the what and why of fund accounting may 15, 2014 gfoaz 1
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The What and Why of Fund Accounting
May 15, 2014GFOAz
1
Overview
•Who are the users and what are the uses of governmental financial information?•What is fund accounting?•Why do we need fund accounting?• Accounting principals and the types of
funds•Measurement Focus and Basis of
Accounting (MFBA) 2
Users of financial information
Private Sector• Investors• SEC• Lenders• Internal Management
Public Sector• Taxpayers• Governing Bodies• Donors• Bond Rating Agencies• Grantors• Investors
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Environmental Differences (Uses)
Private Sector• Profit motive
• Return on investment
• Budget is a financial plan
Public Sector• Service motive
• Stewardship
• Budget carries the force of law
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Fund Accounting
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What is accounting?
• “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results….”
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What is a fund?
• “a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations”
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What is fund accounting?
• Accounting & financial reporting that focuses on how resources are segregated for purpose of carrying on a specific activity or attaining certain objectives in accordance with special regulations, restrictions, or limitations
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Types of financial reporting
• Internal Financial Reporting• Special Purpose External Financial
Reporting
• General Purpose Financial Reporting
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Why do we need fund accounting?• Publicly accountable & transparent• Information to the taxpayers & stakeholders• Assess service levels• Evaluate operating results• Financial condition
• Compliance• Budgetary compliance• Debt covenants• Fund restrictions
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Accounting Principles & Funds
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Principles & Standards
•Who establishes principles and standards?• Federal Government – FASAB• State & Local Governments – GASB• Businesses & nonprofits – FASB•Who designated these three bodies?
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Who has the “sole legal authority” to set financial reporting standards?
Governmental Funds
• State and local governments must1. Present financial activities in accordance
with GAAP AND2. Determine and demonstrate compliance• Fund accounting meets the need of #2
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Number of Funds Principle• Only the minimum number of funds
consistent with legal and operating requirements should be established• Financial reporting (suitable for decision
making)• The number of funds for financial reporting is
less than the number for accounting purposes•What is the total number of fund types
available?14
Fund CategoriesFund Categories Purpose Types
Governmental Funds
Primarily supported by taxes, grants & similar revenue sources
1. General Fund2. Special Revenue Funds3. Capital Projects Funds4. Debt Service Funds5. Permanent Funds
Proprietary Funds
Receive significant support from fees & charges
1. Enterprise Funds2. Internal Service Funds
Fiduciary Funds
Accounts for resources that a governments holds as a trustee or agent of an outside party
1. Agency Funds2. Pension Trust Funds3. Investment Trust Funds4. Private Purpose Trust Funds
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Interfund Activity
• Financial transactions between funds of the primary government• Two types
1. Reciprocal – interfund loans, interfund services
2. Non-reciprocal – interfund transfers, interfund reimbursements
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MFBA
•Measurement Focus• Determines what is measured• Basis of Accounting• Determines when recognition takes place
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MFBA•Measurement Focus• Governmental funds focus = current financial
resources• Focus is near term liquidity of assets & liabilities
• Proprietary & fiduciary funds focus = all economic resources
• Difference between the two = measurement focus
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MFBA
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Governmental FundsProprietary & Fiduciary
Funds
Measurement Focus
Current Financial Resources All Economic Resources
Basis of Accounting Modified Accrual Full Accrual
Statement of Position
Financial Assets – cash or converted to cash in the near termLiabilities – liquidates with current available financial resources (excludes long-term debt)
All Assets
All Liabilities
Statement of Resource Flows
Revenue – recognized if measurable & availableExpenditures – Recognized when a fund liability is incurred
Revenue – when earned
Expense – when incurred
Budgetary Accounting• Budgets for the private sector are essentially
management tools• Budgets for the public sector• Are also essential management tools, AND• Must be legally approved• Impose legal restraints on spending• Public sector management must be in a
position to ensure budgetary compliance (ensure spending is within the legally appropriated amounts) 20
Encumbrances•What are encumbrances?• Expenditure is not recognized until a
good/service is received• Encumbrances are “virtual” expenditures
between the issuance of a contract or P.O. and the actual receipt of the good or service• Prevents inadvertent overspending of
appropriation 21
Example: Vehicle Purchases
Appropriation Expenditures EncumbrancesUnencumbered
Balance
1. YTD Activity ($1,000,000) $250,000 $-0- ($750,000)
2. P.O. Issued (2) ($1,000,000) $250,000 $400,000 ($350,000)
3. 1 Vehicle Rec’d ($1,000,000) $450,000 $200,000 ($350,000)
4. Question: Can a $500,000 fire truck be purchased?
5. 1 Vehicle Rec’d ($1,000,000) $650,000 $-0- ($350,000)
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The Reporting Entity
• Primary Government + Component Units = Financial Reporting Entity• Special Purpose Must Meet ALL to qualify
as a primary government, otherwise a component unit• Separate Legal Status• Separately Elected Governing Body• Fiscal Independence
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The Reporting Entity• If not a primary government, then the entity
is a potential component unit (PCO)• If a PCO is financially accountable to the
primary government, then it is normally a component unit
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Primary Factor Secondary Factor
Fiscal dependence + Financial benefit or
burden relationship = Financial accountability
Board appointment + Financial benefit or
burden relationship = Financial accountability
Board appointment + Ability to impose will = Financial
accountability
The Reporting Entity• Blended Component Unit• Integral part of the primary government• Treated as funds of the primary government• General Fund of a Blended Component Unit is
reclassified as a special revenue fund of the primary government
• Discretely Presented Component Unit• Not an integral part of the primary
government• Presented separately in the government-wide
financial statements
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Beyond Fund Financial Reporting• Government-Wide Financial Reporting• Single, integrated financial reporting unit• Users could see the big picture• Are the government-wide financial
statements being utilized?• CAFR• Popular Annual Financial Reporting• Performance Reporting 26
Questions?
Tom Duensing, Executive Financial Services DirectorCity of Glendale(623) 930-2116
tduensing@glendaleaz.com27
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