chapter sixteen accounting for state and local governments, part i mcgraw-hill/irwin copyright ©...

Chapter Sixteen

Accounting for Accounting for State and Local State and Local Governments, Governments,

Part IPart I

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Importance of Governmental Accounting

Absence of profit removes an important internal control

Allocation of limited resources to unlimited needs creates public debate

Focus on methods used to generate financial sources and the uses made of those funds

Need to keep public informed (Stewardship) Massive

Federal government 50 State governments Thousands of local governmental units

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Governmental Accounting

Focuses on financial reporting for non-profit governmental agencies.

Many concepts are similar to financial accounting, but terminology and procedures differ.

Governmental Accounting Standards Board (GASB) generates primary standards.

Now requires two sets of financial statements

Focuses on financial reporting for non-profit governmental agencies.

Many concepts are similar to financial accounting, but terminology and procedures differ.

Governmental Accounting Standards Board (GASB) generates primary standards.

Now requires two sets of financial statements

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Governmental AccountingUser Needs

In Concepts Statement #1, In Concepts Statement #1, GASB identified 3 basic GASB identified 3 basic

groups of users of groups of users of governmental governmental

accounting information:accounting information: CitizenryCitizenry Legislative and oversight Legislative and oversight

bodiesbodies Investors and creditorsInvestors and creditors

In Concepts Statement #1, In Concepts Statement #1, GASB identified 3 basic GASB identified 3 basic

groups of users of groups of users of governmental governmental

accounting information:accounting information: CitizenryCitizenry Legislative and oversight Legislative and oversight

bodiesbodies Investors and creditorsInvestors and creditors

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Government-wide Government-wide Financial StatementsFinancial Statements

Government-wide Government-wide Financial StatementsFinancial Statements

GASB Statement No. 34

Requires the production of two sets of statements:

Requires the production of two sets of statements:

Fund-Based Financial Fund-Based Financial StatementsStatements

Fund-Based Financial Fund-Based Financial StatementsStatements

Report all revenues and costs of providing

services each year and all resources available

to the governmental unit.

Report all revenues and costs of providing

services each year and all resources available

to the governmental unit.

Show restrictions on the use of resources and measures, in the

short run, revenues and expenditures from certain activities.

Show restrictions on the use of resources and measures, in the

short run, revenues and expenditures from certain activities.

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Important Difference in Focus

Fund-based financial statements Focus on specific activities (and the resources

allocated and used by them) Primary measurement focus is on flow and

amount of current financial resources Recognition timing is typically based on the

modified accrual approach Assess fiscal accountability

Government-wide financial statements Report on activities as a whole Assess operational accountability Focus on all economic resources Utilize accrual accounting Comparable to business-type accounting

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Reporting Diverse Governmental Activities - Fund Accounting

Governmental units Governmental units have many different have many different types of activities.types of activities.

No common No common motivation links motivation links these activities.these activities.

Therefore, each Therefore, each activity operates activity operates quasi-independent, quasi-independent, self-balancing sets of self-balancing sets of accounts called accounts called “funds.”“funds.”

Governmental units Governmental units have many different have many different types of activities.types of activities.

No common No common motivation links motivation links these activities.these activities.

Therefore, each Therefore, each activity operates activity operates quasi-independent, quasi-independent, self-balancing sets of self-balancing sets of accounts called accounts called “funds.”“funds.”

Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions

Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions

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Fund-Based Financial Statements Seek to Answer Three Questions

How did the government generate its

current financial resources?

How did the government generate its

current financial resources?

Where did those financial resources go?

Where did those financial resources go?

What amount of financial resources is presently held?

What amount of financial resources is presently held?

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Governmental Funds

Governmental Funds

Accounting for activities related

to serving the public.

Accounting for activities related

to serving the public.

Proprietary Funds

Proprietary Funds

Accounting for business-type

activities.

Accounting for business-type

activities.

Fiduciary Funds

Fiduciary Funds

Accounting for financial

resources held for others in a

trustee capacity.

Accounting for financial

resources held for others in a

trustee capacity.

Fund Accounting Classification

All funds fall into one of three broad classifications.

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Fund Accounting ClassificationGovernmental Funds

G eneralFund

SpecialRevenue

Fund

Cap italPro jects

Fund

DebtService

Fund

Perm anentFund

(Endow m ents)

G overnm enta l F unds

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Governmental Funds - General Fund

Used to account for all Used to account for all financial resources financial resources except those except those accounted for in other accounted for in other funds.funds.

