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FUND ACCOUNTING


Chapter Two
Chapter 2
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Thought to Ponder: Chapter 2
Chapter 2
That government is best which
governs the least, because its
people discipline themselves
Henry David Thoreau
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Learning Objectives

After studying Chapter 2, you should understand:
The nature of funds
The hierarchy classification of fund balances
The three basic fund types of a state or local
government:
-Governmental funds,
-Proprietary funds, and
-Fiduciary funds
The main components of a CAFR
The primary F/S issued by governments
The difference between the current and the old accounting
models.



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Business
One company
Fund used as an informal term (multiple
meanings)
May refer to working capital (current net assets)
May refer to cash or investments available
May have other definitions
The company is a single fiscal and accounting
entity
A = L + E (E usually called Owners Equity)




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Governmental
Multiple entities
--Fund used as a formal term (single meaning)
A fiscal and an accounting entity with a self-
balancing set of accounts.
Each fund is like its own entity
--In other words, a fund is an entity with its own
set of books (i.e., chart of accounts , general
journal, general ledger, trial balances, and
financial statements)
Fund accounting uses the equation:
Assets = Liabilities + Fund balance (often
referred to as net assets)




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GASB Statement No. 54
In February 2009, the GASB issued Statement No. 54,
Fund Balance Reporting and Governmental Fund
Type Definitions, to improve the usefulness, and
understandability of governmental fund balance
information.


The statement is effective for years beginning after June 15,
2010. (i.e. June 30, 2011 year ends)

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Brief Summary
Fund balances of governmental type funds are now to be
reported based on a hierarchy in five different classifications:
Nonspendable
Restricted
Committed
Assigned
Unassigned
The reporting of Reserve for Encumbrances is eliminated
According to GASB Statement No. 54, only the Fund balance
reported on the balance sheet of Governmental type funds is
affected.
It does not affect the reporting of net assets by proprietary or
fiduciary funds.
It also does not affect the reporting of net assets of governmental
activities in the government-wide financial statements.
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GASB 54 -- Exhibit 1
Chapter 2
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GASB 54Exhibit 2
Chapter 2
GASB 54 -- Contd
Fund Balance should be identified between Nonspendable
resources and Spendable resources
Nonspendable resources include amounts that are not in spendable form or
are required to be maintained intact.
Inventories and prepaids (also includes assets held for sale and long-term
receivables)
The principal (corpus) of a Permanent Fund
Ex. In Table 2-5, pg. 48, the FB Reserved for Inventories in the GF will now be
presented as FB-Nonspendable.
Spendable resources is the remaining balance and is to be reported in a
hierarchy of classification (4 categories) based on the extent to which the
government is bound by restrictions/constraints on those funds
--Restricted (most constraint)
--Committed
--Assigned
--Unassigned (no constraint)

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Spendable Resources


Restricted (most constraint) includes amounts constrained to specific
purposes by their providers, through constitutional provisions, or by
enabling legislation.
Externally imposed constraints by
--creditors, bondholders,
--grant providers, contributors, or
--imposed by law through constitution or enabling legislation .
Enabling legislation (imposed by law) authorizes the government to assess,
levy, charge, or mandate payments of resources and includes a legally
enforceable requirement that the resources be used only for the specific
purpose.
Thus the level of constraint on restricted fund balance is equivalent to the level
of constraint on Net Assets-Restricted in proprietary funds and the
government-wide statement of net assets.
Ex. In, Table 2-5, pg. 48, the balances for State Statute, Convention Center
debt service and Tourism debt service will be presented as FB Restricted


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Spendable Resources (Contd)


Committed fund balancehere the constraints are imposed by a formal
action of the governments highest level of decision-making authority (for
ex. City council committing funds for construction contracts, rainy day
fund etc).
--These funds cannot be used for any other purpose unless the
government removes or changes the specified use by taking the same
formal action that originally imposed the constraint.
--Committed funds include contractual obligations for which existing
resources in the fund have been specifically committed for use.
--The funds may also include rainy day or stabilization funds.
Note: In contrast to fund balance that is restricted by enabling legislation,
amounts in the committed fund balance can be redeployed for other
purposes with appropriate due process.
Ex. In, Table 2-5, pg. 48, assuming FB reserved for Encumbrances is
a contractual commitment, it will be presented as FB Committed.

