© 2009 Pearson Education, Inc. publishing as Prentice Hall18-1 Chapter 18: An Introduction to...

© 2009 Pearson Education, Inc. publishing as Prentice Hall 18-1

Chapter 18: An Introduction to Accounting for State and Local

Governmental Unitsby Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany

Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,

Joseph H. Anthony, and Suzanne Lowensohn


Governmental: Objectives

1. Learn about the historical development of accounting principles for state and local governmental units.

2. Understand the need for fund accounting and its basic premises.

3. Perform transaction analysis using proprietary and governmental accounting models.

4. Recognize various fund categories, as well as their measurement focus and basis of accounting.


Objectives (cont.)

5. Review basic governmental accounting principles.

6. Learn about the contents of a governmental entity's comprehensive annual financial report.


1: History1: History

An Introduction to Accounting for State and Local Governmental Units


Governmental Entity

• Popular election of officers or appointment by officials of one or more state or local governments

• Potential for unilateral dissolution by government– Net assets revert to government

• Power to enact or enforce a tax


Developing Standards

• Municipal Finance Officers Association• Governmental Accounting, Auditing and Financial

Reporting, 1968• AICPA

• Audits of State and Local Governmental Units, 1974• National Council on Governmental Accounting

• Governmental Accounting and Financial Reporting Principles (beginning 1979)

• Governmental Accounting Standards Board• GASB Statements (beginning 1984)• Codification (1985, updated continually)


Hierarchy of GAAP

GAAP for local and state governmental accounting:

1. GASB Statements and Interpretations2. GASB Technical Bulletins3. Consensus positions of GASB's Emerging

Issues Task Force4. Implementation Guides 5. Other accounting literature


2: Fund Accounting2: Fund Accounting



Accounting for Governments

Focus on continuing ability to fund and provide goods and services– Not profit

Types of activities1. Business type activities

• Provide services or goods to users for fees2. General governmental activities

• Provide services or goods to citizens without regard for ability to pay


Fund (def.)

"a fiscal or accounting entity with a self balancing set of accounts recording cash and other … balances, and changes therein, which are segregated for the purpose of carrying on specific activities…" [GASB Codification]

Groups of funds:– Proprietary funds– Governmental funds– Fiduciary funds


Fund Accounting

Each fund has

• Accounting equation• Journals, ledgers and other records• Financial statements

A single governmental unit, e.g., one city, has multiple funds each with their own financial statements. There is a comprehensive report.


Proprietary Fund Model

Current assets + noncurrent assets - current liabilities

- noncurrent liabilities= net assets

CA + NCA – CL – NCL = Net assets

Accounting is similar to business enterprises.


Governmental Fund Model

Current assets – current liabilities

= fund balance

CA – CL = Fund Balance

Accounting focuses on current financial resources.Expenditures reflect the use of working capital, instead

of expenses which focus on consumption of resources.


General FA and LTD

General fixed assets (FA) are not recorded in governmental funds.– General fixed asset and depreciation records

are maintained separatelyGeneral long term debt (LTD) is not recorded in

governmental funds.– Separate records are also kept

Both are reported in the government-wide statements


3: Transaction Analysis3: Transaction Analysis



Transactions

1. Borrowed $75 by issuing a 3-year note.2. Purchased equipment costing $30 for cash.3. Sold a fully depreciated truck costing $80,

with a residual value of $10 for $8 cash.4. Computed current depreciation as $15.5. Borrowed $30 on a six month note.


Using Proprietary Fund Model

Model: CA + NCA – CL – NCL = Net Assets

CA NCA CL NCLNet

Assets

1 Borrowed long term 75 75

2 Bought equipment (30) 30

3 Sold truck 8 (10) (2)

4 Depreciation (15) (15)

5 Borrowed short term 30 30


Using Governmental Fund Model

• The long term borrowing is a source of current financial resources, as is the sale of the truck.

• Acquisition of equipment uses current financial resources

Model: CA – CL = Fund balance

CA CLFund

balance1 Borrowed long term 75 75 2 Bought equipment (30) (30)3 Sold truck 8 8 4 Depreciation 5 Borrowed short term 30 30


4: Fund Categories4: Fund Categories



Proprietary Fund Types1. Internal service funds

– Provide goods or services on a business type basis primarily for internal customers• For departments and agencies of that

government• Motor pools, central printing

2. Enterprise funds– Provide goods or services on a business type

basis primarily for external customers• For citizens and others• Utilities, trash service, mass transit


Governmental Fund Types

1. Special revenue funds– General governmental financial resources

restricted for specific purposes2. Permanent funds

– Resources are restricted but earnings benefit government or citizens

3. Capital projects funds– Resources used to construct or acquire

major governmental fixed assets


Governmental Funds (cont.)

