Chapter 19 AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL UNITS

Questions 1 The Governmental Accounting Stan ar ! "oar ha! #rimar$ re!#on!i%ilit$ &or !etting !tan ar ! that #rovi e GAA' &or !tate an local governmental unit!( The mo!t authoritative literature inclu e! GAS" Statement! o& Stan ar ! an GAS" Inter#retation!( The !econ level o& authoritative literature inclu e! GAS" Technical "ulletin! an tho!e AIC'A au it an accounting gui e! an !tatement! o& #o!ition that the AIC'A inten e to ma)e a##lica%le to government! and that the GAS" ha! cleare ( "e&ore *+,-. the Munici#al Finance O&&icer! A!!ociation /MFOA0 an it! National Committee on Governmental Accounting #rovi e gui ance via the #u%lication o& Municipal Accounting and Auditing in *+1* an Governmental Accounting, Auditing, and Financial Reporting /GAAFR0 in *+2,( Since *+3-. the AIC'A ha! al!o i!!ue in u!tr$ au it gui e! &or au it! o& !tate an local governmental unit!( The Munici#al Finance O&&icer! A!!ociation /MFOA0. no4 re&erre to a! the Government Finance O&&icer! A!!ociation /GFOA0. &ir!t i!!ue Governmental Accounting, Auditing, and Financial Reporting (GAAFR) in *+2,( For man$ $ear!. thi! re!ource %oo) 5 o&ten re&erre to a! the "lue "oo) ue to it! i!tinctive %lue cover 6 con!titute the mo!t com#lete &rame4or)! o& accounting #rinci#le! !#eci&ic to governmental unit!. an #rovi e !tan ar ! &or #re#aring an evaluating the &inancial re#ort! o& governmental unit!( U# ate #erio icall$ to re&lect change! to governmental accounting. the 7881 GAAFR i! the mo!t recent ver!ion 4ith a ne4 ver!ion e9#ecte late 78**( Accor ing to the AIC'A:! Au it an Accounting Gui e. a governmental entit$ i! generall$ create &or the a mini!tration o& #u%lic a&&air! an ha! one or more o& the &ollo4ing characteri!tic!; < 'o#ular election o& o&&icer! or a##ointment /or a##roval0 o& a controlling ma=orit$ o& the mem%er! o& the organi>ation:! governing %o $ %$ o&&icial! o& one or more !tate or local government!? < The #otential &or unilateral i!!olution %$ a government 4ith the net a!!et! reverting to a government? or < The #o4er to enact or en&orce a ta9( An organi>ation ma$ al!o %e cla!!i&ie a! a governmental entit$ i& it #o!!e!!e! the a%ilit$ to i!!ue e%t that i! e9em#t &rom &e eral ta9ation( 4 A fund i! a !e#arate &i!cal an accounting entit$ 4ith a !el&6%alancing !et o& account!. @!egregate &or the #ur#o!e o& carr$ing on !#eci&ic activitie! or attaining certain o%=ective! in accor ance 4ith !#ecial regulation!. re!triction!. or limitation!(A B GASB CodificationC Fun accounting &acilitate! %u getar$ control( A governmental unit ma$ have hun re ! o& &un !. %ut onl$ eight fund types( The Codification i!cu!!e! three &un categorie! /governmental. #ro#rietar$. an &i uciar$0 an eight &un t$#e! /general. !#ecial revenue. #ermanent. ca#ital #ro=ect!. e%t !ervice. internal !ervice. enter#ri!e. an tru!t an agenc$ &un !0( Governmental funds are @e9#en a%leA or @!ource an i!#o!itionA &un ! through 4hich mo!t governmental &unction! are &inance ( The!e &un ! are e!!entiall$ 4or)ing ca#ital entitie!( The$ inclu e the general &un . !#ecial revenue &un !. #ermanent &un !. ca#ital #ro=ect! &un !. an e%t !ervice &un !( Proprietary funds are @none9#en a%leA or @commercial t$#eA &un ! u!e to account &or ongoing activitie! that are !imilar to tho!e &oun in #rivate enter#ri!e( The$ u!e the %u!ine!! accounting eDuation 2009 Pearson Education, Inc. publishing as Prentice Hall 18-1