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Spendable Resources (Contd)
Assigned fund balance Governments intent to use the funds for a specific
purpose. Here INTENT is the key.
--Intent can be expressed by the governing body itself or another body that
has the delegated authority.
--In the General Fund, assignment conveys that the intended use is
narrower than the general purposes of the government itself.
--Fund Balance in other governmental funds (except General Fund) that is
not restricted or committed is considered as Assigned FB in those funds.
In other words it is the residual balance of these funds.
Note: the authority for making an assignment does not have to be made by the
governments highest level of decision-making authority.
Thus, constraints imposed on assigned amounts can be more easily
removed or modified than those that are classified as committed.
Ex. In, Table 2-5, pg. 48, the Unreserved balances in Debt Service,
Capital Projects and Special revenue funds will be presented as FB
Assigned
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Spendable Resources (Contd)
Unassigned fund balance this is the residual
classification of the General Fund
--includes amounts that are available for any purpose
--only the GF can report this positive Unassigned FB
--for other governmental funds, this category is used to
report only a negative fund balance (i.e. when
expenditures have exceeded the revenues).
Ex. In, Table 2-5, pg. 48, the Unreserved FB in the
General Fund will be presented as FB
Unassigned.
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A crosswalk
Governmental-type funds
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Special Revenue Funds x x x x x NO
Debt service funds x x x x x NO
Capital project funds x x x x x NO
Permanent funds x x x x x NO
General fund x x x x x x
Level of Constraints (GASB 54)
X =allowable
NO = prohibited
* Nonspendable amounts associated with long-term receivables or property
acquired for resale that are restricted, committed or assigned are included in that
category instead of the nonspendable category. For permanent funds, the corpus
of gifts which must be maintained in perpetuity are designated nonspendable in
governmental-type funds but as restricted-nonexpendable in the government-
wide financial statements.
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A CROSSWALK (Contd)

1
Items like inventory and prepaids would be reported as nonspendable.

2
Depends on the terms of the legal or contractual requirement. If the earnings of a
permanent fund can be used only for the purpose the donor stipulates, then the
earnings would be restricted. If the donor does not place limitations on how the
earnings can be used, the government certainly could take action to commit them. In
the absence of a restriction or commitment, the earnings in the permanent fund are
presumed to be assigned to the purpose of the fund.

3
This is probably less likely to occur, but technically possible. Ones first reaction
might be to think a negative unassigned in a permanent fund indicates that the
government violated the legal or contractual requirement to maintain the corpus. But
it more likely means that the government spent more for the purpose of the fund than
was available in expendable earnings, and therefore must have spent unassigned
general fund resources as well.

4
However, negative unassigned fund balance in the general fund cannot be caused
by assignment (see par. 15).


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Not-for-profit
NFP may use fund accounting internally to ensure control of
funds, but they do not report these funds externally.
Classifies Net Assets into 3 groups:
--Unrestricted
--Temporarily restricted used for specific purpose
--Permanently restricted -explained further on later slides
FASB regulates NFP reporting for nongovernmental
organizations and only requires 6 totals
Total assets
Total liabilities
Total net assets
Total unrestricted net assets
Total temporarily restricted net assets
Total permanently restricted net assets.