4. Debt service funds– Resources to be used to pay principle,

interest and charges on long term debt5. General fund

– Working capital available for general governmental use• Governmental offices, police, fire, library


Fiduciary Fund Types

Basic proprietary model:CA + NCA – CL – NCL = Net Assets

1. Pension trust funds2. Investment trust funds3. Private purpose trust funds

An abbreviated model:CA = CL

4. Agency funds


Apply Model to Specific Funds1. Issued general obligation bonds, par value of $3,000, at

101 to finance construction of a government office building.

2. Transferred the premium on the bonds to the fund used to account for payment of principal and interest on the bonds.

3. Incurred and paid construction costs of $125 on the building.

4. Levied and collected sales taxes restricted to use for economic development, $60.

5. Paid general governmental employees’ salaries, $450. Another $50 of salaries accrued but has not been paid.

6. Borrowed $7,500 on a six-month note to finance general operating costs of the government.


Model: CA – CL = Fund balance

Specific Fund: CA CLFund

balance1Capital projects fund 3,030 3,030 2a Capital projects fund (30) (30)2b Debt service fund 30 30 3 Capital projects fund (125) (125)4 Special revenue fund 60 60 5 General fund (450) 50 (500)6 General fund 1,500 1,500

Transactions in Governmental Type Funds


Bases of Accounting

• Governmental type funds– Modified accrual basis of accounting– Focus on flow of current financial resources– Record expenditures

• Proprietary & fiduciary type funds– Accrual basis of accounting– Focus on economic resources – Record expenses


5: Governmental Accounting 5: Governmental Accounting PrinciplesPrinciples



Revenue Recognition

• Exchange or exchange-like transactions• Nonexchange transactions

– Derived tax revenues (sales or income tax)– Imposed nonexchange (property tax)– Government mandated nonexchange (federal

mandates) – Voluntary nonexchange (donations)

• Recognize revenue in governmental funds– Transaction is substantially complete– Funds are measurable and available

• Not more than 60 days • Net revenue approach (net of uncollectibles)


Expenditures and Expenses

• Expenses– Cost of assets or services used– Recognize in period incurred

• Expenditures– Cost of goods or service acquired, whether or

not consumed– Maturing of long term debt principal – Recognized in period current liability is

incurred• Except: interest on long term debt is

recognized when due


Interfund Activity

• Interfund loans• Interfund transfers

– Operating or residual equity1. Nonreciprocal– Government funds

• Other financing sources and uses– Proprietary funds

• Nonoperating revenues or expenses2. Reciprocal

• Seller has revenues• Purchaser has expense or expenditure


Budget

When approved by the legislative body, the budget for expenditures becomes a spending ordinance that has the force of law. An approved revenue plan also has the force of law.

Appropriations– Approved or authorized expenditures

Allotment– Appropriation for a specific time period


Financial Reporting Entity

• Primary government– City, town, state

• Special purpose government– Water district, hospital, transit authority– Treated as primary government

• Separately elected body, legally separate, fiscally independent

• Component unit• Legally separate, but primary government is

financially accountable


6: Comprehensive Annual Financial 6: Comprehensive Annual Financial Report (CAFR)Report (CAFR)



Primary Government ReportingAnnual report called Comprehensive Annual

Financial Report (CAFR)• Includes primary government and blended

component unitsGASB Statement No. 34 • Government wide financial statements• Fund financial statements


CAFR – Introductory Section

• Table of contents• Letter of transmittal• Principal officers• Organizational chart


CAFR – Financial Section

• Management's Discussion & Analysis• Auditor's report• Government-wide financial statements

– Statement of Net Assets– Statement of Activities

• Fund financial statements (detailed later)• Notes and required supplementary information


Statement of Net Assets


Statement of Activities


Fund Financial Statements

• Balance sheet – Governmental funds (GF)• Statement of revenues, expenditures, and changes

in fund balance – GF• Statement of net assets – Proprietary funds (PF)• Statement of revenues, expenses and changes in

net assets – PF and similar trust funds• Statement of cash flows – PF and similar trust

funds• Statement of fiduciary net assets • Statement of fund changes in fiduciary net assets


CAFR – Statistical Section

• Includes – social and economic data– Financial trends– Fiscal capacity

• Comparative, multi-period• Accounting and non-accounting data


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