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Introduction to Governmental Accounting

Introduction to Governmental Accounting. Presented by Leanne T. Cross, CPA lcross@mjcpa.com. Governmental Acronyms. FASB – Financial Accounting Standards Board GAAP – Generally Accepted Accounting Principles GASB – Governmental Accounting Standards Board

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Introduction to Governmental Accounting

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  1. Introduction to Governmental Accounting Presented by Leanne T. Cross, CPA lcross@mjcpa.com

  2. Governmental Acronyms • FASB – Financial Accounting Standards Board • GAAP – Generally Accepted Accounting Principles • GASB – Governmental Accounting Standards Board • RSI – Required Supplementary Information • SLG – State and Local Government

  3. Characteristics of Government • Absence of profit motive • Owned by constituents – no stock • Contributors of resources do not receive proportional share of benefits • Decisions made – directly or indirectly – by voters • Popular election of governing board • Meetings where decisions are made open to the public • Power to enact and enforce a tax levy • Ability to issue tax-exempt debt

  4. Similarities to the Private Sector • Operate in same economy and compete for same resources: financial, capital, and human • Acquire and convert resources into goods and services • Use of accounting and other information systems • Need to operate economically, effectively, and efficiently

  5. Differences from Private Sector • Organizational objectives • Private Sector – maximize income from resources • Government Sector – maximize services from resources • Sources of financial resources • Private Sector – raise resources from sales, capital stock, and debt transactions • Government sector – raise resources from taxes, state appropriations, grants, and fees • Methods of evaluating performance and operating results

  6. Differences from Private Sector (cont’d) • Methods of evaluating performance and operating results • Private Sector – continuing a product or service is determined by success in the marketplace • Government Sector – • Profit is not a motive • Services are usually not found elsewhere so there is no competition • Face rules and regulations not found in private sector

  7. Typical Activities of SLG • Governmental Activities – unique to SLGs • Police and fire protection • Education • Social services • Courts • Business-type Activities – similar to private sector • Utilities • Golf courses • Airports

  8. Governmental Activities • Purpose is to provide goods and services that all constituents need regardless of ability to pay for goods and services. • Sources of Financial Resources • Taxes – property, sales, and income • Intergovernmental revenues – grants, revenue sharing • Licenses and permits • Fines and forfeitures • Debt proceeds (typically not used for operations)

  9. Business-type Activities • Purpose is to provide same types of services found in private sector. • Source of Financial Resources • Charge fee for services received • Separate, self-sufficient operations

  10. Financial Report Users • Citizens • Legislative and oversight bodies • Investors and creditors

  11. Financial Report Uses • Comparing results with legally adopted budgets • Assessing financial condition and results of operations • Assisting in determining compliance with finance-related laws, rules, and regulations • Assisting in evaluating efficiency and effectiveness

  12. Fundamentals of SLG Accounting and Financial Reporting • GAAP and legal compliance • Fund accounting • Fund categories • Types of funds • Comparative financial statement formats among governments • Annual financial reporting

  13. GAAP Reporting and Legal Compliance • Ensures that all financial reports of all SLGs contain the same types of financial statements and disclosures for the same types of funds and activities • Trying to assure comparability among and between governments • Requires “full” disclosure • Maintaining budgetary accounting control during the year.

  14. SLG GAAP Hierarchy • GASB Statements and Interpretations, which are periodically incorporated into the Codification • GASB Technical Bulletins and AICPA Audit Guides and SOPs if made applicable to SLG’s and cleared by GASB • AICPA Practice Bulletins if made applicable to SLGs and cleared by GASB • GASB staff Implementation Guides (Q&As)

  15. Fund Accounting • Must understand fund structure, fund model, and interrelationships between funds • Use of fund accounting allows for • Proper accounting controls • Demonstrating compliance

  16. Definition of a Fund • Independent accounting entity with a self-balancing set of accounts • A fund captures all reported attributes of a portion of the government’s activities and resources accounted for in that fund

  17. Fund Categories • Proprietary funds • Governmental funds • Fiduciary funds

  18. Proprietary Funds • Similar to accounting for businesses • Accounting measures net position, changes in net position, and cash flows

  19. Types of Proprietary Funds • Enterprise Funds – used to report activity for which a fee is charged to external users for goods and services. Customers are usually the general public, as well as businesses and other entities besides the government’s own department or agencies • Activities required to reported in an enterprise fund if any one of the criteria on the following page are met:

  20. Types of Proprietary Funds (cont’d) • Activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity. • Laws or regulations that the activity’s costs of providing services, including capital costs, be recovered with fees and charges • The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs.

  21. Types of Proprietary Funds (cont’d) • Internal Service Funds – used to report any activity that provides goods or services to other funds, departments, or agencies of the primary government and its component units, or to other governments, on a cost-reimbursement basis. These funds should be used only if the reporting government is the predominant participant in the activity. • Facilitate greater economy, efficiency, and effectiveness. • Facilitate the equitable sharing of costs among departments.