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Basis of Accounting
Full Accrual: Revenues recognized
when earned; expenses recognized
when incurred
Cash: Revenues recognized when
available; expenses/expenditures
recognized when paid
Modified Accrual: revenues are
recognized when measurable and
available; expenditures when incurred
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Measurement Focus
What is measured?
Where is the focus of an entity?
Economic resources measurement focus
-Report on the determination of net income,
financial position, and cash flows (i.e. capital
maintenance)
-To measure operational accountability
Current financial resources measurement focus
-Report on the inflows and outflows of current
financial resources (i.e. cash or other items
expected to be converted into cash during the
current period)
-To measure fiscal accountability; meet the
legal and budget needs of government

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Measurement Focus and Basis of Accounting
Measurement
Focus
Basis of
Accounting
Government-wide
statements (GASB 34)
Economic
resources
Accrual
Governmental fund
statements
Current
financial
resources
Modified
accrual
Proprietary fund
statements
Economic
resources
Accrual
Fiduciary fund
statements
Economic
resources
Accrual


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Types of Local Governments
Counties 3,033
Municipalities 19,492
Townships 16,519
School districts 13,051
Special districts 37,381
Total 89,476
Source:
U.S. Bureau of the Census, Government Organizations, 2007
Census of Government, July 2007.
http://www.census.gov/govs/www/cog2007.html

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Activities of Government

Governmental Activities
Core governmental services like police and fire
protection, streets, highways, etc. Chapters 3-6. These
activities are accounted under governmental funds.
Proprietary Activities
Public utilities, toll roads (Sam Houston Tollway) and
toll bridges, airports (ex. Houstons new Toyota Center,
Hobby, IAH) Chapter 9. These activities are accounted
under proprietary funds.
Fiduciary Activities
Sometimes known as Trust & Agency Funds. Accounts
for resources for which the government is acting in a
trustee capacity (ex. Houston Foundation, MacGregor
Parks Endowment) Chapter 10. These activities are
accounted under fiduciary funds.




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Types of Funds

Funds divide a government into units to control resources or
attain objectives, not functional department or operations.
Governmental Funds (5)
General Fund
Special Revenue Funds
Capital Projects Funds
Debt Service Funds
Permanent Funds
Proprietary Funds (2)
Internal Service Funds
Enterprise Funds
Fiduciary Funds (2)
Agency Funds
Trust Funds
Pension (and other employee benefit)
Investment Trust Funds
Private purpose Trust Funds


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Definition of Fund Types

Governmental Funds
A generic classification used by GASB to refer to all funds other
than proprietary or fiduciary
No guarantee that the funds will be reimbursed for services
rendered
Proprietary Funds
Government generally makes initial contribution but thereafter
the fund is expected to pay its own way through fees for
services rendered. Also referred to as business-like or
commercial-type funds.
Fiduciary Funds
Any fund held by a government in a fiduciary capacity.
Simply, the govt. holds someone elses money
in trust and acts as a custodian. Since it is not the
governments money, it is not expendable for the
governments own programs.


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Overview
Basis of Accounting:
--Modified Accrual
Measurement Focus:
--Current Financial Resources
Other names: financial flow focus or spending focus
Only current assets and liabilities are generally included on
their balance sheet (i.e. Capital assets and long-term liabilities
are not included)
Reports expenditures (not expenses) of appropriations

Fund Balance (net current assets) measures available
spendable resources
Fund Balance = Current Assets Current Liabilities
Increased by revenues and other financing sources
Decreased by expenditures and other financing uses
Governmental fund operating statements present these
increases and decreases in net current assets.
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Required Financial Statements
Balance Sheet
Statement of Revenues, Expenditures,
and Changes in Fund Balances
Reconciliation of the Statement of
Revenues, Expenditures, and Changes
in Fund Balances of Governmental
Funds to the Statement of Activities at
the government-wide level.

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(1) - General Fund (GF)
The operating fund of the government-embraces most major
governmental functions
Accounts for all resources that are not required to be accounted
for in other funds; in essence, it accounts for all unassigned
resources.
Only one per government and is the most significant single fund

General Activities of city government (ex. Fire, police)






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(2) - Special Revenue Funds (SRF)
Accounts for financial resources that are restricted or committed
(does not include assigned) to expenditure for specific purposes
other than debt service or capital projects.
Accounting and budgeting usually identical to GF
Ex. City of Houston maintains over 17 SRF
-Examples include
Public Safety Special Fund (9-1-1 Emergency Network)
Public Works Special Fund
Health and Housing Special Fund
Parks and Recreation Special Fund
Other Special Revenue Fund (Cable Television)




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(3) - Capital Projects Funds (CPF)
Accounts for financial resources that are
restricted, committed, or assigned to
expenditure for capital outlays.

