Chapter 20: Accounting for State

and Local Governmental Units –

Proprietary and Fiduciary Funds
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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 Proprietary and Fiduciary Funds:
Objectives
1. Review the appropriate accounting and financial
reporting for proprietary funds.
2. Recognize the proper treatment of internal
service funds in the government-wide statements.
3. Introduce the differences between a proprietary
fund statement of cash flows and its commercial
business counterpart.
4. Prepare journal entries and fund financial
statements for fiduciary funds.
5. Learn about GASB guidance for pension fund
accounting.
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Accounting for State and Local Governmental Units –
Proprietary and Fiduciary Funds
1: Proprietary Funds

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 Accounting for Proprietary Funds
• Model
CA + NCA – CL – NCL = Net assets
• Use accrual accounting
• Net assets
– Invested in capital assets net of related debt
– Restricted net assets
– Unrestricted net assets
• Two types
– Internal service funds
– Enterprise funds
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 Internal Service Funds
• Use for government activities that provide
goods and services to other departments or
agencies of that same governmental unit
• Central stores/ purchasing
• Motor pools
• Print shop
• Might be started with transfers from general
fund and/or contributed capital from other
sources
• Main source of revenues is other funds
• Use "Due from …" rather than accounts
receivable
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 ISF – Entries (1 of 3)
Cash 200
Motor vehicles 120
Other financing source - nonreciprocal
transfer from general fund 200
Contributed capital from municipality 120
• A village begins a central motor pool with $200
from the general fund and a contribution of
vehicles
– The Other financing source and Contributed
capital increase the ISF's net assets
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 ISF – Entries (2 of 3)
ISF Due from general fund 100
Due from special revenue fund 30
Service revenues 130
GF Expenditures 100
Due to internal service fund 100
SRF Expenditures 30
Due to internal service fund 30
• It provides motor pool services to the general
fund and special revenue fund and bills them
$100 and $30
• The general fund and special revenue fund will
record the bills received as expenditures
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 ISF – Entries (3 of 3)
ISF Cash 100
Due from general fund 100
GF Due to internal service fund 100
Cash 100

• The internal service fund collects the $100 due

from the general fund
• The general fund will record the payment of its
liability

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 ISF – Other Transactions
• Most other transactions parallel those of
businesses
– Use expenses, not expenditures
– Record acquisition, disposition, and
depreciation of fixed assets
– Income is closed to unrestricted net assets

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 Enterprise Funds
• Use for governmental activities
– Financed and operated like a business
– Provide goods and services to general public
• Utilities, civic centers, golf clubs
• Might start with funds transferred and
contributions
• Main revenues from general public, but some
from other departments of the government
• Use "Accounts Receivable" for general public
and others and "Due from …" for other funds
of this governmental unit
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 EF – Entries (1 of 4)
Restricted cash 10
Customer deposits 10
• Utility-type enterprise funds often charge
customer deposits
– Amounts given as deposits are restricted
cash, not included in current assets
– Customer deposits are liabilities, may be
current or long term
• Deposits may be returned or applied against the
customers accounts receivable
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 EF – Entries (2 of 4)
Due from other governments 50
Contributed capital - capital grant 50
Equipment 65
Cash 65
Cash 50
Due from other governments 50
• Grants to acquire or enhance capital assets are
recorded as contributed capital
• Grants to help fund operating activities are non-
operating revenue
• The three entries represent:
– Notice of grant to fund new equipment
– Acquire equipment, eligible to receive cash
– Receive grant monies
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 EF – Entries (3 of 4)
EF Accounts receivable 500
Due from general fund 40
Service revenues 540
GF Expenditures 40
Due to internal service fund 40
• Provide services and bill general public $500
and its own governmental unit $40
• General fund records the bill of $40

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 EF – Entries (4 of 4)
EF Cash 490
Accounts receivable 450
Due from general fund 40
GF Due to internal service fund 40
Cash 40
• Collect from general public and the general
fund
• The general fund records the payment
• The enterprise fund will use allowances for
uncollectibles and bad debt expense, like
business enterprises
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 EF – Other Transactions
• Most follow that of businesses
• Income is closed to unrestricted net assets
• Enterprise funds may issue bonds
– General obligation or revenue bonds
• Record as bonds payable
• Use effective interest method
• Premiums or discounts
• Capital leases
– Record leased assets and lease obligation

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Accounting for State and Local Governmental Units –
Proprietary and Fiduciary Funds
2: Internal Service Funds in
Government-wide Statements

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 Proprietary Fund Financial
Statements
Three statements
1. Statement of net assets (balance sheet)
2. Statement of revenues, expenses, and changes in
net assets
3. Statement of cash flows
Use separate columns for each significant enterprise fund,
other enterprise funds, total enterprise funds and total
internal service funds
– Internal service funds are not added to enterprise
funds
– ISFs are governmental activities
– EFs are business type activities
Columnar presentation is not included for brevity

