State and Local Government Accounting Principles

1. State and Local Government Accounting Principles Chapter 2

2. Learning Objectives • Discuss major aspects of government financial reporting model • Define fund and examine broad categories • Identify MFBA found in financial statements • Analyze effects of transactions • Discuss budgetary accounting & reporting • Understand revenue, expenditure, expense and interfund activity classifications • Understand basic financial reporting requirements

3. GASBS 34: Basis forFinancial Reporting • Issuance in 1999 marked a major change in governmental financial reporting • Created dual perspective reporting: • Government-wide financial statements, using accrual accounting • Fund financial statements, using other bases of accounting

4. Basic Financial Statements: Overview

5. Minimum Requirements for External Financial Reporting:The GASB’s View

6. Classifications of Principles • GAAP & legal compliance • Fund accounting • Measurement focus and basis of accounting (MFBA) • Capital Assets & Long-term Liabilities • Classification & terminology • Annual financial reports

7. Principle 1:Accounting & Reporting Capabilities • Present fairly and with full disclosure funds and activities in conformity with GAAP • Determine and demonstrate compliance with finance-related legal and contractual provisions

8. GAAP Requirements • Trying to assure comparability among and between governments • Full disclosure may result in much more information than “adequate” disclosure required by FASB

9. Compliance: With What? • With GAAP – in most basic form • With budget requirements – may be complicated if budgetary basis is different then GAAP basis • With requirements of grants received from other governments (special reports or non-GAAP basis reports)

10. Principle 10:Budgeting, Budgetary Control and Budgetary Reporting • Annual budget should be adopted by every governmental unit • Accounting system should allow for budgetary control • Budgetary reporting should provide for comparisons for budget and actual information

11. Adopting an Annual Budget • Not GAAP – GASB does not have authority to make this a requirement • Typically placed on cities and counties by State and on State by constitutional requirements

12. Accounting system allowing for budgetary control • GASB cannot require certain accounting system designs • Still, GASB can encourage governments to use system that will allow for budgetary and financial control over revenues and expenditures or expenses

13. Budgetary Reporting • This is a GAAP requirement • GASB requires reporting for General Fund and major Special Revenue Funds as part of minimum reporting requirements • Governments may elect to provide additional reports outside minimum requirements (other information)

14. Information to be provided in budgetary reporting • Original budget • Final budget for the reporting period • Actual inflows and outflows on budgetary basis – if different from GAAP basis, the differences must be explained on face of statement/schedule or elsewhere in report

15. Principle 2:Fund Accounting Systems • Accounting system should be organized on a fund basis • Fund defined by the GASB

16. Accounting system • As in budgeting, GASB cannot define capabilities of accounting system • Still, if governments are to report on a fund basis, accounting system better have capabilities for accounting and reporting in this manner

17. What is a Fund? • Abraham Lincoln once said that America is a government “…of the people, by the people, and for the people…” • Ordinary people have traditionally run local governments – they designed a system they understand

18. Cash Receipts Cash Disbursements Checkbook Balance Most people have a checkbook

19. Cash Receipts Cash Disbursements Fund Balance A “Fund” is an adaptation of the checkbook concept

20. Cash and Other Financial Resources Related Liabilities Fund Balance – = Other financial resources and related liabilities added to checkbook concept to get a governmental fund:

21. GOVERNMENTAL FUNDS General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds PROPRIETARY FUNDS Enterprise Funds Internal Service Funds FIDUCIARY FUNDS Pension Trust Funds Investment Trust Funds Agency Funds Private Purpose Trust Funds Categories and Types of Funds

22. Governmental Funds • Most basic type of fund – use basic fund format defined earlier • Used to account for general government activities • Accounting equation does not allow for capital assets and long-term liabilities – necessitates use of nonfund accounts: • General Capital Assets • General Long-Term Liabilities

23. Nonfund accounts • General Capital Assets – property, plant, & equipment used in general operation of government • General Long-term Liabilities – debt used to finance capital assets and other long-term liabilities not recognized in the governmental funds

24. Proprietary Funds • Used to account for business-like activities of the government: • Golf courses • Maintenance operations • Airports • Utilities • May use more “traditional” accounting equation: Current Assets + Capital Assets Current + Long-term Liabilities – = Net Assets

25. Fiduciary Funds • Accounts for assets held by government in trustee or agency capacity for others • Not used to report assets held for government’s own use

26. Principle 3:Types of Funds • Provides definition for each fund type • Permanent Fund is exception to rule concerning Governmental Funds – more on that later

27. Principle 4:Number of Funds • Governments should use minimum number of funds in order to reduce complexity – must still comply with rules and regulations • Requires use of professional judgment

28. Trick Questions: What is the minimum number of funds? One Which is it? The General Fund Some believe the answer is two: Additional fund is Debt Service Fund – used to hide money from governing council to keep them from spending it

29. Principle 5:Reporting Capital Assets Must know which fund type is using capital assets: • Proprietary fund – reported at fund and government-wide level • Fiduciary fund – reported only at fund level • Governmental Fund – reported only at government-wide level and in notes to financial statements