19-2 an their re#orting #arallel! that o& a %u!ine!! entit$ in mo!t regar !( The$ inclu e t4o &un t$#e!E enter#ri!e &un ! an internal !ervice &un !( Fiduciary funds are u!e to account &or a!!et! hel %$ the governmental unit a! tru!tee or agent &or in ivi ual!. #rivate organi>ation!. an other governmental unit!( Fi uciar$ &un ! inclu e tru!t &un ! /#en!ion. inve!tment. an #rivate #ur#o!e0 an agenc$ &un !( 6 The &ive t$#e! o& governmental &un ! are the general &un . #ermanent &un !. !#ecial revenue &un !. ca#ital #ro=ect! &un !. an e%t !ervice &un !( Each i! a 4or)ing ca#ital entit$. there&ore. each i! u!e to account &or a #ortion o& a government:! general government 4or)ing ca#ital( The$ are i!tingui!he %$ the #ur#o!e &or 4hich the re!ource! o& each &un ma$ /mu!t0 %e u!e ( For)ing ca#ital to %e u!e &or con!tructionGacDui!ition o& ma=or general government &i9e a!!et! !houl %e accounte &or in ca#ital #ro=ect! &un !? that to %e u!e to #a$ #rinci#al an intere!t on general long6term e%t !houl %e accounte &or in e%t !ervice &un !( S#ecial revenue &un ! are u!e to account &or #ortion! o& 4or)ing ca#ital to %e u!e &or other !#eci&ic general o#erating #ur#o!e!( 'ermanent &un ! re#ort re!ource! that are legall$ re!tricte to the e9tent that onl$ earning!. an not #rinci#al. ma$ %e u!e &or #ur#o!e! that !u##ort the re#orting government:! #rogram!Ethat i!. &or the %ene&it o& the government o& it! citi>enr$( The governmental &un accounting eDuation i!; Current A!!et! 6 Current Lia%ilitie! H Fun "alance 8 The t4o t$#e! o& #ro#rietar$ &un ! are enter#ri!e &un ! an internal !ervice &un !( "oth charge &ee! &or their !ervice! that are inten e to recover #art. i& not all. o& the co!t! o& #rovi ing goo ! or !ervice!( The )e$ i!tinction %et4een the t4o i! that the #re ominant cu!tomer! o& internal !ervice &un ! are other e#artment! or agencie! o& the government. 4herea! the #re ominant cu!tomer! o& enter#ri!e &un ! are out!i e entitie! or in ivi ual!( The accounting eDuation &or a #ro#rietar$ &un i! e!!entiall$ the %u!ine!! accounting eDuationE Current a!!et! 1 I Noncurrent a!!et! 5 Current lia%ilitie! 5 Noncurrent lia%ilitie! H Net A!!et!

Un er the mo i&ie accrual %a!i! o& accounting. &i9e a!!et! are not recor e in the general &un . %ecau!e general &i9e a!!et! o not re#re!ent &inancial re!ource! availa%le &or current e9#en iture!. i(e(. the$ are not 4or)ing ca#ital item!( In the &un &inancial !tatement!. the general &un i! u!e to account &or unre!tricte re!ource! that can %e e9#en e currentl$ &or o#erating #ur#o!e!( Since &i9e a!!et! re!ult &rom e9#en ing re!ource! &or long6term nee !. the$ are not inclu e in the &un &inancial !tatement!( Fith the a vent o& GAS" J-. the general &un i! re#orte in the government64i e !tatement! un er the accrual %a!i! o& accounting( General &un &i9e a!!et! 5 4hich have t$#icall$ %een ocumente in&ormall$ in the accounting recor ! an note in the ol general &i9e a!!et account grou# 5 4ill a##ear in the government64i e !tatement o& net a!!et!( !odified accrual accountin" i! the !$!tem o& accounting in 4hich revenue! are recogni>e in the accounting #erio in 4hich the$ %ecome availa%le an mea!ura%le an e9#en iture! are recogni>e in the accounting #erio in 4hich the relate fund lia%ilit$ i! incurre an o%=ectivel$ mea!ura%le( Unmature intere!t on general long6term e%t i! an e9ce#tion &or 4hich the e9#en iture i! recogni>e 4hen ue( Mo i&ie accrual accounting a##lie! to governmental &un ! /general &un . !