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Principles of Accounting and Financial Reporting for State and Local Governments

. `. . . . . Learning Objectives. After studying Chapter 2, you should be able to:Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities.. . . Learning Objectives (Cont'd). . Explain th

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Principles of Accounting and Financial Reporting for State and Local Governments

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    4. Key Terms Accrual basis Agency fund Available Blending Business-type activities Capital projects fund Component unit Current financial resources Debt service fund Discrete presentation Economic resources measurement focus Enterprise fund Escheat properties Expenditure Expense Fiduciary activity Fund Fund Balance Fund Equity General Fund Governmental activities Governmental funds Internal service funds

    5. Key Terms (Contd) Investment trust funds Major funds Modified accrual Pension trust fund Permanent fund Primary government Private-purpose trust fund Proprietary funds Reporting entity Special revenue funds

    6. Activities of Government Governmental Business-type Fiduciary Q: What activities are included in each of the above categories? Discuss.

    7. Reporting Entity A reporting entity consists of: A primary government and Component units

    8. Reporting Entity (Contd) A primary government is: A state government, General purpose local government (e.g., a city, town, village, township, borough, county, etc.), or a Special purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments

    9. Reporting Entity (Contd) A component unit is a legally separate organization for which the elected officials of a primary government are financially accountable may also include another organization for which the nature and significance of its relationship with a primary government or its component units is such that exclusion would cause the reporting entitys financial statements to be misleading

    10. Reporting Entity (Contd) The financial information of a component unit can be reported by: Discrete presentation (i.e., in a separate column from the primary governments financial information--see Ill. 1-4 and 2-1), or by Blending (combined with financial information of the primary government) Notes to financial statements should describe reporting entity

    11. Required Financial Statements Two sets of basic financial statements required (in addition to MD&A and other required supplementary information)

    12. Required Financial Statements (Contd) Government-wide financial statements: Are prepared on the accrual basis and use the economic resources measurement focus (i.e., similar to for-profit business entities) Report the primary governments financial information in two columns (governmental activities and business-type activities) Internal service fund information usually reported in the governmental activities column; fiduciary activities not reported at all in the government-wide financial statements

    13. Required Financial Statements (Contd) Fund financial statements (Described in later slides): Three categories (see Ill. 2-1): Two governmental fund financial statements. See Illustrations 1-6 and 1-7 Three proprietary fund financial statements. See Illustrations 1-9, 1-10, and 1-11 Two fiduciary fund financial statements. See Illustrations 1-12 and 1-13

    14. Major Funds Financial statements for governmental funds must contain a separate column for each major governmental fund. Financial information for all nonmajor governmental funds is combined in a single column. Financial statements for proprietary funds must contain a separate column for each major enterprise fund; financial information for all internal service funds is reported in a single column. See Footnote 7 on page 34 for definition of major fund.

    15. Definition of Fund A fund is a separate fiscal and accounting entity with a self-balancing set of accounts; segregating financial resources, liabilities payable from fund resources, and fund equities to attain objectives specified by regulations, restrictions, or limitations. In other words, a fund is conceptually an entity with its own set of books (i.e., chart of accounts, general journal, general ledger, trial balances, and financial statements)

    16. Types of Funds Governmental Funds (5 types) (Discussed in Chapters 3-6) General Fund; Special Revenue Funds; Capital Projects Funds Debt Service Funds; Permanent Funds Proprietary Funds (2 types) (Discussed in Chapter 7) Internal Service Funds; Enterprise Funds Fiduciary Funds (4 types) (Discussed in Chapter 8) Agency Funds; Investment Trust Funds; Private-purpose Trust Funds; Pension Trust Funds

    17. Governmental Funds General Fund (GF) Only one per government Most of general government operating activities are accounted for in the GF

    18. Governmental Funds (Contd) Special Revenue Funds (SRF) Used when required by law or by policy to account for financial resources earmarked for a specified operating purpose Accounting and budgeting usually identical to GF

    19. Governmental Funds (Contd) Debt Service Funds (DSF) Used to account for financial resources segregated to pay principal or interest on long-term general liabilities

    20. Governmental Funds (Contd) Capital Projects Funds (CPF) Used to account for financial resources segregated to pay for construction or acquisition of long-lived capital assets

    21. Governmental Funds (Contd) Permanent Funds Used to account for resources provided by trust in which the earnings but not the principal must be used for public purposes

    22. Governmental Funds Common Characteristics Current financial resources measurement focus Modified accrual basis of accounting used Account for expenditures of appropriations (not expenses) Capital assets and long-term liabilities are not accounted for within governmental funds

    23. Governmental Funds Required financial statements Balance Sheet - Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level.

