Chapter Sixteen

Accounting for State and Local Governments,

Part I

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Learning Objective 16-1

Explain the history of andthe reasons for the uniquecharacteristics of the financialstatements produced by stateand local governments.

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Importance of Governmental Accounting

Allocation of limited resources to unlimited causes Absence of profit motive primary purpose is to provide services in accordance

with public policy goals Serves a broader group of stakeholders Exist longer and are not typically subject to dissolution

Why is it different than “for profit” businesses?

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Governmental Accounting

Governmental Accounting Standards Board (GASB), created in 1984, serves as the public sector counterpart of FASB.

In Concepts Statement No. 1, GASB identified three basic groups of users of governmental accounting information: Citizenry Legislative and oversight bodies Investors and creditors Requires two sets of financial statements

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Learning Objective 16-2

Differentiate between the twosets of financial statementsproduced by state and localgovernments.

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Government-wide Financial Statements

Two Sets of Financial Statements

GASB requires two distinct sets of statements by state and local governments, each with its own unique principles and objectives.

Fund Financial Statements

Report all revenues and costs with a long term focus. Of interest to

creditors, to assess the likelihood of being paid.

Show restrictions on the use of resources, and

report current revenues and expenditures from

certain activities.

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Fund Financial Statements

Report on individual government activities during the current year.

Primary measurement focus is current financial resources especially cash and receivables.

Assess fiscal accountability in raising and utilizing money.

The timing of recognition, in most cases, is based on modified-accrual accounting.

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Government-wide Financial Statements

Report on financial affairs as a whole. Assess operational accountability. Help users evaluate government’s financial decisions

and long-term stability. Permits stakeholders to: • Determine the government’s overall financial position• Understand cost of services • See how programs are financed.• See extent government has invested in capital assets.

Focus on all economic resources. Utilizes accrual accounting.

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Two Sets of Financial Statements

Comparison of the two sets of financial statements required by GASB

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Learning Objective 16-3

Understand the reason thatfund accounting has traditionallybeen a prominent factor in the internal recording of state and local governments.

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Internal Recordkeeping - Fund Accounting

Governmental units report a diverse array of activities financed from numerous resources.

Governments operate through many relatively independent departments and functions.

Accounting for each activity is maintained in a quasi-independent, bookkeeping system – a fund.

Separate information is accumulated for every activity such as: library, school system, fire department, road construction, and more.

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Learning Objective 16-4

Identify the three fund typesand the individual fund categorieswithin each.

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Governmental Funds

Accounting for activities related to

serving the public.

Proprietary Funds

Accounting for business-type

activities.

Fiduciary Funds

Accounting for financial

resources held for others as

trustee.

Fund Accounting Classification

All funds fall into one of three broad classifications.

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Governmental Funds

Dominate because of a service orientation. Internal accounting system maintains individual funds

for every distinct service function. Each fund accumulates and expends current financial

resources to achieve one or more desired public goals. Governmental funds are subdivided into five categories:

• General Fund, • Special Revenue Funds, • Capital Projects Funds, • Debt Service Funds, and • Permanent Funds.

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Governmental Funds - General Fund

GASB’s definition of the General Fund is: “to account for and report all financial resources not accounted for and reported in another fund.”

Implies that it records only miscellaneous revenues and expenditures , but

It accounts for many of a government’s most important ongoing functions.

2011 fund financial statements for the City of Baltimore, Maryland, disclosed 11 major areas of current expenditures within its General Fund.

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Governmental Funds - Special Revenue Fund

Account for resources that are restricted or committed for a specific purpose other than debt payments or capital projects.

Donor stipulations or legislative mandates require these financial resources must be spent in a designated fashion.

St. Paul, Minnesota, reported approximately $95 million of revenues within over 25 individual Special Revenue Funds during the 2011 fiscal year for: Rent received from use of the Municipal Stadium Administration Fees for charitable gambling Money received from solid waste and recycling programs Cable television franchise fees.

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Governmental Funds - Capital Projects Fund

Accounts for capital resources assigned for capital outlays such as bridges, schools, and other major governmental facilities.