Ex. Astrodome, Toyota Center, GRB

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(4) - Debt Service Funds (DSF)
Accounts for financial resources that are
restricted, committed, or assigned for the
payment of interest and principal on long-
term debt.
Ex. City of Houston reports as of 6/30/2009
Total fund balance in DSF
$161,414,000.
Total outstanding debt
$14.55 Billion ($13.8 B in 2008).
I.O.U.
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(5) - Permanent Funds
Accounts for resources provided that are legally
restricted so that only earnings, not principal,
may be used to support the governments
programs.


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(1) - Internal Service Funds (ISF)
Accounts for activities in which goods are services are provided to
(1) other departments of the same government
(2) other governments for a charge on a cost reimbursement
basis
Examples include central stores, central computing, motor pools, and
printing.
ISF are reported as governmental activities in the government-wide
statements because they primarily benefit the government.
--ex. City of Houstons employees Health Benefits and
Long -Term disability.


These funds are covered in depth in Chapter 9.

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(2) - Enterprise Funds (EF)
Accounts for activities in which goods or
services are provided to the general public
for a charge
Reported as business-type activities in the
government-wide financial statements
Examples include electric and water
utilities, airports, parking garages,
transportation systems, and liquor stores
Ex. City of Houstons EF
Airport System
Convention & Entertainment facilities
Combined Utility system
Nonmajor Enterprise funds (Houston Area
Water Corporation, Parking Management)
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Overview
Basis of Accounting:
Full Accrual
Operated like a normal for-profit business
--ex. City of Houston operates its Airports under a Proprietary
fund
Measurement Focus:
Economic Resources
All assets and liabilities (both current and noncurrent) are included
in the balance sheet
Accounts for expenses (not expenditures)
--Depreciation expense is reported
Fund Equity (Total Net Assets)
Net Assets = Assets Liabilities
Increased by revenues and other financing sources
Decreased by expenses and other financing sources
Segregated into contributed capital and retained earnings
components

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Required Financial Statements
Similar to those of for-profit entities
Statement of Net Assets
Statement of Revenues, Expenses,
and Changes in Net Assets (i.e.
operating statement)
Statement of Cash Flows
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Fiduciary Funds - Agency Funds
Accounts for financial resources in which the
government is acting in an agency capacity
Agent - Government holds assets on behalf of another
government
Accounting is simple: assets = liabilities.
No revenue and expense to accrue
No fund equity account
Examples are tax agency funds, certain special
assessment funds, and pass-through agency
funds
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Overview
Both Trust funds and Agency funds account
for assets held by the City in a trustee capacity
or as an agent for individuals, private
organizations, other governments, and/or other
funds.
Therefore, the government cannot include
these funds in the government-wide
statements.
Basis of Accounting:
Full Accrual
Measurement Focus:
Economic Resources
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Required Financial Statements
Statement of Fiduciary net assets
Statement of Changes in Fiduciary net
assets
Only Trust Funds may have a change in net
assets
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Trust Funds
Each trust is classified for accounting measurement
purposes as either a governmental fund or a proprietary
fund (ex. Houston Firefighters Relief and Retirement
and Police Officers Funds).
Funds can be either expendable or nonexpendable.
Three types of trust funds
(i) Pension (and other employee benefits)
Trust Funds (one or more)
(ii) Investment Trust Funds
(iii) Private Purpose Trust Funds

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Trust Funds
(i) Pension (and other employee benefits) Trust Fund
Accounts for financial resources in which the
government (or other designated trustee) is
acting in a trustee capacity for the employees
of the government to provide retirement
benefits.
Uses business-type accounting practices.
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Trust Funds
(ii) Investment Trust Funds
Accounts for external investment pools in
which the assets are held for other
(external) governments, along with funds of
the sponsoring government
Reports the assets, liabilities, net assets,
and changes in net assets corresponding to
the equity of the external participants

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Trust Funds
(iii) Private-purpose Trust Funds
Encompasses all trust funds other than pension and
investment trust funds
Accounts for financial resources in which the
government is acting in a trustee capacity for the
benefit of individuals, other organizations, or other
governments (e.g., an endowment in which the
principal amount must be kept intact)
Accounting is virtually identical to that for an
enterprise fund.