    24. Proprietary Funds Internal service funds (ISF) Used to account for activities in which goods or services are provided to other departments of the same government or to other governments for a charge Examples include central stores, central computing, motor pools, and printing ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government.

    25. Proprietary Funds (Contd) Enterprise Funds Used to account for activities in which goods or services are provided to the general public for a charge Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores EF are reported as business-like activities in the government-wide financial statements

    26. Proprietary Funds Common Characteristics Accounting and reporting are essentially the same as those of for-profit entities, including full accrual accounting Capital assets and long-term liabilities are accounted for in the funds Depreciation expense is reported in the funds Reports expenses not expenditures

    27. Proprietary Funds (Contd) Required Financial Statements Similar to those of for-profit entities Statement of Net Assets - Proprietary Funds Statement of Revenues, Expenses, and Changes in Net Assets - Proprietary Funds (i.e. operating statement) Statement of Cash Flows - Proprietary Funds

    28. Fiduciary Funds Agency Funds (often several) To account for financial resources in which the government is acting in an agency capacity Accounting is simple; assets = liabilities. No revenue and expense accounts used, nor is there a fund equity account Examples are tax agency funds, special assessment debt service funds, and pass-through agency funds

    29. Fiduciary Funds (Contd) Investment Trust Funds Used to account for external investment pools in which the assets are held for other (external) governments, along with funds of the sponsoring government. The assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants is reported in this fiduciary fund.

    30. Fiduciary Funds (Contd) Private-purpose trust funds To account for nonexpendable financial resources in which the government is acting in a trustee capacity (an endowment in which the principal amount must be kept intact either indefinitely or for a specified period of time) Accounting is virtually identical to that for an enterprise fund.

    31. Fiduciary Funds (contd) Pension (and other employee benefits) Trust Funds (one or more) To account for financial resources in which the government (or other designated trustee) is acting in a trustee capacity for the employees of the government to provide retirement benefits Uses business-type accounting practices.

    32. Reporting Capital Assets General capital assets should be distinguished from capital assets of proprietary and fiduciary funds General capital assets are reported in the government-wide financial statements but not in fund financial statements Proprietary capital assets are reported in both the government-wide and fund financial statements Fiduciary capital assets are reported only in the statement of fiduciary net assets, a fund financial statement.

    33. Valuation of Capital Assets Capital assets should be accounted for at historical cost, or estimated cost if actual cost is unknown. Donated assets should be accounted for at estimated fair value at time of gift.

    34. Depreciation of Capital Assets Capital assets should be depreciated over their estimated useful lives, except inexhaustible assets such as land A modified approach may be used for certain infrastructure assets instead of depreciation Depreciation expense for general capital assets is reported only in the government-wide financial statements; for other capital assets it is also reported in the fund financial statements.

    35. Reporting Long-term Liabilities General long-term liabilities should be distinguished from fund long-term liabilities. General long-term liabilities should be reported in the government-wide statements but not in the fund financial statements. Long-term liabilities to be repaid from proprietary funds should be reported in the proprietary fund statements. Long-term liabilities to be repaid from fiduciary funds should be reported in the fiduciary fund statements.

    36. Measurement Focus What is measured? Economic resources measurement focus Report on the determination of net income, financial position, and cash flows (i.e., capital maintenance) To measure operational accountability Current financial resources measurement focus Report on the inflows and outflows of current financial resources (i.e., cash or other items expected to be converted into cash during the current period) To measure fiscal accountability; meet the legal and budgetary needs of government

    37. Basis of Accounting When are revenues and expenses/expenditures measured? Modified accrual basis of accounting Revenues recognized when available and measurable; expenditures when incurred Accrual basis of accounting Revenues when earned; expenses when incurred

    38. Measurement Focus and Basis of Accounting Summary

    39. Concluding Comments GASBS 34 requires both government-wide financial statements and fund financial statements Government-wide financial statements and fund financial statements for proprietary and fiduciary funds utilize accrual accounting and the economic resources measurement focus (similar to commercial accounting) Fund financial statements for governmental funds utilize the modified accrual basis of accounting and a current financial resources measurement focus END

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