Chapter 18

Governmental
Entities:
Special Funds and
Government-wide
Financial Statements
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 1

Understand and explain the

differences in financial
reporting requirements of
the different fund types.

18-2
 Big Picture

 A government should establish those funds

required by law and the specific operating and
management needs of the government entity.

 Figure 18-2 summarizes the different types of

funds.
18-3
Overview of Accounting and Financial
Reporting for Governments

18-4
 The Governmental Funds:
General Fund (#1 of 5)
 General rule:
 All activities should be accounted for in the
general fund unless specifically required by law
or
 The nature of the activities is proprietary or
fiduciary.
 We discussed the general fund in chapter 17.

18-5
 The Governmental Funds:
Special Revenue Funds (#2 of 5)
 Purpose: To account for the proceeds of specific
revenue sources that are legally restricted to
expenditure for specific purposes.
 With the exception of inflows for Capital projects and
Expendable trusts.
 Includes resources and expenditures for operations, such as
public libraries, when a separate tax is levied for their
support.
 Inflows: Usually from specific taxes or nontax sources
not directly related to services provided.
 A General Fund “clone”—identical accounting.
 Thus, we don’t discuss them in detail here.
18-6
 Governmental Funds Worksheets

 Each of the five governmental funds will

report two fund-based financial statements:
 The Balance Sheet
 The Statement of Revenues, Expenditures, and
Changes in Fund Balance

18-7
Worksheet for the Balance Sheet for the
Governmental Funds

18-8
Worksheet for the Statement of Revenues, Expenditures, and
Changes in Fund Balances for the Governmental Funds

18-9
 Practice Quiz Question #1
Which of the following statements is true
about fund accounting?
a. An enterprise fund is an example of
fiduciary fund.
b. Most transactions of a state or municipal
government are accounted for in the
general fund.
c. A capital projects fund is an example of
proprietary fund.
d. Most transactions of a state or municipal
government are accounted for in the
internal service fund.
18-10
Learning Objective 2

Make calculations and

record journal entries for
capital projects funds.

18-11
 The Governmental Funds:
Capital Projects Funds (#3 of 5)
 Purpose: To account for financial resources
used for the acquisition or construction of
major capital facilities
 Except for those financed by:
 Proprietary Funds and
 Trust Funds

18-12
 The Governmental Funds:
Capital Projects Funds (#3 of 5)
 A temporary fund related to the acquisition
or construction of a specific capital project.
 At the completion of the project:
 The fund is closed and
 The project ’s cost is recorded as a capital asset
in the GCA-GLTL general ledger.
 Outflows: Costs incurred during construction are
charged to expenditures.
 Inflows: Bond sales and transfers from the
General Fund.
18-13
 GCA-GLTL General Ledger

 Since governmental funds only report

current resources and obligations, the long-
term assets and liabilities are recorded in
another location..

GCA = General Capital Assets

GLTL = General Long Term Liabilities

GCA-GLTL General Ledger

18-14
 The Governmental Funds:
Capital Projects Funds (#3 of 5)
 Things to remember:
 Fixed assets or depreciation are not recorded in capital
projects funds
 Long-term debt is not recorded in capital projects funds
 Capital projects funds typically do not have operating
budgets
 A capital budget is prepared as a basis for selling bonds
to finance a project, and the capital budget is the control
mechanism for the length of the project
 The capital budget for the project may, or may not, be
formally recorded in the accounts
 The fund records capital outlays as expenditures

18-15
 Practice Quiz Question #2

Which of the following statements is true

about capital projects funds?
a.Capital projects funds record depreciation.
b.Capital projects funds are permanent because
long-term assets remain in the fund until
disposal.
c.Capital projects funds are required by law to
have operating budgets.
d.When a capital project is completed, the fund is
closed and the asset is tranferred to the GCA-
GLTL general ledger.
18-16
Learning Objective 3

Make calculations and record

journal entries for debt service
funds.