In 2006, 49% of In 2006, 49% of Baltimore’s Baltimore’s governmental funds governmental funds (over $1 Billion) were (over $1 Billion) were accounted for in the accounted for in the General Fund.General Fund.

Used to account for all Used to account for all financial resources financial resources except those except those accounted for in other accounted for in other funds.funds.

In 2006, 49% of In 2006, 49% of Baltimore’s Baltimore’s governmental funds governmental funds (over $1 Billion) were (over $1 Billion) were accounted for in the accounted for in the General Fund.General Fund.

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Governmental Funds – Special Revenue Fund

Expenditures are Expenditures are legally restricted.legally restricted.

Resources must be Resources must be spent for specific spent for specific purposes.purposes.

St. Paul, Minnesota, St. Paul, Minnesota, requires that receipts requires that receipts from charitable from charitable gambling must be gambling must be used to support youth used to support youth athletics or “otherwise athletics or “otherwise as legally determined.”as legally determined.”

Expenditures are Expenditures are legally restricted.legally restricted.

Resources must be Resources must be spent for specific spent for specific purposes.purposes.

St. Paul, Minnesota, St. Paul, Minnesota, requires that receipts requires that receipts from charitable from charitable gambling must be gambling must be used to support youth used to support youth athletics or “otherwise athletics or “otherwise as legally determined.”as legally determined.”

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Governmental Funds - Capital Projects Fund

Accounts for costs Accounts for costs incurred to acquire or incurred to acquire or build major build major governmental governmental facilities.facilities.

The actual asset is The actual asset is notnot recorded in this recorded in this account, but the account, but the money to finance its money to finance its purchase or purchase or construction is.construction is.

Accounts for costs Accounts for costs incurred to acquire or incurred to acquire or build major build major governmental governmental facilities.facilities.

The actual asset is The actual asset is notnot recorded in this recorded in this account, but the account, but the money to finance its money to finance its purchase or purchase or construction is.construction is.

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Governmental Funds - Debt Service Funds

Record financial resources accumulated to pay long-term liabilities and interest as they come due.

Does not account for the actual debt

In 2005, Birmingham, Alabama, reported paying out $19 million in principal payments and $17 million in interest payments from its debt service funds.

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Governmental Funds - Permanent Funds (Endowments)

Account for assets Account for assets donated to the donated to the government by government by external donors with external donors with stipulation that the stipulation that the principal cannot be principal cannot be spent.spent.

In 2005, Dallas In 2005, Dallas reported nearly $9 reported nearly $9 million in funds million in funds maintain four different maintain four different parks.parks.

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Fund Accounting Classification - Proprietary Funds

Enterprise Fund Internal ServiceFund

P rop rieta ry F un ds

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Proprietary Funds - Enterprise Funds

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

An activity MUST be accounted for here if, any one of An activity MUST be accounted for here if, any one of the conditions below are met . . . the conditions below are met . . .

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

An activity MUST be accounted for here if, any one of An activity MUST be accounted for here if, any one of the conditions below are met . . . the conditions below are met . . .

Net revenues generated by the

activity provide the sole security for the

activity’s debts.

Net revenues generated by the

activity provide the sole security for the

activity’s debts.

The law requires costs to be

recovered from user fees.

The law requires costs to be

recovered from user fees.

Fees are set high enough to recover costs.

Fees are set high enough to recover costs.

16-17

Proprietary Funds - Internal Service Funds

Account for any Account for any operation that operation that provides services to provides services to OTHER governmental OTHER governmental departments.departments.

Inter-departmental Inter-departmental fees are charged on a fees are charged on a cost-reimbursement cost-reimbursement basis.basis.

Tennessee Tech Tennessee Tech University charges its University charges its departments for the departments for the use of University use of University vehicles.vehicles.

Account for any Account for any operation that operation that provides services to provides services to OTHER governmental OTHER governmental departments.departments.

Inter-departmental Inter-departmental fees are charged on a fees are charged on a cost-reimbursement cost-reimbursement basis.basis.

Tennessee Tech Tennessee Tech University charges its University charges its departments for the departments for the use of University use of University vehicles.vehicles.