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 Statement of Net Assets
Cash $720 Accounts payable $68
Receivables, net 261 Due to other funds 4
Due from other Other current
funds 32 liabilities 129 $201
Supplies 62 Customer deposits $185
Total current assets $1,075 Compensated
absences 295
Restricted cash $185
Bonds and notes
Land 95 payable 465 945
Buildings and Total liabilities $1,146
equipment 1,990 Net assets:
Vehicles 220 Invested in capital
Accumulated assets, net of related
depreciation (1,005) debt $575
Total noncurrent Restricted 270
assets $1,485 Unrestricted 569
Total assets $2,560 Total net assets $1,414
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 Statement of Revenues, Expenses
and Changes in Net Assets
Operating revenues $1,220
Operating expenses (936)
Operating income $284
Nonoperating revenues (expenses):
Miscellaneous revenue 2
Interest expense (19)
Income (loss) before contributions and transfers $267
Capital contributions 50
Transfers in 1
Transfers out (19)
Change in net assets $299
Total net assets, 7/1/08 1,200
Total net assets, 6/30/09 $1,499
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 Government-wide Statements
• Internal service funds are included with
governmental funds
– All represent governmental activities
• Enterprise funds displayed in a single column
labeled Business-type activities
• ISF and EF already use accrual accounting
• Interfund balances: either
• Eliminate
• Show interfund balances separate from
other assets/ liabilities
• No reconciliations needed for ISF and EF
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 ISF in Financial Statements
• In the Proprietary fund statements:
– Internal service funds are in a separate
column
• Separately, to the side of the total for
business-type/ enterprise funds
• Not added to those enterprise funds
• In the Government-wide statements:
– Internal service funds plus governmental
funds are shown as one total
• Labeled as governmental-type activities
• Governmental-type and business-type
activities are the added together
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Accounting for State and Local Governmental Units –
Proprietary and Fiduciary Funds
3: Proprietary Funds Statement of
Cash Flows

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 Cash Flow Categories
Four cash flow categories:
1. Cash flows from operations
2. Cash flows from noncapital financing activities
3. Cash flows from capital and related financing
activities
4. Cash flows from investing activities
Compared to for-profit enterprises
– Capital expenditures are removed from other
investing activities
– Their related financing activities are taken from
other financing activities
– Capital expenditures and related financing have
their own category
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 Statement of Cash Flows
Cash flows from operations:
Cash received from customers $1,161
Cash paid to suppliers (326)
Cash paid for other expenses (471)
Net cash provided by operations $364
Cash flows from noncapital financing activities:
Cash from general fund 3
Cash flows from capital and related financing activities:
Purchase of equipment ($18)
Payment on capital debt (87)
Net cash provided by capital and related financing (105)
Cash flows from investing activities:
Interest and dividends 1
Net increase in unrestricted cash $263
Cash balance, 7/1/08 457
Cash balance, 6/30/08 $720
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Accounting for State and Local Governmental Units –
Proprietary and Fiduciary Funds
4: Fiduciary Funds

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 Accounting for Fiduciary Funds
• Account for assets held in a trust or agency
capacity
– Not used for government's own programs
• Fiduciary funds
– Private purpose trust funds
– Investment trust funds
– Pension trust funds
– Agency funds
• Focus on demonstrating fulfillment of fiduciary
responsibilities
– Accrual accounting
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 Agency Funds
• For funds held in custodial capacity
– County government acts as agent collecting
tax for local government
– Collections on special assessments from
taxpayers and repayment of special
assessment bonds if local government is not
obligated on bonds

Agency Model:
Assets = Liabilities
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 Agency Transactions
• New County collects property taxes for two
cities, A and B. New County uses an agency
fund to record the assessment and collections
• It deducts a 1% commission for acting as agent
– The 1% commission is transferred to the
general fund, and recorded as revenue there
• For simplicity, assume all taxes assessed are
collected
• Entries for New County follow

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 Agency Entries – for New County
Taxes receivable 300
Liability to City A 200
Liability to City B 100
Cash 300
Taxes receivable Only asset and 300
Liability to City A liability 2
accounts are
Liability to City B used! 1
Due to general fund 3
Due to general fund 3
Liability to City A 198
Liability to City B 99
Cash 300

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 Trust Funds
CA + NCA – CL – NCL = Net assets
• Assets: cash, receivables, investments
• Liabilities: payables
• Net assets
– Net assets held in trust, expendable
– Net assets held in trust, nonexpendable
• Temporary accounts
– Contributions (in)
– Distributions (out)
– Investment income, expenses
• Use Accrual accounting
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 Fiduciary Fund Financial
Statements
• Fund Statements
– Statement of fiduciary net assets
– Statement of changes in fiduciary net assets
• Fiduciary funds are not included in the
government-wide statements

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Accounting for State and Local Governmental Units –
Proprietary and Fiduciary Funds
5: Pension Funds

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 Pension Trust Fund
• Account for Public Employee Retirement
Systems (PERS)
• GASB Statement No. 25, 27 and 50
• Do not apply FASB pension accounting
• Disclosures
– Scheduled of funding progress for defined
benefit, single and multiple employer plans
• Also disclose
– Other post-employment benefits

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