18-17
 The Governmental Funds:
Debt Service Funds (#4 of 5)
 Purpose: To account for the servicing of debt initially
recorded as a liability in the GCA-GLTL general ledger.
 “Servicing of Debt” is the payment of
 (1) interest and
 (2) debt principal at maturity.
 The accounting is the same as for the general fund.
 Unusual Features:
 Interest is not accrued until the due date.
 Principal payments are not recorded as liabilities until the
due date.

18-18
 Debt Service Funds

 Examples of general long-term debt

obligations:
 Serial bonds
 Term bonds
 Special assessment bonds
 Notes and warrants
 Capital leases

18-19
 Special Assessments

 Special Assessments are

 Assessments made against taxpayers (citizens or
businesses) that directly benefit from
improvements.
 Examples: sidewalks, street lighting, gutters
 Special Assessment Bonds are usually issued
to initially pay for the improvements.
 Over time, the special assessments levied against
taxpayers are used to pay off the bonds.
 All construction activity takes place in a Capital
Projects Fund.
18-20
 The GCA-GLTL General Ledger

 Purpose of GCA-GLTL General Ledger:

 Accounts for capital assets (at historical cost)
and
 Long-term debt not accounted for in Enterprise
Funds, Internal Service Funds, or Trust Funds.
 The GCA-GLTL General Ledger is not a fund
 It has no cash for paying liabilities.
 It is a self-balancing set of accounts.

18-21
 General Capital Assets

 Categories of Assets
 Land
 Buildings
 Improvements other than buildings
 Equipment
 Construction work in progress (being performed
by Capital Projects Funds)
 Infrastructure assets (see next slide)

18-22
 General Capital Assets: Infrastructure Assets

 Capitalization is mandatory for public domain or

“infrastructure” capital assets such as:
 Streets and roads
 Sidewalks
 Bridges and tunnels
 Water and sewer systems
 Lighting systems
 Characteristics of infrastructure
 Stationary in nature
 Normally preserved longer than other capital assets.

18-23
 General Capital Assets: Post-capitalization
Periods
 Depreciation is mandatory—
except for certain infrastructure
assets:
 Depreciation Expense is never
reported in the operating statement
of governmental funds.
 It is reported only in the two
government-wide statements.
 Sales of Assets: record proceeds as
other financing sources in General
Fund.
18-24
 General Long-term Liabilities

 Examples of Debt Recorded in GCA-GLTL

general ledger
 General obligation bonds (usually issued to pay
for capital projects).
 Claims and judgments.
 Compensated absences (vacation & sick pay).
 Unfunded pension contributions.
 Capital leases payable.
 Special assessment debt having government
commitment (explained earlier).
18-25
 General Long-term Debt Liabilities

 Liquidation of GLTL
 Debt Issuance Liabilities: at the maturity date,
the liability is transferred to a Debt Service Fund.
 Nondebt Issuance Liabilities: at the payment
date, the liability is transferred to the General
Fund.
 Note that the GLTL is not removed from the
GCA-GLTL general ledger when it becomes a
current liability (due within 12 months).

18-26
Practice Quiz Question #3

Which of the following statements is true?

a.Long-term debt resides permanently in the
debt service fund.
b.The GCA-GLTL General Ledger services
interest payments on long-term debt.
c.Special assessments are levied against the
general population.
d.A debt service fund only makes interest and
principal payments.
e.Debt service funds accrue liabilities as
incurred.
18-27
Learning Objective 4

Make calculations and record

journal entries for permanent
funds.

18-28
 The Governmental Funds:
Permanent Funds (#5 of 5)
 Permanent Funds:
 Are established when there is a donor restriction
requiring that
 the fund principal be preserved and
 the income from these permanent funds be used
to benefit the government’s programs or its
general citizenry.
 The accounting for permanent funds is similar
to that of the general fund.

18-29
 Practice Quiz Question #4

Which of the following is NOT true about

permanent funds?
a. The principal of permanent funds is usually
required to be preserved.
b. The income from permanent funds is usually
allowed to be spent for the benefit of the
governmental entity and its citizens.
c. Permanent funds are accounted for in the
general fund.
d. The accounting for permanent funds is
similar to the accounting in the general fund.
e. Permanent funds usually have donor
restrictions.
18-30
Learning Objective 5

Understand and explain how

governmental funds are
reported and rules for separate
reporting as major funds.