16-18

Internal Service Funds - Example

In its 2006 financial statements, the City of Lincoln, Nebraska had the following internal service funds:

Information services fundEngineering revolving fundInsurance revolving fundFleet services fundPolice garage fundCommunication services fundCopy services fund

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Fiduciary FundsAccount for assets that Account for assets that

are held in a are held in a Trustee Capacity for Trustee Capacity for

External UsersExternal Users

4 types:4 types:Investment TrustInvestment Trust – outside portion of investment pools – outside portion of investment poolsPrivate-Purpose TrustPrivate-Purpose Trust – principal and interest are both for the – principal and interest are both for the

benefit of parties outside the governmentbenefit of parties outside the governmentPension TrustPension Trust – employee retirement – employee retirementAgency FundsAgency Funds – any resources held by the government as – any resources held by the government as

an agent for others (some taxes and tolls frequentlyan agent for others (some taxes and tolls frequentlyfall into this category)fall into this category)

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Coverage of Fund Accounting Procedures

16-21

Let’s look at an overview of

the Government-

Wide Statements.

16-22

Government-Wide Financial Statements

Two separate statements are

required:

Statement of Net Assets

&Statement of

Activities

Two separate statements are

required:


&Statement of

Activities

The economic resources

measurement focus requires reporting of

ALL assets and liabilities.

The economic resources

measurement focus requires reporting of

ALL assets and liabilities.

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Note that we Note that we keep the keep the

Governmental Governmental Activities Activities

separate from separate from the Business-the Business-

Type Activities.Type Activities.

Note that we Note that we keep the keep the

Governmental Governmental Activities Activities

separate from separate from the Business-the Business-

Type Activities.Type Activities.

Exh.16-1

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Also note that Also note that this statement this statement does not give does not give information information

about about Fiduciary Fiduciary

FundsFunds

Also note that Also note that this statement this statement does not give does not give information information

about about Fiduciary Fiduciary

FundsFundsThis is consistent with the This is consistent with the

economic resources economic resources management focus which only management focus which only includes assets and liabilities includes assets and liabilities

that are available to use for that are available to use for governmental purposes.governmental purposes.

This is consistent with the This is consistent with the economic resources economic resources

management focus which only management focus which only includes assets and liabilities includes assets and liabilities

that are available to use for that are available to use for governmental purposes.governmental purposes.

Exh.16-1

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Statement of Activities

The net for a given function is determined horizontally, while the

totals for expenses and revenues are

determined vertically.

The net for a given function is determined horizontally, while the

totals for expenses and revenues are

determined vertically.

Exh.16-2

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Statement of Activities

The general revenues are

shown separately at the bottom of

the statement.

The general revenues are

shown separately at the bottom of

the statement.

Exh.16-2

16-27

Importance of Budgets

The budget serves several important purposes: Expresses public policy by showing

allocative preferences Expresses financial intent Provides control by establishing

authorized spending limits Comparison of actual results to the

budget provides a means of evaluating performance

16-28

Now, let’s look

at an overview

of the Fund-

Based

Statements.

16-29

Fund-Based Financial Statements

Two separate statements are required:

Balance Sheet&

Statement of Revenues, Expenditures, and Changes in Fund

Balance

Two separate statements are required:

Balance Sheet&

Statement of Revenues, Expenditures, and Changes in Fund

Balance

Fund-Based statements

include information on fiduciary funds.

Fund-Based statements

include information on fiduciary funds.

16-30


These statements will differ from the Government-Wide financial statements for three reasons.

These statements will differ from the Government-Wide financial statements for three reasons.

3

The Internal Service Funds are included in separate statements for Proprietary Funds.

The current financial resources measurement basis is used.

The modified accrual accounting approach is used.

The Internal Service Funds are included in separate statements for Proprietary Funds.

The current financial resources measurement basis is used.

The modified accrual accounting approach is used.

16-31

Fund Accounting - Balance Sheet Example

Exh.16-3

16-32

Fund Accounting - Balance Sheet Example

Note that the Note that the statement has a statement has a separate column separate column for the General for the General

Fund and for each Fund and for each fund identified as fund identified as a “major” fund.a “major” fund.

Note that the Note that the statement has a statement has a separate column separate column for the General for the General

Fund and for each Fund and for each fund identified as fund identified as a “major” fund.a “major” fund.

