Accounting for State and Local Governments Part One

2. Governmental Accounting Focuses on financial reporting for non-profit governmental agencies. Many concepts are similar to financial accounting, but terminology and procedures differ. Governmental Accounting Standards Board (GASB) generates standards.

3. Others involved National Municipal League National Council on Governmental Accounting Government Finance Officers Association FASB prior to GASB

4. GAAP Hierarchy GASB Statements GASB Technical Bulletins & AcSEC Audit Guides GASB Implementation Guides Other – including FASB Statements

5. FASB SFAC 4 Objectives Encourage accountability Permit evaluation of operations Enable assessment of level (cost) of services and ability to meet obligations

6. Governmental AccountingUser Needs In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: Citizenry Legislative and oversight bodies Investors and creditors

7. Accountability and Governmental Accounting Governmental Accounting Statements attempt to answer 3 questions related to accountability:

8. Governmental entities What is the appropriating reporting unit? Separately elected Legally separate Fiscally independent Often broken into funds which account for economic entities within the legal entity e.g., fire and police within a city Funds are accounting segregations of financial resources with purpose of achieving accountability and stewardship over those resources.

10. GASB Statement No. 34

11. Old versus new (preview only) Strictly fund accounting Modified accrual Recognize revenue when available to be spend Expense when paid Financial resources approach Focus on money in-money out Current balance sheets only Funds plus enterprise Full accrual Recognize revenue when earned Match expenses Economic resources approach Focus on efforts vs accomplishments Complete balance sheets

12. Reporting Diverse Governmental Activities - Fund Accounting Governmental units have many different types of activities. No common motivation links these activities. Therefore, each activity operates quasi-independent, self-balancing sets of accounts called funds.

13. Fund Accounting Classification All funds fall into one of three broad classifications.

14. Activities include Governmental – streets and police Proprietary – garbage collection, water Fiduciary – social security

15. Fund Accounting ClassificationGovernmental Funds

16. Fund Accounting ClassificationProprietary Funds

17. Fund Accounting ClassificationFiduciary Funds

18. Modified accrual method (basics) Borrowings are recorded as income If available for use in spending that year Asset acquisitions are recorded as expenditures If income for that year was spent in acquiring the asset that year Reflects an emphasis on financial resources

19. Revenues (modified accrual) Recognized when measurable and available to finance expenditures of the current period This is backwards from for-profit accounting There revenue recognized then matched by expense Here expenditure defines the revenue Cash received in this period for next period’s expenditures is not revenue of this period Creates a liability cf. deferred revenue Financing is an inflow, not a liability

20. Expenditures (modified accrual) Recognize when measurable and the related liability is incurred Note no mention of matching – or asset usage Capital acquisitions are expenditures There is no depreciation in government accounting Interest is not accrued Expense when paid – or when payable if some trigger

21. Costs for personal services, such as wages and salaries, are generally recorded in the period paid because they are normal, recurring expenditures of a governmental unit. Goods and services obtained from outside the governmental entity are recorded as expenditures in the period in which they are received. Capital outlays for equipment, buildings, and other long-term facilities are recorded as expenditures in the period of acquisition. Interest on long-term debt is recorded in the period in which it is legally payable.

22. Understanding The Accounting Process

24. Fund-Based Financial Statements

25. Fund-Based Financial Statements The proprietary funds are reported in a separate statement. The current financial resources measurement basis is used. The modified accrual accounting approach is used.

27. Statement of Revenues, Expenditures, and Changes in Fund Balances - Example

28. Statement of Revenues, Expenditures, and Changes in Fund Balances - Example

30. Government-Wide Financial Statements

31. Statement of Net Assets - Example

32. Statement of Net Assets - Example

43. The Fund is identified to show the specific source of the expenditure. Character classifications are based primarily on the period the expenditures are anticipated to benefit. Functions are group-related activities directed at accomplishing a major service or regulatory responsibility. Classifying by organization unit maintains accountability by each unit director.

51. Investments in debt securities Investments in equity securities, including option contracts, stock warrants, and stock rights Investments in open-ended mutual funds Investment pools in which a governmental entity combines with other investors Interest-earning investment contracts in which the value is affect by market changes

56. Recording Budgetary Entries Purposes of the budget, per the GASB: Expresses public policy. Serves as an expression of financial intent. Provides control by establishing spending limits. Offers a means of evaluating performance.

57. Recording Budgetary Entries

58. Recording Budgetary Entries

59. Encumbrances In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities. A recorded commitment or contract is called an “encumbrance”.

60. Encumbrances For Fund-Based Financial Statements: An entry is required to record the encumbrance. An entry is required when the bill is received. For Government-Wide Financial Statements: No entry is required to record the encumbrance. An entry is required when the bill is received.

61. EncumbrancesExample Drye Township has budgeted office supplies for $180,000 for 2002. On May 15, Drye Township places an order for $16,000 office supplies with Ye Olde Office Supplies.

62. EncumbrancesExample

63. EncumbrancesExample

64. Fund-Based StatementsFixed Assets While the expenditure for a fixed asset is usually recorded in the General Fund . . . . . . the fixed asset itself is recorded in the General Fixed Assets Account Group. Depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units.

65. Government-Wide StatementsFixed Assets Historically, recording of fixed assets in the General Fixed Assets Account Group was optional. GASB Statement No. 34 requires a record of ALL capital assets in the Statement of Net Assets in the government-wide statements. Depreciation expense is recorded. Governments have 4 years to capitalize previously acquired assets.

66. Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions Recognition of RevenuesNonexchange Transactions

68. Issuance of Bonds Government-Wide Financial Statements Increase the Cash and the Debt. Fund-Based Financial Statements Increase Cash and Other Financing Sources.

69. Issuance of Bonds Government-Wide Financial Statements Increase the Cash and the Debt. Fund-Based Financial Statements Increase Cash and Other Financing Sources.

70. Payment of Long-Term Liabilities Government-Wide Financial Statements Record principle and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund.

71. Payment of Long-Term Liabilities Government-Wide Financial Statements Record principle and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund.

72. End of Chapter 16