  22. Proprietary Funds • Measurement Focus • Economic resources • Financial statement recognition of all assets (current and noncurrent) and all liabilities (current and noncurrent) • Basis of Accounting • Accrual • Recognize revenues when earned and expenses when incurred, regardless of the timing of related cash flows

  23. Proprietary Funds – Accounting Equation • Current assets + • Noncurrent assets + • Deferred outflows Minus • Current liabilities • Long-term liabilities • Deferred inflows • Equals Net Position

  24. Statement of Revenue, Expenses, and Changes in Fund Net Position Operating revenues, net of uncollectible amounts - Operating expenses = Operating income (loss) + or – Nonoperating revenues and expenses = Income (loss) before other rev, exp, and transfers + Capital contributions + Additions to permanent and term endowments + or - Special items + or - Extraordinary items + or - Transfers = Net increase (decrease) in fund net position + Fund net position – beginning of period = Fund net position – end of period

  25. Statement of Cash Flows • Several differences from private sector • Direct method required (FASB allows either method) • Report all cash flows and balances – restricted and unrestricted cash and cash equivalents • Noncash transactions reported on face of statement (FASB allows it to be reported in notes) • Cash flows from operating activities • Reflects only activities affecting operating income (FASB includes all transactions affecting net income) • Excludes interest revenue and expense

  26. Statement of Cash Flows (cont’d) • Cash Flows from Noncapital Financing Activities • Debt issued to finance operations • Transfers not related to capital acquisitions • Cash Flows from Capital and Related Financing Activities • Acquisition and sale of capital assets • Issuance and repayment of debt, including interest, issued to acquire capital assets • Transfers from other funds related to capital asset acquisitions

  27. Statement of Cash Flows (cont’d) • Cash Flows from Investing Activities • Acquisition and sale of investments • Interest and dividends received • Making and collecting loans (except operating loans) • Noncash transactions • Signing a capital lease • Donated capital assets • Unrealized gains/losses on investments

  28. Governmental Funds • Used to account for sources, uses, and balances of general government resources

  29. Types of Governmental Funds • General Fund – used to account and report all financial resources not accounted for and reported in other funds. Only fund for a general-purpose government. • Special Revenue Funds – used to account for the proceeds of specific revenue sources that are restricted or committed to expenditures for specified purposes. • Debt Service Funds – used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest.

  30. Types of Governmental Funds (cont’d) • Capital Projects Funds – used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities or other capital assets • Permanent Funds – used to account for resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs – that is for the benefit of the government or its citizens.

  31. Governmental Funds • Measurement Focus • Current financial resources • Financial statement recognition of current assets and current liabilities • Basis of Accounting • Modified accrual basis • Revenues earned during or levied for the period, and are both measurable and available (usually within 60 days) • Expenditures generally are recorded when a liability is incurred, as under accrual accounting, except for debt service expenditures, compensated absences, and claims and judgments which are recorded when due.

  32. Governmental FundsAccounting Equation • Current assets+ • Deferred outflows Minus • Current liabilities • Deferred inflows • Equals fund balance

  33. Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues - Expenditures = Excess (deficiency) of revenues over (under) expenditures + Other financing sources (uses) + or - Special and extraordinary items = Net change in fund balance + Fund balance – beginning of period = Fund balance – end of period

  34. Fiduciary Funds • Accounts for assets held by a government in a trustee or agency capacity for others • Used to report assets that are not being held for the government’s own use

  35. Types of Fiduciary Funds • Pension (and other employee benefit) Trust Funds – established to account for resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, other post-employment benefit plans, etc. • Investment Trust Funds – used to account for the external portion of investment pools held by the sponsoring government.

  36. Types of Fiduciary Funds (cont’d) • Private-Purpose Trust Funds – used to account for all other trust arrangements under which principal and/or income benefit individuals or groups outside the government. • Agency Funds – established to account for resources held in a purely custodial capacity for others. • Only has assets and liabilities • No additions or deductions

  37. Fiduciary Fund • Measurement Focus • Economic resources • Financial statement recognition of all assets (current and noncurrent) and all liabilities (current and noncurrent) • Basis of Accounting • Accrual • Recognize additions (not revenues) when earned and deductions (not expenses) when incurred, regardless of the timing of related cash flows

  38. Fiduciary FundAccounting Equation • Assets+ • Deferred outflows Minus • Liabilities • Deferred inflows • Equals net position

  39. Statement of Fiduciary Net Position Additions - Deductions = Change in net position + Net position – beginning of year = Net position – end of year

  40. Questions In accounting for state and local governments, the modified accrual basis is required for: A. Proprietary and fiduciary funds.B. Governmental funds only.C. Proprietary funds only.D. All funds.

  41. Questions Which of the following funds is a governmental fund-type? A. Private-purpose trust fund.B. Internal service fund.C. Permanent fund.D. Enterprise fund.

  42. Questions Which of the following is a fiduciary fund? A. Investment trust fund.B. Special revenue fund.C. Debt service fund.D. Enterprise fund.

  43. Questions Which of the following funds would be most appropriate for accounting for an activity that provides goods or services to the public for a fee that is intended to make the activity self-supporting? A. Investment trust fund.B. Enterprise fund.C. Internal service fund.D. Special revenue fund.

  44. Questions Which of the following funds would be used to account for an activity that provides centralized purchasing and sales of goods or services to other departments or agencies of the governmental, or to other governments, on a cost-reimbursement basis? A. Enterprise fund.B. Fiduciary fund.C. Internal service fund.D. Permanent fund.

  45. Governmental Financial Reporting

  46. Basic Financial Statements • GASB Statement 34 – Basis for Financial Reporting • Issued in 1999 – marked a major change in financial reporting. • Created dual perspective reporting • Fund financial statements – detailed presentation • Government-wide financial statements – consolidated overview

  47. Basic Government Financial Statements Overview

  48. Annual Financial Reporting

  49. Annual Financial Reporting (cont’d) • Minimum Reporting Requirements • Management’s Discussion and Analysis • Basic Financial Statements • Government-wide financial statements • Fund financial statements • Notes to the financial statements • Required Supplementary Information other than MD&A

  50. Annual Financial Reporting (cont’d) • Primary Government • Component Units • Organizations for which the PG is financially accountable • Other organizations whose omission would cause financial statements to be misleading.

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