Funding comes from a number of sources. The actual asset to be obtained is not recorded, only

the money to finance its purchase or construction is. The Lexington-Fayette Urban County Government

in Kentucky reported, as of June 30, 2012, that it held more than $20.4 million in financial resources in 18 different Capital Projects Funds

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Governmental Funds - Debt Service Funds

Record financial resources accumulated to pay long-term liabilities and interest when due.

Does not account for the government’s actual debt. Debt Service Funds monitor balances currently

available to make the payment to satisfy long-term liabilities.

In 2012, Birmingham, Alabama, reported $34 million in cash and investments held to pay its long-term debt. It paid $21. 6 in principal payments and $13.7 million in

interest payments from its debt service funds.

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Governmental Funds - Permanent Funds (Endowments)

Account for financial resources restricted by external donors, contract, or legislation with stipulation that the principal can never be spent, but any income can be used for a designated purpose.

In 2011, Dallas, Texas reported nearly $8 million in funds to maintain four different parks and help finance other municipal projects.

These gifts are referred to as endowments.

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Proprietary Funds

Category accounts for government activities that assess a user fee.

User charges help recover some of the costs.

Accounting resembles that of a for-profit activity - accrual accounting is used to recognize assets and liabilities.

Proprietary funds are broken into two divisions: Enterprise Funds

Internal Service Funds

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Proprietary Funds - Enterprise Funds

May be used to account for any government activity that is financed, at least in part, by user charges.

An activity MUST be accounted for here if, any one of these conditions below are met . . . Revenues generated by the activity provide the sole

security for the activity’s debts.

Laws or regulations require recovering the activity’s costs through fees and charges.

Fees are set at prices intended to recover costs.

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Proprietary Funds - Internal Service Funds

Account for any operation that provides services to ANOTHER governmental department for a fee.

Services are provided for the primary benefit of parties with the government.

Accounted for similar to for-profit operations in the private sector.

In 2012, Lincoln, Nebraska reported eight operations that were accounted for as separate internal service funds that provided a variety of services including ∙ central data processing ∙ engineering ∙ insurance ∙ copy ∙ maintenance facility for city and police vehicles ∙ graphic arts and ∙ operation of facilities for government functions.

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Fiduciary Funds

Account for assets that are held in a trustee or agency capacity for external parties.

Money cannot be used to support government’s own programs.

Use the economic resources measurement focus and accrual accounting.

Funds are omitted entirely from government-wide financial statements.

Separate statements are included within the fund financial statements.

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Fiduciary Funds

Investment TrustInvestments held on behalf of others

Private-Purpose TrustPrincipal and interest are both for the benefit of

parties outside the governmentUnclaimed property is usually recorded here

Pension TrustEmployee retirement benefits (quite large)

Agency FundsResources held by a government as an agent for

others (taxes and tolls collected and transferred)

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Learning Objective 16-5

Understand the basic structureof government-wide financialstatements and fund financialstatements (as produced forthe governmental funds).

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Government-wide Financial Statements

Two statements are required:1) Statement of Net Position2) Statement of Activities

Reporting is separated into: Governmental activities

All governmental funds and most internal service funds.

Business-type activities All enterprise funds and remaining internal

service funds.

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Statement of Net Position

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Statement of Net Position

The economic resources measurement focus is used in government-wide financial statements. All assets and liabilities are reported, but GASB has identified several balances that do not qualify as either assets or liabilities. These amounts are shown as deferred outflows or deferred inflows of resources. The final section, the net position category, indicates (1) the amount of capital assets being reported less

related debt, (2) legal or external restrictions on the use of any assets

or resources, and (3) the total unrestricted amount.

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Statement of Activities

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Statement of Activities

The statement of activities provides details about revenues and expenses separated into governmental activities and business-type activities.

Direct expenses and program revenues are shown for each government function. Program revenues include fines, fees, and grants that the specific activity generates. Thus, a single net revenue or net expense is determined for each function to indicate the financial burden or financial benefit to the government and its citizens.

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Fund Financial Statements

Three categories in the second fund financial statement are addressed in detail:1) Revenues 2) Expenditures 3) Other Financing Sources (Uses)

Two statements are required:1) Balance Sheet2) Statement of Revenues, Expenditures, and

Other Changes in Fund Balance

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Fund Financial Statements

1) The Internal Service Funds are grouped with the funds they benefit.2) Governmental activities use the economic resources measurement basis focus, and the current financial resources measurement focus is used for governmental funds.3) The timing of recognition is different, and the differences create the need for reconciliations between the totals on the two types of statements.