30. Principle 6:Valuation of Capital Assets • Report at historical cost (may use estimated cost of historical cost cannot be determined) • Cost of capital asset included charges to get it to intended location and ready for use • Donated capital assets reported at fair value at time of donation, plus charges to get it to intended location and ready for use

31. Principle 7:Depreciation of Capital Assets • Capital assets depreciated over useful lives • Inexhaustible capital assets (land and some land improvements) should not be depreciated • Infrastructure assets may be accounted for using the “modified approach”

32. Reporting depreciation depends on fund category • Proprietary fund – reported at fund and government-wide level • Fiduciary fund – reported only at fund level • Governmental Fund – reported only at government-wide level and in notes to financial statements

33. Principle 8:Accounting for Long-Term Liabilities Must know type of fund incurring liability • Proprietary Fund – report at fund and government-wide level • Fiduciary Fund – report only at fund level • Governmental Fund: • Unmatured – report at government-wide level & in the notes • Matured – report as fund liabilities

34. Principle 9:Measurement Focus (MF) and Basis of Accounting (BA) Government-Wide Financial Statements • Measurement focus is on economic [all] resources • Basis of accounting is accrual • Revenues, expenses, gains, losses, assets, & liabilities recognition depends on transaction: • Exchange – when exchange takes place • Nonexchange – according to GASBS 33

35. Principle 9:Measurement Focus (MF) and Basis of Accounting (BA) Governmental Fund Financial Statements • Measurement focus is on current financial resources • Basis of accounting is modified accrual • Revenues recognized in period they become available and measurable • Expenditures recognized when liability is incurred, except for interest on long-term debt which is recognized when due

36. Principle 9:Measurement Focus (MF) and Basis of Accounting (BA) Proprietary Fund Financial Statements • Measurement focus is on economic [all] resources • Basis of accounting is accrual • Revenues, expenses, gains, losses, assets, & liabilities recognition depends on transaction: • Exchange – when exchange takes place • Nonexchange – according to GASBS 33

37. Principle 9:Measurement Focus (MF) and Basis of Accounting (BA) Fiduciary Fund Financial Statements • Measurement focus is on economic [all] resources • Basis of accounting is accrual • Exception for certain liabilities of defined benefit pension plans and certain postemployment healthcare plans

38. Principle 9:Measurement Focus (MF) and Basis of Accounting (BA) Internal interfund transfers should be reported in the accounting period in which the [related] interfund receivable and payable arise.

39. Revenue Recognition Rules – Must be: • Earned or levied • Measurable • Available • Collected in current period or soon enough thereafter to pay liabilities of the current period – usually considered to be 60 days • If not collected within this period, reported as deferred revenues in current period and revenues in year when they become available

40. Expenditure Recognition Rules • For current operations & capital outlay, when liabilities to be paid currently by governmental funds are incurred • For debt service (principal and interest) when payments on long-term liabilities are due

41. Expenditure / Expense Comparison

42. Principle 11:Transfer, Revenue, Expenditure, & Expense Classification At a minimum, [government-wide] Statement of Activities should present: • Activities accounted for in Governmental Funds by function with level of detail determined by GF operating statement • Activities accounted for in Enterprise Funds by different identifiable activities

43. Principle 11:Transfer, Revenue, Expenditure, & Expense Classification Governmental Funds • Revenues reported by fund & major sources • Expenditures reported by fund, function (or program), organizational unit, activity, character, or principal classes of objects

44. Principle 11:Transfer, Revenue, Expenditure, & Expense Classification Proprietary Funds • Revenues reported by major source • Expenses should be classified in same manner as a similar private sector business • Both revenues and expenses should be reported as either operating or nonoperating

45. Principle 11:Transfer, Revenue, Expenditure, & Expense Classification • Proceeds of general long-term debt issues should be reported separately from revenues and expenditures in the governmental fund financial statements • Contributions, special items, extraordinary items, & transfers should be reported separately from revenues and expenditures/expenses

46. Reporting Interfund Activity:Reciprocal interfund activity • Interfund loans (asset / liability) • Short-term (due from / due to) • Long-term (advance to / advance from) • Interfund services provided and used – recognized as revenue in providing fund and expenditure/expense in using fund

47. Reporting Interfund Activity:Nonreciprocal interfund activity • Interfund transfers • Reported in governmental funds as Other Financing Sources / Uses • Reported in proprietary funds after nonoperating revenues and expenses • Interfund reimbursements • Repayment from one fund to another – increases expenditures / expenses in paying fund while decreases them in receiving fund • Not separately reported in financial statements

48. Principle 12:Common Terminology & Classification A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports of each fund or activity. Like, what else would you do?

49. Principle 13:Annual Financial Reports • Appropriate interim reports should be prepared to facilitate management control • One problem – no GAAP for this requirement • Some governments have very formal process – most don’t

50. Principle 13:Annual Financial Reports Comprehensive Annual Financial Report (CAFR) • Should be prepared for all governmental entities • Sections include: • Introductory – little GAAP for this section • Financial – most GASB standards apply to this section • Statistical – see recently issued GASBS 44