18-31
 Governmental Funds Financial Statements

 Required financial statements

1. The Governmental Funds Balance Sheet
2. The Governmental Statement of Revenues,
Expenditures, and Changes in Fund Balance.
 These statements are prepared for each
individual governmental fund
 These individual fund statements are the
foundation for the financial statements
prepared for the governmental entity.

18-32
 Governmental Funds Financial Statements
 Major funds must be reported in separate columns
 GASB 34 specifies that the general fund is always a major
fund.
 Major funds: revenues, expenditures or expenses,
assets, or liabilities >=
 10% of the total for their fund category or type (governmental
or enterprise) and
 5% of the aggregate amount for all governmental and
enterprise funds
 Nonmajor funds are
 Aggregated and reported in a separate column (labeled “other
governmental funds”).
18-33
Practice Quiz Question #5

Which of the following is NOT true about

governmental reporting?
a. The special revenues fund is always a
major fund.
b. Non-major funds are aggregated and
reported in a single column.
c. The general fund is always a major fund.
d. Major funds are defined as those that
constitute at least 10% of their fund
category or 5% of all funds.

18-34
Learning Objective 6

Make calculations and record

journal entries for enterprise
funds.

18-35
 The Proprietary Funds: Enterprise Funds

 Enterprise Funds account for activities that

provide services primarily to the public
 Examples: Gas, electric, water utilities
 Accounting like business accounting.
 Measurement focus on all economic
resources and the accrual basis of
accounting.
 Report fixed assets, which are depreciated,
and long-term debt.
 Focus on income determination and capital
maintenance.
18-36
Practice Quiz Question #6

Which of the following statements is true

about enterprise funds?
a. The activities accounted for in
enterprise funds primarily benefit other
government units.
b. The accounting for enterprise funds is
similar to the accounting for businesses.
c. Enterprise never report long-term assets
or depreciation.
d. A maintenance service center for public
busses other city vehicles is an example
of an activity accounted for in an
enterprise fund.
18-37
Learning Objective 7

Understand and explain the

financial reporting of
proprietary funds.

18-38
 The Financial Statements of Proprietary Funds

 Financial statements for the proprietary funds

 Can be major funds
 If a governmental entity has more than one
enterprise fund, each must be individually
assessed
 Must meet either the 10 percent criterion or the 5
percent criterion.

18-39
 The Financial Statements of Proprietary Funds

 The financial statements for proprietary

funds are very similar to those for
commercial entities
1. The statement of net assets (balance sheet)
2. The statement of revenues, expenses, and
changes in fund net assets (income statement)
3. The statement of cash flows
 Budgeting in the proprietary funds also has
the same role as in commercial entities

18-40
 The Financial Statements of Proprietary Funds

 Statement of net assets

 Proprietary funds report their own fixed assets,
investments, and long-term liabilities
 GASB 34 specifies that the net assets section be
separated into three components:
1. Invested in capital assets, net of related debt
2. Restricted because of restrictions beyond the
government’s control
3. Unrestricted

18-41
 The Financial Statements of Proprietary Funds

 Statement of Revenues, Expenses, and

Changes
 A separation of operating and nonoperating
revenues and expenses is made to provide more
information value regarding the operations of
the proprietary funds.

18-42
 The Financial Statements of Proprietary Funds

 Statement of Cash Flows

 Because of the large number of capital asset
acquisition and financing transactions, the GASB
specified four sections:
1. Cash flows from operating activities
2. Cash flows from noncapital financing activities
3. Cash flows from capital and related financing
activities
4. Cash flows from investing activities

18-43
Practice Quiz Question #7
Which of the following statements is true
about the financial reporting of proprietary
funds?
a. The financial statements are identical to
those of the general fund.
b. Proprietary funds do not need to meet
the 10% or 5% tests to be major funds .
c. Enterprise funds are always major funds.
d. Internal service funds are not required
to provide a statement of cash flows.
e. Proprietary funds provide financial
statements very similar to those of
commercial businesses.
18-44
Learning Objective 8

Make calculations and record

journal entries for internal
service funds.