Exh.16-3

Two criteria determine whether a fund is classified as

“major”:1. Total assets, liabilities,

revenues, or expenditures are at least 10% of the

corresponding total for all funds of the same category.

2. Total assets, liabilities, revenues, or expenditures

are at least 5% of the corresponding for all other

funds combined.

Two criteria determine whether a fund is classified as

“major”:1. Total assets, liabilities,

revenues, or expenditures are at least 10% of the

corresponding total for all funds of the same category.

2. Total assets, liabilities, revenues, or expenditures

are at least 5% of the corresponding for all other

funds combined.

16-33

Statement of Revenues, Expenditures, & Changes in Fund Balances - Example

ContinueContinue

Exh.16-4

16-34

Statement of Revenues, Expenditures, & Changes in Fund Balances - Example

Exh.16-4

16-35

Let’s look at the accounting

procedures for the Governmental

Accounts for both the Fund-Based and Government-Wide

Statements.

16-36

Recording Budgetary Entries

Purposes of the budget, per the GASB:

1. Expresses public policy.2. Serves as an expression

of financial intent.3. Provides control by

establishing spending limits.

4. Offers a means of evaluating performance.

Purposes of the budget, per the GASB:

1. Expresses public policy.2. Serves as an expression

of financial intent.3. Provides control by

establishing spending limits.

4. Offers a means of evaluating performance.

Budget information

for the General Fund and for each of the major

Special Funds must be

presented.

16-37

Prepare the journal entry to record the Special Revenue

Fund budget.

Prepare the journal entry to record the Special Revenue

Fund budget.

For example, assume a town enacts a motel excise tax to promote tourism and conventions. For 2008, the tax is

expected to generate $490,000 in Special Revenues. Based on this projection, the city council authorizes

expenditures of $400,000 which include $200,000 designated for salaries, $30,000 for utilities, $80,000 for

advertising, and $90,000 for supplies.

For example, assume a town enacts a motel excise tax to promote tourism and conventions. For 2008, the tax is

expected to generate $490,000 in Special Revenues. Based on this projection, the city council authorizes

expenditures of $400,000 which include $200,000 designated for salaries, $30,000 for utilities, $80,000 for

advertising, and $90,000 for supplies.

Recording Budgetary Entries16-38

BudgetBudget EncumbranceEncumbrance ActualActual

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 called an “encumbrance.”

16-39

Encumbrances

For Fund-Based Financial Statements: An entry is required to record the

encumbrance. An entry is required when the bill is

received.

For Government-Wide Financial Statements: No entry is required to record the

encumbrance. An entry is required when the bill is

received.

16-40

Record the order in Drye Township’s books.

Encumbrances – ExampleFund-Based Statements

Nagy Township has budgeted office supplies for $180,000 for 2008. On May 15, Nagy

Township places an order for $16,000 office supplies with Kicsi Office Supplies.

Remember, this entry is only recorded for Fund-Based Financial Statements.

Remember, this entry is only recorded for Fund-Based Financial Statements.

16-41

Record the receipt of the supplies in Drye Township’s books for the Fund-

Based Statements.

Record the receipt of the supplies in Drye Township’s books for the Fund-

Based Statements.

On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16,

and the city was given the sale price).



Encumbrances – ExampleFund-Based Statements

This is the account title typically used in governmental accounting in

place of Accounts Payable.

This is the account title typically used in governmental accounting in

place of Accounts Payable.

16-42

Record the receipt of the supplies in Drye Township’s books for the Government-Wide Statements.

Record the receipt of the supplies in Drye Township’s books for the Government-Wide Statements.

Encumbrances – ExampleGovernment-Wide Statements

Note that with the Government-Wide Financial Statements, no entry is

necessary for the encumbrances used with the Fund-Based Statements.

Note that with the Government-Wide Financial Statements, no entry is

necessary for the encumbrances used with the Fund-Based Statements.





16-43

Fund-Based StatementsFixed Assets

While the expenditure for a While the expenditure for a fixed asset is usually fixed asset is usually

recorded in the General recorded in the General Fund . . .Fund . . .

Depreciation is not Depreciation is not recorded in the recorded in the

governmental fund, since governmental fund, since net income is not a net income is not a concept relevant to concept relevant to governmental units.governmental units.

While the expenditure for a While the expenditure for a fixed asset is usually fixed asset is usually

recorded in the General recorded in the General Fund . . .Fund . . .

