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ReviewReview

Chapters 1 - 5

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What is GASB Statement no. 34?

Biggest change in governmental GAAP in decades.

Intent of project

-Fiscal accountability (“we have”)

-Operational accountability (“we need”)

Practical effect – “face” of the financial statements changes substantially.

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Fiscal Accountability

Defined as government’s responsibility to justify actions in current period concerning raising and spending of public funds in the short term

-Achieved through annual budget

-Achieved through focus on the “checkbook” (e.g., fund accounting)

-Focus on current spending flexibility

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Operational Accountability

• Defined as government’s responsibility to report on the extent to which operating objectives have been met effectively and efficiently and whether objectives can continue to be met.–Focus on economic resources–Focus on net worth–Focus on “the big picture”

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The Intent of the Current Model

• Provide forum to retain strengths of the current financial statements yet report both fiscal and operational accountability

• Similar to private-sector accounting• Two “perspectives”

–Government-wide financial statements (the current/new)

–Fund financial statements (the old)

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• Level of reporting–Governmental activities–Business-type activities

• Two statements–Statement of Net Assets–Statement of Activities

Government-wide Statements

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• Presents the overall “net worth” of the entity’s governmental and business-type activities.

• NOT a spending focus statement.• Presents all assets and liabilities

–Assets include infrastructure assets–All short and long-term liabilities are

reported

Statement of Net Assets

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•Equity is not fund balance and cannot be interpreted as such

– Invested in capital assets, net of related debt

–Restricted–Unrestricted

NOTE: THIS STATEMENT SHOULD NOT BE USED TO DETERMINE AVAILABILITY OF FUNDS

Statement of Net Assets (cont’d)

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• Designed to identify the full cost of providing various functions and services.

• Identifies net program (cost) or revenue.• Not intended to be interpreted as a “profit/loss”

scenario.• Highlights taxation “subsidy” in the

governmental activities.• Statement is not “budget based”.

Statement of Activities

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• Level of presentation = traditional fund categories and fund types– Governmental– Proprietary– Fiduciary

• Governmental funds report fund balance consistent with budgetary approach

• Again, fund balance ≠ net assets in government-wide statements

• A reconciliation between the two is required.

Fund Financial Statements

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• Fund balance does represent spendable available resources–Reserves–Designations

• Operating statements for governmental funds and budget statements for enterprise funds similar to a “checkbook” approach

Fund Financial Statements (cont’d)

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Two required statements (modified accrual basis)

Balance Sheet for FundsFor each fund, shows CURRENT assets and

liabilities but not long-term assets and liabilitiesNot full accrual

Statement of revenues, expenditures and changes in fund balanceCapital acquisitions are treated as expendituresNo depreciationNo long-term debt to reduce so principal

payments are just another expenditure

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GASB and Revenue RecognitionEarning Revenue the government way!!• Revenues are EARNED if the government has a

legal claim to the resources and the resources raised were intended to finance expenditures during the current or prior periods

• Examples:– Levying a tax establishes a government’s claim to

taxes it assesses (e.g., property taxes)– A business making a taxable sale establishes a taxing

government’s legal claim to sales taxes– Taxpayers earning taxable income establishes a

taxing government’s legal claim to income taxes

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Nonexchange Transactions

• GASB 33: Four Categories of Nonexchange Transactions

1. Imposed nonexchange transactions

2. Derived tax revenues

3. Government-mandated nonexchange transactions

4. Voluntary nonexchange transactions

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Imposed Nonexchange Transactions

• These are assessments imposed on individuals and business entities. –Property taxes–Fines

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Two Types of Limitations

• Time Requirements. These specify the period in which resources must be used or when use must begin (e.g. property taxes; certain grants).

• Purpose restrictions. These specify the purpose for which the resources must be used (e.g. dedicated taxes; restricted grants).