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GASB Statement No. 34
Government-wide Statements
1)Statement of Net Assets
2)Statement of Activities
Address questions that have not been easily answered
by fund accounting
What do government services really cost, e.g., public
safety or recreation?
How much debt for current services are we shifting to
the next generation?
How much of the cost of government is borne by
citizens in the form of general revenues?
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Reporting Model-Statement 34
Fund Presentation
Major funds
Non-major funds presented in a single column by
category
Concept does not apply to fiduciary funds and
internal service funds
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Comprehensive Annual Financial Report - CAFR
Review from Ch. 1
The CAFR is the recommended annual report of
a governmental unit. It has 3 sections.
Introduction section
Financial section
Statistical section
The minimum requirements for general purpose
external reporting include:
MD&A
Basic financial statements
RSI other than MD&A
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Comprehensive Annual Financial Report - CAFR
Every government should prepare interim
statements as needed for sound management
The Government Finance Officers Association
(GFOA) awarded a Certificate of Achievement for
Excellence in Financial Reporting to the City of
Houston for CAFR for the fiscal year ended June
30, 2009.
Note: Please also refer to Chapter 1 slides on
CAFR.

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CAFR
Reviewing again, a CAFR has
Introduction section:
Letter of transmittal presents overview of financial and economical
conditions. General information about how the government is organized.
Financial Section:
MD&A brief overview of financial performance of the government.
Basic financial statements and Notes
Required Supplementary Information
Combining and individual fund financial statements.
Statistical section:
Contains current and historical data. Supplemental information to
the basic financial statements




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Component Units (CU)
Entities that are economically intertwined with the government albeit
legally separate
Criteria to determine whether a primary government (PG) is financially
accountable for another government.
(1) PG appoints a voting majority of units governing body
(2) A majority of units governing body is composed of PGs officials
(3) The PG is able to impose its will upon the unit
(4) Unit can cause the PG financial benefits or burdens
If it meets these criterion, then unit is a CU of PG.
Two Presentations of CU
(1) Blended CU consolidated with PG in government-wide statements
Presented this way if CU provides services exclusively or almost exclusively for
the city (City of Houston CAFR)
(2) Discrete CU shown in a separate column in government-wide
statements

This topic is discussed in depth as part of Ch. 11.

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City of Houston
Blended Component Unit Examples
Chapter 2
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City of Houston
Discrete Component Unit Examples
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Not-for-Profits revisited
Financial Reporting:
NFPs classify and report both current and non
current assets & liabilities based on three
different donor mandated restriction
categories (i.e. 12 different categories
(2x2x3 = 12)).
(1) unrestricted
(2) temporarily restricted
(3) permanently restricted

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Classification of Assets and Liab.
(12 categories)
Current unrestricted
Analogous to general fund
Current temporarily restricted
Analogous to special revenue funds
Current permanently restricted
**Doesnt exist because it would mean you have available resources
you can never use
Noncurrent unrestricted
Property, Plant, and Equipment used for operations
Accounts Receivables which, once collected, may be used
Long-term Liabilities
Noncurrent temporarily restricted
Assets analogous to capital projects fund
Accounts Receivable which, once collected, are restricted for a specific
use or time period
Liabilities analogous to debt service fund and fiduciary funds
Noncurrent permanently restricted
Assets analogous to permanent fund
All Liabilities are either unrestricted or temporarily restricted never
permanently restricted

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Summary

Fund financial statements for governmental funds utilize
the modified accrual basis of accounting and a current
financial resources measurement focus.

GASB Std. # 34 requires both government-wide
financial statements and fund financial statements.

Government-wide financial statements and fund
financial statements for proprietary and fiduciary funds
follow the full accrual basis of accounting and the
economic resources measurement focus (similar to
commercial accounting).

Chapter 2