Fund Financial statements differ from the Government-Wide financial statements for three reasons:

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Fund Financial Statements – Balance Sheet

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Statement of Revenues, Expenditures, & Changes in Fund Balances

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Statement of Revenues, Expenditures, & Changes in Fund Balances

Governmental accounting does not require a stockholders’ equity section on the balance sheet.The term “fund balance” is used to report the amount of the net current financial resources at that time for each fund. These fund balances are reported within five categories: Fund-Balance—Nonspendable Fund-Balance—Restricted Fund-Balance—Committed Fund-Balance—Assigned Fund-Balance—Unassigned

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Learning Objective 16-6

Record the passage of a budget as well as subsequent encumbrances and expenditures.

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Procedures - Importance of Budgets

The budget serves several purposes:– Expresses public policy – Expresses financial intent– Provides control by establishing spending limits– Compares actual results to the budget as a means

of evaluating performance– Indicates whether there is sufficient revenue to

pay for expenditures

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A town enacts a motel excise tax to promote tourism and conventions. For 2015, the tax is expected to generate $490,000 in Special Revenues. The city council authorizes expenditures of $420,000 including $200,000 for salaries, $30,000 for utilities, $110,000 for supplies, and $80,000 for advertising.

Procedures – Recording Budgetary Entries Example

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Budget Encumbrance Expenditure

Procedures – Encumbrances

In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities.A recorded commitment or contract is an “encumbrance.”When the purchased item is received, the expenditure account is recognized and the encumbrance account is removed.

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Procedures for Encumbrances Compared

For Fund-Based Financial Statements:An entry is required to record the encumbrance.An entry is required when the item is received.At the end of the fiscal period, remaining

commitments are removed by reversing the original journal entry.

For Government-Wide Financial Statements:No entry is required to record the encumbrance.An entry is required when the order is filled.

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Learning Objective 16-7

Understand the reporting of capital assets, supplies, and prepaid expenses by a state or local government.

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Procedures – Fixed Assets

Virtually no assets are recorded within the fund statements for governmental funds.

The expenditure for capital assets is recorded at acquisition and closed out at the end of the fiscal period.

Fund financial statements report the amount expended each period by the governmental funds for capital assets and infrastructure items.

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Learning Objective 16-8

Determine the proper timing for the recognition of revenues from various types of nonexchange transactions.

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Procedures – Recognition of Revenues

Nonexchange Transactions ClassificationsDerived Tax Revenues

Imposed Nonexchange RevenuesGovernment-mandated Nonexchange Transactions

Voluntary Nonexchange Transactions

Revenue for governmental organizations differs from revenue for business. Governmental revenue is not true revenue for which an earnings process exists. The revenue is derived from “nonexchange transactions” for which the government does not provide a direct and equal benefit for the amount received.

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Learning Objective 16-9

Account for the issuance of long-term bonds and the reporting of special assessment projects.

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Procedures –Issuance of Bonds

Bond proceeds are not revenue, but the proceeds serve as a major source of financing for many sate and local governments.

The proceeds must be repaid, so the government recognizes no revenue.

Government-wide financial statements recognize cash received and debt incurred.

Fund financial statements recognizes the cash received, but does not record the debt as a claim on current financial resources.

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Special Assessments - Accounting

Governments may provide improvements or services that benefit particular properties.

They may assess the costs, in total or in part, to the property owners for paving and constructing:– Streets– Curbs– Sidewalks– Sewers and drains– Water lines

Usually financed by debt issuance and liens on the benefited property (to ensure reimbursement).

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Learning Objective 16-10

Record the various types of monetary transfers that occur within the funds maintained by a state or local government.

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Interfund Transactions

Commonly used, particularly monetary transfers from the General Fund

Normally reported as “other financing source” and “other financing use” within the fund-based financial records

Intra-activity transactions between two government or two enterprise funds are not reported in the government-wide financial statements because they create no net impact.

Interactivity transactions occur between governmental and enterprise funds and are reported on government-wide financial statements

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