CHAPTER 24

GOVERNMENTAL ACCOUNTING: BASIC PRINCIPLES AND THE GENERAL FUND

FOCUS OF CHAPTER 24
The Governmental Accounting Standards Board The Nature and Diversity of Activities The Objectives of Governmental Financial Reporting Measurement Focus and Basis of Accounting Basic Principles of the GASB Codification The General Fund

The Governmental Accounting Standards Board (GASB)

GASB: Created in 1984. A sister organization to the FASB. Establishes GAAP for state and local units. No authority to establish GAAP for the federal government. Seven memberssimple majority vote needed (4 votes).

Jurisdictional Arrangement Between GASB and FASB

GASB has primary responsibility for state and local governmental units. State and local governmental units: Must follow FASB rules if GASB says so. May elect to follow a FASB rule if GASB has not addressed a specific issue. If election is made, must use ALL such rules.

The Government Finance Officers Association (GFOA): Its Function GFOA: The equivalent of the AICPA for the private sector. Publishes or provides the following to enhance and promote professional management of governmental units: Books, periodicals, monthly newsletter. Services to members. Software.

GAAFR: The Blue Book

Stands for Governmental Accounting, Auditing, and Financial Reporting. Published by the GFOA. Neither prescribes nor authoritatively interprets GAAP for governmental units. Provides detailed guidance (many examples) for applying governmental GAAP. Widely used by governmental units.

The Nature & Diversity of Governmental Activities

Absence of a Profit Motive: What to measure? Revenues & costs of providing services? Inflows and outflows of all resources? Inflows and outflows of certain resources?

The Nature & Diversity of Governmental Activities

Extensive Legal Requirements: Constitutions, charters, and statutes regulate governmental units. Some legal provisions pertain to accounting and financial reporting matters: Keeping separate books for certain activities. Being audited by outside CPAs.

The Nature & Diversity of Governmental Activities

Diversity of ActivitiesOperations are classified as: Governmentalthese activities DO NOT resemble commercial activities. Proprietary typethese activities DO resemble commercial activitiesCan measure profitability or capital maintenance. Fiduciaryholding and managing assets owned by others (e.g., pension assets).

Use of Fund Accounting

Fund Accounting: Accounting for certain activities separately from all other operations. Fund defined: A fiscal and accounting entity with a self-balancing set of accounts (like a branch or a division of a commercial entity). The General Fund: The main and largest fundrecords most routine transactions.

Use of Fund Accounting

Fund Accounting (cont.): The difference between a funds ASSETS and LIABILITIES is called: Governmental and Fiduciary-Type Funds FUND BALANCE Proprietary Funds Net Assets

Use of Fund Accounting

Specific General Ledger Accounts Used: Governmental and Fiduciary-Type Funds Fund Balance:
Reserved for encumbrances Unreserved

Proprietary Funds Net Assets:

Invested in capital assets, net of related debt Restricted Unrestricted

The Objectives of Governmental Financial Reporting GASB Concepts Statement No. 1 Financial Reporting should: Assist in fulfilling accountability and enabling users to assess accountability. Assist users in evaluating operating results. How has the financial condition changed? Assist users in assessing service level capabilities and ability to meet obligations as they become due.

Measurement Focus And Basis Of Accounting (MFBOA)

Measurement Focus: WHAT flows to measure for operations. Basis of Accounting: WHEN should transactions and events be recognized in the financial statements.

MFBOA: Proprietary

Activities

Measure flow of ALL ECONOMIC RESOURCES (both reporting levels): Present a Statement of REVENUES and EXPENSESreveals the CHANGE IN THE ECONOMIC CONDITION. Use accrual basis of accounting (needed in order to report ALL revenues & expenses). Also present a Statement of Cash Flows.

MFBOA: Governmental

Activities

Measure flow of CURRENT FINANCIAL RESOURCES at the fund-based reporting level: Present a Statement of Revenues and Expenditures and Changes in Fund Balancereveals: Financial resources received and spent. Change in net financial resources available for spending in the near future. Use modified accrual basis of accounting.

MFBOA: Current Financial

Resources

Current Financial ResourcesTypical Items: Cash, property tax receivables, prepaids, and supplies inventories. Claims Against Current Financial Resources Typical Items: Wages, payroll taxes, payables to vendors, and liabilities expected to be paid in the NEAR FUTURE (typically within 60 days after the year-end).

MFBOA: What is lacking at the

Fund-Based Reporting Level?

A Statement of Revenues and Costs of Providing ServicesIt would: Reveal the flow of all economic resources. Be a true operating statement. Include ALL expensesnot just those actually paid and expected to be paid in the near future. Reveal the change in economic condition.

