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Internal Service Funds. Chapter 11. Understand nature and usage. Understand applicable accounting principles. Understand pricing policies and methods. Prepare basic journal entries. Prepare financial statements. Understand unique aspects of self-insurance funds.
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Internal Service Funds Chapter 11
Understand nature and usage. Understand applicable accounting principles. Understand pricing policies and methods. Prepare basic journal entries. Prepare financial statements. Understand unique aspects of self-insurance funds. Understand problems associated with significant accumulated increases or decreases in total net assets. Learning Objectives
Purpose To finance, administer, and account for departments or agencies whose exclusive or nearly exclusive mission is to provide goods and services to the government’s other departments on a cost reimbursement basis.
Goals of ISFs • Attain greater economy, efficiency, and effectiveness in acquisition and distribution of common goods and services used by other departments • Facilitate the equitable sharing of costs among departments served
General Principles • Measurement Focus – economic resources • Basis of Accounting – accrual
Special Notes on This Transfer • No entry in GF since asset is not accounted for there • Asset may be written down prior if utility value is less than net book value (NBV) • Capital asset is a Capital Contribution in ISF – will become a transfer when government-wide statements are prepared • Asset could be accounted for at NBV in ISF, but this entry is usual practice to maintain audit trail
Pricing Policies • Typical choices • Historical cost • Direct cost, when other costs are insignificant • ISFs usually have a monopoly, so pricing needs to be monitored closely • Excessive charges must be avoided
Pricing Methods • Predetermined rates – so much per page, mile, or order • Charge departments based on actual cost Predetermined rates preferred because • Departments need to know charges at time work is done • Actual cost charges may result in inequitable allocations among departments
Relation to Budget Budget may not be used since level of activity depends on demand, not predetermined spending by the fund
ISF Accounting Illustrations Three funds in example: • Central Automotive Equipment Fund (CAEF) • Stores Fund (SF) • Self-Insurance Fund (SIF)
CAEF Financial Statements • Statement of Net Assets (balance sheet format) • Statement of Revenues, Expenses, and Changes in Net Assets • Statement of Cash Flows 1 2 3
Central Stores Fund • Used to centralize purchasing and warehousing operations • Enhances economy, efficiency, and control • Holds inventory until requested by departments • Billings based on direct inventory cost plus overhead factor
Perpetual Inventory Procedures • Department submits stores requisition • Storekeeper issues requested supplies • Cost of issuance determined using direct cost of supplies and overhead application • Department billed for supplies issued
Physical Inventory • Should be done at least annually • Adjust records to match physical count – usually have a shortage due to breakage, theft, or improper recording • Losses would be included in subsequent overhead charges
Self-Insurance Fund • Full insurance coverage for all types of risk can be prohibitively expensive • Self-insurance used to cover some losses • Amounts set aside should be actuarially determined
Consolidating Risk Financing Activities GASB Statement #10 gives governments two options: • General Fund • Internal Service Fund
General Fund • All claims and judgments recorded in GF when paid or due • Remainder is recorded in GLTL accounts • Amounts charged to other funds recorded as reduction of expenditures – reimbursements, not revenues • May not accumulate reserves for catastrophic losses
Internal Service Fund • All claims and judgments recorded in ISF when incurred – may be current or long-term liability • GLTL accounts are not involved • Amounts charged to other funds recorded as revenues • May accumulate reserves for catastrophic losses
Requirements in Using ISFs • Recognize all claims & judgments liabilities & expenses in ISF • Charge other funds amounts that are reasonable and equitable – preferably actuarially based – so that ISF revenues and expenses are approximately equal • Accumulated net assets should be disclosed in notes as being designated for future catastrophic losses • Determine whether amounts paid to ISFs that differ from required amounts are in substance interfund loans or transfers
Accounting Aspects for SIFs • Revenues from billings to departments • Investment of SIF resources • Recognition and settlement of claims & judgments
Revenue Recognition • Amounts paid based on actuarial estimates should be recorded as revenues • Overpayments • If intended to cover next year’s contribution, record as deferred revenues • If not so intended, payment may be a loan, advance, or transfer
Expense Recognition • Information prior to issuance of financial statements indicate that it is probable that an asset was impaired or a liability was incurred at date of statements. AND • Amount of loss can be reasonably estimated.
Accruing Interest on Investments & Recording Change in Fair Value
Disposition of Increase/Decrease in Net Assets • Charged or credited to billed departments based on usage. • Closed to Net Assets with intention of modifying subsequent years’ charges. • Closed to Net Assets with no adjustments – assumes that fund will have profitable and loss years and will breakeven over time.