Depreciation is not Depreciation is not recorded in the recorded in the

governmental fund, since governmental fund, since net income is not a net income is not a concept relevant to concept relevant to governmental units.governmental units.

16-44

Government-Wide StatementsFixed Assets

. GASB Statement No. 34 requires

a record of ALL capital assets in the Statement of Net Assets

in the government-wide statements.

Depreciation expense is recorded.

Governments have 4 years to capitalize previously acquired

assets.

. GASB Statement No. 34 requires

a record of ALL capital assets in the Statement of Net Assets

in the government-wide statements.

Depreciation expense is recorded.

Governments have 4 years to capitalize previously acquired

assets.

16-45

Classifications Derived Tax Revenues Imposed Nonexchange

Revenues Government-mandated

Nonexchange Transactions

Voluntary Nonexchange Transactions

Classifications Derived Tax Revenues Imposed Nonexchange

Revenues Government-mandated

Nonexchange Transactions

Voluntary Nonexchange Transactions

Recognition of Revenues - Nonexchange Transactions

For Government-Wide Statements,

record the revenues at the “time of

eligibility”.

For Government-Wide Statements,

record the revenues at the “time of

eligibility”.

For Fund-Based Statements, record the revenues when

they become “available for recognition”.

For Fund-Based Statements, record the revenues when

they become “available for recognition”.

16-46

Prepare the journal entry to record the bonds for government-wide statements.

Prepare the journal entry to record the bonds for government-wide statements.

Issuance of Bonds


Increase both Cash and the Debt.


Increase both Cash and the Debt.


Increase Cash and Other Financing Sources.



Nagy Township issues $50,000 in bonds for new sidewalks.


No revenuesNo revenuesrecognized!!recognized!!

16-47

Prepare the journal entry to record the bonds for fund-based statements.

Prepare the journal entry to record the bonds for fund-based statements.

Issuance of Bonds


Increase the Cash and the Debt.


Increase the Cash and the Debt.







No revenuesNo revenuesrecognized!!recognized!!

16-48

Prepare the journal entry to record the loan payment for government-wide statements.

Prepare the journal entry to record the loan payment for government-wide statements.

Payment of Long-Term Liabilities


Record principle and interest as with GAAP.




Record expenditures in the Debt Service Fund.



Nagy Township makes a $10,000 payment on a loan that includes $1,000 in interest.


16-49

Prepare the journal entry to record the loan payment for fund-based statements.

Prepare the journal entry to record the loan payment for fund-based statements.

Payment of Long-Term Liabilities











16-50

Special Assessments

Governments may provide improvements or services that benefit particular properties

In these cases, they may assess the costs, either in total or in part, to the property owners

Examples Paving Curbing Sidewalks Sewers and drains Water lines

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

16-51

Special Assessments - Accounting

Government-wide financial statements Debt and subsequent construction handled as for-

profit enterprises do Asset recorded at cost Taxes assessed and collected Tax receipts used to settle debt

Fund-based financial statements Infrastructure not recorded Debt not recorded Reported in Capital Projects Fund and Debt

Service Fund (tagged as special assessment in both)

16-52

Interfund Transactions

Commonly used, particularly involving monetary transfers from the General Fund

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

Many of these are not reported in the government-wide financial statements because they create no net impact (intra-activity transactions)

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

16-53

Summary

Traditionally, accounting for governmental units was handled by means of fund accounting because of the absence of profit as a control

GASB 34 radically altered this tradition and now requires that government-wide financial statements be produced in addition to the fund-based financial statements previously required

The primary focus of governmental accounting remains the sources and uses of financial resources, as well as the amounts remaining and their allocation

16-54

Possible Criticisms

GASB 34 has proven quite controversial. Some critics contend that it has driven up the cost of governmental accounting by requiring the production of two sets of financial statements based on radically different methods of accounting.

Others have argued that it represents an inappropriate application of for-profit accounting methods to the not-for-profit sector and that it attempts to force a “single accounting methodology.”

WHAT DO YOU THINK????

16-55

chapter sixteen accounting for state and local governments, part i mcgraw-hill/irwin copyright ©...

Documents

financial accounting

financial reporting

governmental fundsaccounting

financial statementsfocus

financial sources

governmental accountingfocuses

baltimores governmental

sets of financial statements16