Basic Principles of the GASB Codification: Grouped into 7

Categories

Accounting & Reporting Capabilities Types of Funds Basis of Accounting Financial Reporting Long-Term Liabilities Capital Assets Budgets and Budgetary Accounting

Basic Principles:

Category 1 Accounting & Reporting Capabilities

Present financial statements on a GAAP basis. When conflicts exist between GAAP BASIS and LEGAL REQUIREMENTS: Demonstrate legal compliance by either: Additional schedules and narrative explanations or A separate legal basis report.

Basic Principles: Category 2

Types of Funds

Governmental Funds: General FundAccounts for all activities not required to be accounted for in another fund. Special Revenue FundA clone of the General Fund. Capital Projects Funds Debt Service Funds Permanent Funds

Types of Funds & Account Groups

Proprietary Funds: Enterprise FundsProvides services PRIMARILY to nongovernmental users (city-owned utilities are prime example). Internal Service FundsProvides services SOLELY governmental departments.

Basic Principles: Category 2

Types of Funds & Account Groups

Fiduciary Funds: Trust Funds: Pension (and similar) Trust Funds Investment Trust Funds Private-Purpose Trust Funds (these activities do not benefit the government unit) Agency Funds

Basic Principles: Category 2

Basic Principles: Category 3Basis of Accounting

Accrual Basis Funds: Proprietary funds Enterprise Funds Internal Service Funds Fiduciary funds (3 Trust & 1 Agency) The two propriety funds and the three trust funds have either a profitability or capital maintenance orientation.

Basic Principles: Category 3Basis of Accounting

Modified Accrual Basis Funds: Governmental funds General Fund Special Revenues Fund Capital Projects Funds Debt Service Funds Permanent Funds

Basic Principles: Category 3Basis of Accounting

Modified Accrual Basis Defined: REVENUES: Recognize in period in which they become available and measurable. Available means: Collectible within the current period or soon enough thereafter to be used to pay current period liabilities.

Basic Principles: Category 3Basis of Accounting

Pointers on Recognizing REVENUES: Revenues STAND ALONE. Revenues are not earned as in the private sector. The delivery of services requires expendituresbut delivery does not generate revenues.

Basic Principles: Category 3Basis of Accounting

Modified Accrual Basis Defined: EXPENDITURES: Recognize in the accounting period in which the fund liability is incurred. One exception exists for interest on general long-term liabilities.

Basic Principles: Category 3Basis of Accounting

Pointers on recognizing EXPENDITURES: Liabilities are recorded when they are incurred. The offsetting debit will usually be to: Expenditures (and thus reported in the current operating statement) OR The Net AssetsUnrestricted account in the GCA-GLTL g/lthe debit balance will be reported as expenditures in a later future period.

Basic Principles: Category 4(A) Financial ReportingThe Basics

THE BALANCE SHEETDisplay restrictions of the fund balance in the following manner:
Fund Balance: Reserved for encumbrances.... $ 33,000 Unreserved................................. 417,000 Total Fund Balance.............. $450,000

Numerous types of restrictions can exist thus several types of reservations are used.

Basic Principles: Category 4(A) Financial ReportingThe Basics

THE OPERATING STATEMENTUse the allinclusive format that includes the analysis of the fund balance (modified accrual basis funds) or net assets (accrual basis funds) for the period: Revenues (inflows) Expenditures (outflows) Excess of Revenues over Expenditures Fund Balance, 1/1/06 Fund Balance, 12/31/06

Basic Principles: Category 4(B) Financial ReportingBond Proceeds BOND PROCEEDSFor governmental funds, report in a special category in the operating statement as follows:

Revenues (inflows) Expenditures (outflows) Other Financing Sources and Uses: Bond proceeds (an inflow)

Basic Principles: Category 4(B) Financial ReportingInterfund Transfers INTERFUND ACTIVITIESReport in one of the following four categories (A and B are reciprocal in nature; C & D are nonreciprocal in nature): (A) Interfund loans. (B) Interfund services provided and used. (C) Reimbursements. (D) Transfers ( the last resort).

Basic Principles: Category 4(B)Financial ReportingInterfund Transfers

(B) INTERFUND SERVICES PROVIDED AND USED: Transactions in which one fund provides a service to another fund. Such service would be provided by an outside company if not provided internally. Service provider reports REVENUES. Service recipient reports EXPENDITURES (or expenses if an accrual basis fund).

Basic Principles: Category 4(B) Financial ReportingInterfund Transfers (C) REIMBURSEMENTS: Occur when a fund that is ultimately responsible for a particular expenditure or expense repays (or agrees to repay) some other fund that initially paid for the item on its behalf. Results in getting the expenditure or expense recorded in the proper general ledger.