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The modified accrual “layer” for funds-based statements

• For funds: revenues are recognizable ONLY if• They are susceptible to accrual, which means

BOTH– Objectively measurable, and– Available to finance current period expenditures

• An item is available only if it is BOTH– Collected in the current period or soon enough

thereafter to be used to pay liabilities of the current period, and

– The money collected is legally available to finance current period expenditures

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Recognition Standards• Imposed Nonexchange Transactions• The asset is recognized when the government

has an enforceable legal claim or when the resources are received, whichever comes first– Government-wide: The revenue is recognized in the

period in which the government has an enforceable legal claim to the resources and the relevant time requirements have been met

– Funds-based: The revenue must also be available and is recognized in the earliest period in which both “available” criteria are met

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Recognition Standards - applied

• Imposed Nonexchange Transactions–Property taxes would normally be

recognized as an asset when levied and as revenue during the period for which they were levied (government-wide) and available (funds-based)

–Parking tickets – receivable after protest date has passed. If protested, not enforceable until judge rules on case.

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Derived Tax Revenues

• These are derived (i.e. result) from assessments on exchange transactions carried on by taxpayers. – Sales taxes (derived from sales transactions)– Income taxes on wages– Other taxes on earnings or assets (derived

from various commercial transactions)

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Government Mandated and Voluntary Nonexchange Transactions

– Asset is recognized when all eligibility requirements have been met, or when resources are received, whichever comes first

– Government-wide: The revenue is recognized in the period when all eligibility (and time) requirements have been met

– Funds-based: The revenue must also be available and is recognized in the earliest period in which both “available” criteria are met

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Exchange and “exchange-like” Transactions

• Fees for licenses and permits, passenger facility charges, certain tap fees and certain developer contributions should be considered exchange rather than nonexchange transactions, even though the party making the payment may receive less in value than it surrendered.

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Modified Accrual Accounting also applies to expenditures (in government-type funds)

Criteria : Measurable and Available Measurable : Government is able to

determine or reasonably estimate the amount.

Available : Collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period.

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Expenditures

Closely tied to cash flows and near-cash flows

Governmental funds report only current liabilities and not long-term liabilities.

Expenditures recognized when cash is paid or fund liability accrued* for goods/services received.

* next slide . . .

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Expenditures vs. ExpensesExpenditures

Definition: “measure of fund liabilities liquidated with current resources”

Decreases net current financial resources (i.e. Fund Net Assets)

Used in Modified Accrual Basis--i.e. Fund Financial Statements

Expenses Definition: “measure of costs expired or consumed during a

period” Reduction in net economic resources (overall net

assets)

Used in Full Accrual Basis--i.e. Government-wide Statements

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. . . liability accrued* “Revised” Expenditure Definition:

---Decreases in net current financial resources (i.e. Fund Net Assets) NOT resulting from Transfers (and refunding transactions)

NORM – Recognize when FUND Liability is incurred* Exceptions include:

--Debt Service Expenditures on Government Long Term Debt -Recognize when Legally Due

--Materials, Supplies, and Prepaid Items-Recognize based on either Purchases or Consumption Basis

--Pensions, Claims and Judgments, Compensated Absences-Recognize when Payable from Available Expendable Financial Resources

--Capital Leases -Recognize based on Substance vs. Form Basis

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Modified vs Full Acrual

7 Major differences

1) Compensated absences (Chs. 5 & 8)

2) Pension accounting (Ch. 10)

3) Claims and Judgments (Ch. 8)

4) Inventory accounting

5) Prepayments

6) Accounting for capital assets (Chs. 6 & 7)

7) Accounting for interest and principal (Chs. 6 & 8)

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AdditionallyDiscussed all of the critical concepts:

– Funds– Different types of funds, basis of accounting– Budgeting entries– Budgeting accounts– Closing entries– Property Taxes– Introductory level discussion of not-for-profit

entities (multiple choice only)– Reporting Entity: Primary Government and

Component Units (multiple choice only, if any discussed more in later chapters)