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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

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 .Basic Financial Statements: Overview Fund Financial Statements 7 .

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) .

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

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 .

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

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 .Accounting system  As in budgeting. GASB cannot define capabilities of accounting system  Still. if governments are to report on a fund basis.

by the people. 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.

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 .

Nonfund accounts  General Capital Assets – property. & 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 . 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 .

& liabilities recognition depends on transaction:   Exchange – when exchange takes place Nonexchange – according to GASBS 33 . gains.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. expenses. assets. losses.

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.

& liabilities recognition depends on transaction:   Exchange – when exchange takes place Nonexchange – according to GASBS 33 . losses. assets. expenses. gains.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.

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.

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. reported as deferred revenues in current period and revenues in year when they become available .

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.

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

Revenue. Expenditure. & Expense Classification At a minimum.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 .

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

Revenue. & 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 .Principle 11: Transfer. Expenditure.

special items. 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. Revenue. & transfers should be reported separately from revenues and expenditures/expenses .Principle 11: Transfer. Expenditure.

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   .

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

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. Jr.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.

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

Expenses. & 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.

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).

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

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

.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. The total column from these statements becomes a single column in the major fund statements along with a separate column for each major fund. the non-major fund combining statements can be prepared.

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. .

.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. This process completes the Basic Financial Statements (BFS).

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. individual fund statements. Dept.-wide Statements Other RSI 3 2 Conversion Process Notes Transaction Data MD&A Information from the transaction data. Heads Program Managers . Then information from all sources combine to provide data for the MD&A. and schedules are used to complete the Other RSI.