Basic Principles: Category 4(B)Financial ReportingInterfund Transfers

(D) TRANSFERS: The default category: For transfers that cannot be classified into one of the other three categories (A, B, and C).
Report in the OTHER FINANCING SOURCES AND USES section of the operating statement for governmental funds.

Basic Principles: Category 4(B) Financial ReportingOther Financing

Sources and Uses

OTHER FINANCING SOURCES AND USES category of the operating statementlimited to the following types of transactions: Bond proceeds Transfers in Transfers out Proceeds from sale of general capital assets Proceeds from capital lease

Basic Principles: Category 4(C)

Financial ReportingThe CAFR

Comprehensive Annual Financial Report (CAFR): Includes 2 types of financial statements: #1: Government-wide statements (show the big picture) #2: Fund-based statements.

Basic Principles: Category 4(C)

Financial ReportingThe CAFR

The General Purpose Financial Statements: GOVERNMENT-WIDE STATEMENTS: Consists of two specific financial statements designed to present an OVERVIEW of financial position and operations. FUND-BASED STATEMENTS: Consists of seven specific financial statements (narrow focus statements).

Basic Principles: Category 5

Long-Term Liabilities

Certain funds account for and report long-term liabilities. Long-term liabilities not accounted for in a specific fund is called General Long-Term Liabilities: GLTL is accounted for in the GCA-GLTL g/l. GLTL is the liability of the government as a whole and not that of any specific fund.

Basic Principles: Category 6

Fixed Assets

Certain funds account for & report capital assets. Fixed assets not accounted for in a specific fund are called General Capital Assets. They are reported in the GCA-GLTL g/l. Depreciation expense is not reported in the operating statement of the governmental fundsat the fund-based reporting level.

Budgets and Budgetary Accounting

Appropriation: The statutory authorization for spending a budgeted amount during a coming year. Annual Budgets for the General Fund and the Special Revenue Funds are always recorded in the general ledger for control purposes. Also done for Capital Projects Funds and Debt Service Funds if useful.

Basic Principles: Category 7

Budgets and Budgetary Accounting

Encumbrances: Commitments related to unperformed (executory) contracts for goods or services. Special general ledger accounts are used to record encumbrancesthe purpose is to prevent spending more than has been appropriated. SUCH ENTRIES HAVE NO EFFECT ON REPORTED OPERATIONS.

Basic Principles: Category 7

Two Alternative Ways to Handle

Consumption Method: The preferred methodit parallels business practice. The ACQUISITION of inventory is treated as the conversion of resources (debit Inventory). The USE of inventory is treated as an outflow of resources (credit Inventory and debit Expenditures or Expenses).

Inventories of Supplies:

Two Alternative Ways to Handle

Purchases Method: The ACQUISITION of inventory is treated as an outflow of resources (debit Expenditures or Expenses).

Inventories of Supplies:

The Operating Statement for Governmental Funds: Classifications REVENUES: Always classified by source. EXPENDITURES: Always classified by character: Current, Capital Outlay, or Debt Service And then by function (for example): Health, Welfare, Sanitation, Public Safety

Measuring FLOWS: Cash

Only

STATEMENT OF CASH FLOWS

INFLOWS: Property tax collections...................... $100,000 Parking meter receipts........................ 5,000 Total CASH Inflows....................... $105,000 OUTFLOWS: Payments to employees..................... $ 90,000 Payments to services vendors........... 11,000 Total CASH Outflows................... $101,000 Net CASH Inflow...................... $ 4,000

(simplified)

Cash & Receivables Only

STATEMENT OF FLOWS OF CASH & RECEIVABLES
(simplified) INFLOWS (REVENUES): Property tax assessments, net........... $120,000 Parking meter receipts....................... 5,000 Total Inflows................................... $125,000 OUTFLOWS:.. Payments to employees.................... $ 90,000 Payments to services vendors.......... 11,000 Total Outflows.............................. $101,000 Net Inflow.............................. $ 24,000

Measuring FLOWS:

Measuring FLOWS: Cash, Receivables,

& Vouchers Payable Only

STATEMENT OF FLOWS OF CASH, RECEIVABLES, & VOUCHERS PAYABLE

(simplified) INFLOWS (REVENUES): Property tax assessments, net................. $120,000 Parking meter receipts............................. 5,000 Total Inflows........................................ $125,000 OUTFLOWS (EXPENDITURES): Employee salary costs incurred............. $ 96,000 Services provided by service vendors.. 17,000 Total Outflows.................................... $113,000 Net Inflow..................................... $ 12,000

End of Chapter 24
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