Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 6: Proprietary Funds -- Internal Service and Enterprise

2. Overview of Chapter 6 • Review of common characteristics of proprietary type funds • Internal Service Funds • Enterprise Funds • Review of Fund statements - Proprietary type funds

3. Review of Proprietary Type Funds • Use accrual basis • Match Revenues and Expenses, including depreciation • Emphasis on income measurement • Balance sheet includes both short term and long-term assets and liabilities • Economic Resources Measurement Focus: • Can handle related construction and debt service within the proprietary funds • Typically do not record budgets or encumbrances

4. Proprietary FundClosing Entries • All revenue and expense type accounts as well as transfers are closed to Net Assets • Net Assets are divided into three categories: • Invested in Capital Assets net of Related Debt • Restricted (if needed) and • Unrestricted for the remainder

5. Internal Service Funds • Used for sales of service primarily to others within the government unit on a cost reimbursement basis • Purpose is to pool resources for more efficient operations • More efficient to have separate department responsible for these types of services and charge their costs back to other departments

6. Internal Service Funds • Examples of internal service fund uses: • Motor pool, • Telecommunications, • Maintenance, • Purchasing /supplies/central stores, • Insurance/risk management

7. Self-Insurance and Risk Management • Governments have a choice of using the GF or an Internal Service fund for self-insurance activities • If an ISF is used, the amount of premium is treated as a revenue to the ISF and as an Expense or Expenditure to other funds provided that the amount paid is a reasonable amount calculated in a manner that will yield an amount roughly equal to the amount of average long-term claims

8. “Reasonable Premium” Requirement • The purpose of this accounting requirement is to prevent governments from managing their budgets by hiding part of government fund resources in a proprietary fund when they have a surplus and underfunding in other years • Otherwise, treat payments as Transfers

9. Used for sales of service primarily to others outside the government unit such as the general public Mandatory if: Have debt backed solely by fees and charges Legally required to charge fees that will recover the cost, including depreciation Government policy of requiring cost recovery from fees Enterprise Funds

10. Use of Enterprise Fund • Not mandatory, but permitted if: • None of the three mandatory requirements are met, but management would like to see the activity’s “net cost” after depreciation expense • Implication—bus system or swimming pool charging fees can be handled in government or proprietary type fund

11. Common Examples of Enterprise Funds • Usually in mandatory enterprise funds • Water utilities • Gas or electric utilities • Airports • Mandatory or permissive • Bus systems • Swimming pools • Hospitals, parking garage, toll roads, public housing • Civic Centers

12. Revenue Bonds: Revenue bonds promise bondholders that enterprise revenues will be used to make payments. These are listed as Bonds Payable in the enterprise funds. General obligation bonds: These are backed by the full faith and credit of the government (i.e. the taxing authority of the government. Bonds in Enterprise Funds

13. General Obligation Bonds Use to Finance Enterprise Activities: • This may be done to get a better credit rating (lower interest cost) • If this is just a formality, the bonds are still listed as a liability in Enterprise Fund • Bonds are omitted from Enterprise Fund only if the government agrees and fully intends to pay the bonds from other resources

14. Solid Waste LandfillsEnterprise Fund • Accrual basis and closure costs • Costs of complying with environmental protection laws after closure have to be estimated and accrued as a cost of operating the landfill during its life. • Each year accrue: Post-closure expenses XX Liability for post-closure expenses XX (units of production method used to determine $) • After closure, as maintenance costs are incurred: Liability for post-closure expenses XX Cash XX

15. Solid Waste Landfills – Governmental Activities • Alternatively, some governments may operate landfills within the Governmental Activities. • In this case, the long-term portion of any liability for closure and post-closure care costs will appear in the government-wide statement of net assets and the periodic expense in the government-wide statement of activities.

16. Segment Disclosures • Segment disclosures help make sure information is not overly aggregated • When segment disclosures are made the government should disclose: • The type of activity/service being reported • And provide condensed financial statements for that activity

17. When Segment Disclosures are Required • Segment disclosures are needed when business activities are combined in a single fund or in the nonmajor fund column. • They are required if: • There is a separate bond issue for a portion of the activities -- such as a bond on water only when water is in a city water and light fund.

18. Statement of Net Assets • Must classify assets and liabilities by current/noncurrent • Net assets 3 categories: unrestricted, restricted, and capital assets net of related debt • Restricted means restricted by external parties or by legislation, including legislation by the government’s governing body

19. Statement of Revenues, Expenses and Changes in Fund Net Assets • Format: • Revenues • - Expenses • = Operating NI • - nonoperating revenues and expenses • - capital contributions and transfers • = Change in Net Assets • + Beginning Net Assets • = Ending Net Assets

20. Commercial Statements May use Direct or Indirect Methods for Cash Flows from Operating Activities Interest and dividends received are reported in operating section Interest payments are reported in operating section Purchases or sales of long-term assets are reported in investing The reconciliation of income and cash flows from operations starts with Net Income Proprietary Fund Statements Direct Method is required for Cash Flows from Operating Activities Interest and dividend revenue is reported in investing section Interest Payments are reported in capital or noncapital related financing section Fixed asset transactions are reported in capital related financing The reconciliation of income and cash flows from operations starts with Operating Income Cash Flow Statements

21. Four Categories of Cash Flows 1. Operating • Interest and dividend revenue not in this section as it is in FASB’s (eg. Business) Statement of Cash Flows. 2. Capital Related Financing • FASB’s Statement of Cash Flows show only principal payments on debt in financing, GASB’s approach includes principal and interest payments here. Purchases of long-term assets are here not in investing per business Statements of Cash Flows. 3. Noncapital Related Financing • short term loans and repayments including interest 4. Investing • Investments and their associated revenues. Does not include purchase and sale of other long-term assets.

22. Proprietary Funds and the Government-wide Statements • Enterprise Funds are “Business-Type Activities”. • They are included in the Government-Wide statements without adjustment. • Internal Service Funds are generally classified as “Governmental Activities” • Their assets and liabilities are included in the Statement of Net Assets. • Only revenues and expenses on outside sales are reported in the Statement of Activities.