Data Start with the transaction data – the basic building blocks for everything in the Comprehensive Annual Financial Report (CAFR).

Individual Fund Statements Transaction Data Schedules 1 . some of the transaction data will be used later in the CAFR preparation process. Also.Preparation Process: Step 2 From the transaction data. prepare the individual fund financial statements and schedules.

Individual Fund Statements Major Fund Determination Transaction Data 2 Schedules 1 3 .Preparation Process: Step 3 Determine the major funds (this process will be discussed later). information from the individual fund statements and schedules will be used later in the process. Also.

the non-major fund combining statements can be prepared. . The total column from these statements becomes a single column in the major fund statements along with a separate column for each major fund.Preparation Process: Step 4 Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 Transaction Data Schedules 1 3 Once the major funds have been determined.

.Preparation Process: Step 5 Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 CU Statements Schedules 1 3 Govt.-wide Statements Conversion Process Transaction Data The major funds statements undergo a conversion process and are combined with the component units financial statements to complete the government-wide statements.

This process completes the Basic Financial Statements (BFS).Preparation Process: Step 6 Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 CU Statements Schedules 1 3 Govt. .-wide Statements 3 2 Conversion Process Notes Transaction Data Information from all the financial statements and the schedules are used to prepare the notes to the financial statements.

-wide Statements Other RSI 3 2 Conversion Process Notes Transaction Data MD&A Information from the transaction data. Dept. Then information from all sources combine to provide data for the MD&A. individual fund statements. and schedules are used to complete the Other RSI. Heads Program Managers .Preparation Process: Step 7 1 Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 CU Statements Schedules 1 Budget Personnel 3 Govt.