18-45
 The Proprietary Funds: Internal Service Funds

 Purpose: to account for activities that

provide services solely to other departments.
 These services are not available to the
general public, making it different from the
enterprise fund.
 Accounting like business accounting.
 Measurement focus on all economic resources and
the accrual basis of accounting.
 Report fixed assets, which are depreciated, and
long-term debt.
18-46
 Practice Quiz Question #8
Which of the following an example of an activity
that would be accounted for in an internal
service fund?
a. A public swimming pool.
b. A municipal golf course with a club house
used for weddings and other public
gatherings.
c. A maintenance department that provides
services to various government offices.
d. A state beach or park.
e. A city recreation center with weight rooms, a
workout facility, and a pool available to
citizens of the community.
18-47
Learning Objective 9

Make calculations and record

journal entries for trust funds.

18-48
 The Fiduciary Funds

 Two categories (four types of funds)

 Trust Funds
 Pension (and other employee benefit) Trust Funds
 Investment Trust Funds
 Private-Purpose Trust Funds
 Agency Funds

18-49
 The Fiduciary Funds: Trust Funds

 Purpose: to account for the investing

and using of money in accordance with
stipulated provisions of trust
indenture agreements or statutes.
 Pension (and other employee benefit)
Trust Funds
 Investment Trust Funds (created by GAS
31)
 Private-Purpose Trust Funds

18-50
 The Fiduciary Funds: Trust Funds

 Private-purpose Trust Funds account for

property held under trust arrangements which
benefit:
 Individuals
 Private organizations
 Other governments

18-51
 The Fiduciary Funds: Trust Funds

 Trust funds use the accrual basis of

accounting.
 Financial statements required:
 The statement of fiduciary net assets
 includes all trusts and agency funds
 the statement of changes in fiduciary net assets.
 includes only the trust funds because agency funds
do not have a net asset balance.

18-52
Practice Quiz Question #9

Which of the following is NOT true trust

funds?
a. Trust funds use the accrual basis of
accounting.
b. Trust funds can account for money that
belongs to employees.
c. Trust funds are not required to provide
financial statements.
d. Pension funds are an example of a trust
fund.

18-53
Learning Objective 10

Make calculations and record

journal entries for agency funds.

18-54
 The Fiduciary Funds: Agency Funds
 Agency Funds serve as conduits for the
transfer of money.
 This role is purely custodial in nature.
 Since the assets belong to someone else,
assets always equal liabilities.

A = L
 The following items do not exist for agency
funds:
 A fund balance/equity
 An operating statement
18-55
 The Fiduciary Funds: Agency Funds
 Agency funds account for resources held by a governmental
unit as a custodial agent for
 individuals,
 private organizations,
 other funds, or
 other governmental units.
 Agency funds use the accrual basis of accounting.
 The financial statement for agency funds is the statement of
fiduciary net assets.

18-56
Practice Quiz Question #10

Which of the following is a good example of

an activity that would be accounted for in an
agency fund?
a. A public parking lot available to all citizens
that charges a fixed daily or monthly rate.
b. A county tax assessment agency that
collects property taxes for all cities in the
county.
c. A county owned ski resort that is available
to both county residents and non-
residents.
d. A public water utility providing services to
all residents of the county.
18-57
Learning Objective 11

Understand and explain the

preparation of government-
wide financial statements.

18-58
 The Government Reporting Model

 GASB 34 specifies the reporting model

 What organizations comprise the
reporting entity?
 The primary government
 A component unit for which the primary
government is financially accountable
 Any organization that has a significant
relationship with the primary government

18-59
 The Government Reporting Model

 What constitutes financial accountability?

 Financial accountability is evidenced when the
primary government appoints a majority of the
organization’s governing board.
 Financial accountability may also exist if the
organization has a separately elected or
appointed board but fiscally depends on the
primary government for the financial resources
required to operate.

18-60
 The Government Reporting Model

 What other organizations should be

included in the reporting entity?
 GASB 14 specifies a third category of
organizations to be evaluated to determine if
they are part of the reporting entity with the
primary government.
 These are legally separate, tax-exempt entities
for which the primary government is not
financially accountable.

18-61
 The Government Reporting Model

 How should the financial results of the

component units be reported?
 A choice between two methods:
 Discrete presentation in a separate column of the
primary government’s financial statements
 Blended presentation by combining the
organization’s results into the primary government’s
financial results

18-62
 The Government Reporting Model

 The Comprehensive Annual Financial

Report (CAFR)
 The CAFR
 Government-wide statements (2)
 Fund-based statements (7)

18-63
 The Government Reporting Model

 Two government-wide statements:

 The Statement of Net Assets
 includes all GCA and GLTL.
 The Statement of Activities
 includes depreciation expense.
 Presented on the accrual basis.
 Measure the flow of economic resources
 Like statements for a commercial enterprise.
 These two statements are presented in addition to the 7
Fund-Based Financial Statements.
18-64
 The Government Reporting Model

 The two government-wide statements must

distinguish between:
1. Governmental activities and
2. Business-type activities.
 The total primary government must be discretely
presented in addition to the component units
reported in separate columns.
 Fiduciary activities are excluded from the
government-wide statements if their resources are
not available to finance the government’s
programs.
18-65
 The Government Reporting Model

 Important features of the government-wide

Statement of Net Assets:
 Reports all “general capital assets”—including
infrastructure.
 Reports all debt—including GLTL.
 Reports net assets in 3 categories:
1. Invested in capital assets, net of related debt
2. Restricted
3. Unrestricted
 In general, interfund balances (loans, advances,
and due to and due from accounts) are eliminated.

18-66
The Comprehensive Annual Financial Report

18-67
Government-wide Statement of Net Assets

18-68
Government-wide Statement of Activities

18-69
 Practice Quiz Question #11
Which of the following is NOT true about the
CAFR?
a. Government-wide financial statements are
similar to the balance sheet and income
statement disclosed by businesses.
b. Government-wide financial statements are
based on the modified accrual basis of
accounting.
c. Since governments provide the two
government-wide financial statements, they
are not required to provide fund statements.
d. Governmental reporting requires a
government-wide statement of cash flows.
18-70
Learning Objective 12

Understand and explain the

additional disclosures that
accompany government-wide
financial statements.

18-71
 The Government Reporting Model

 Reconciliation schedules
 Required to reconcile the net change in the total
amounts reported on the governmental funds
statements with the amounts reported on the
government-wide statements
 Reconciliation schedule for Statement of Net Assets
 Reconciliation schedule for Statement of Activities
 Budgetary comparison schedule
 This should be presented as required supplementary
information for the general fund and for each special
revenue fund that has a legally adopted annual budget.

18-72
 The Government Reporting Model

 Management’s Discussion and Analysis

 MD&A should be included in the required
supplementary information of the government-
wide financial statements to provide an
analytical overview of the government’s
financial and operating activities.
 Notes to the government-wide financial
statements
 GASB 34 specified a number of required note
disclosures.

18-73
 The Government Reporting Model

 Interim reporting
 Governmental entities generally are not required
to publish interim reports, although many
prepare monthly or quarterly reports
 Internal management control instrument
 Auditing governmental entities
 Most entities are audited annually
 Different from the audit of a commercial entity
 Single Audit Act of 1984

18-74
 Additional Considerations

 Special-purpose governmental entities

 Financial reporting for pensions and
OPEB plans
 Employer accounting for pensions and
OPEB plan benefits
 Accounting for termination benefits

18-75
Practice Quiz Question #12
Which of the following is true about
required supplemental disclosures of
governmental entities?
a. Governments are autonomous and need
not provide any specific disclosures.
b. The CAFR must include management
discussion and analysis.
c. No one reads governmental financial
reports, so it doesn’t really matter what
is disclosed.
d. Governments must provide quarterly
interim reports as part of the CAFR.

18-76