#ecial revenue &un !. #ermanent &un !. e%t !ervice &un !. an ca#ital #ro=ect! &un !0 an to a!!et an lia%ilit$ accounting &or agenc$ &un !( Governmental an #ro#rietar$ &un ! u!e i&&erent &ocu!e! 4hen mea!uring &inancial #o!ition! an o#erating re!ult! in the &un &inancial !tatement!( The t4o t$#e! o& &ocu!e! are the @economic re!ource!A mea!urement &ocu! an the @&lo4 o& current &inancial re!ource!A mea!urement &ocu!( The accrual %a!i! /u!e 4ith #ro#rietar$ &un ! an tru!t &un !0 re&er! to recognition o& revenue! an e9#en!e! a! in %u!ine!! accounting an &ollo4! the economic re!ource! mea!urement &ocu!. 4here%$ all economic re!ource!. 2011 Pearson Education, Inc. publishing as Prentice Hall

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19-3 4hether current or noncurrent. are re#orte ( The mo i&ie accrual %a!i! o& accounting /u!e 4ith governmental &un !0 i! con!i!tent 4ith a &lo4 o& current &inancial re!ource! mea!urement &ocu!. 4here%$ &un ! re#ort on current re!ource! an current o%ligation!( Un er GAS" J-. %oth governmental &un ! an #ro#rietar$ &un ! u!e the accrual %a!i! o& accounting an the @economic re!ource!A mea!urement &ocu! in the government64i e !tatement!( 13 Governmental revenue !ource!. a re!!e in GAS" JJ. are varie an inclu e ta9e!. grant recei#t!. an collection! o& u!er &ee! an &ine!( Exchange transactions are tho!e @in 4hich each #art$ receive! an give! u# e!!entiall$ eDual value!(A Nonexchange transactions are tho!e @in 4hich a government give! /or receive!0 value 4ithout irectl$ receiving /or giving0 eDual value in e9change(A Man$ o& the tran!action! in governmental &un ! are none9change in nature. %ecau!e general governmental activitie! o&ten a re!! the nee ! o& the #u%lic an are &un e %$ ta9#a$er! 4ho generall$ o not receive %ene&it! in irect relation to their ta9 #a$ment!( A !hort term note #a$a%le 4ill generall$ %e #ai 4ith current re!ource!. thu! it i! accounte &or a! a lia%ilit$ o& the governmental &un ( Long6term e%t i! not inclu e in the &un &inancial !tatement!. !ince it 4ill %e re#ai 4ith &uture. not current &inancial re!ource!( The long term e%t 4ill. ho4ever. a##ear a! a lia%ilit$ in the government64i e !tatement o& net a!!et!( Thi! i! one o& the reconciling item! %et4een the &un an government64i e !tatement!( #nterfund transfers are not e9#en iture! or e9#en!e!. an the$ are cla!!i&ie !e#aratel$ &rom revenue!. e9#en iture!. an e9#en!e! in the &inancial !tatement! o& the variou! &un !( Inter&un tran!&er! are e!!entiall$ !hi&t! o& re!ource! %et4een &un !. not co!t! or lia%ilitie! incurre %$ the entit$( Inter&un tran!&er! con!i!t o& residual e$uity transfers /nonrecurring or nonroutine tran!&er! o& eDuit$ %et4een &un !0 an operatin" transfers /all other legall$ authori>e tran!&er! %et4een &un !0( Inter&un tran!action! that 4oul %e treate a! revenue!. e9#en iture!. or e9#en!e! i& the$ involve an e9ternal entit$ are not inter&un tran!&er!. %ut rather are Dua!i6e9ternal tran!action! an are treate a! revenue. e9#en iture!. or e9#en!e! in the normal &a!hion( An appropriation i! an authori>ation &rom the legi!lative %o $ to ma)e e9#en iture! &or !#eci&ie #ur#o!e!( I& a##roval %$ the legi!lative %o $ i! &or each etaile e9#en iture item in the %u get /a line6item %u get0. the legi!lative %o $ 4ill have ma9imum control %ecau!e each etaile change 4oul reDuire legi!lative a##roval( I& the %u get i! a##rove in total or %$ ma=or categorie! %ut not &or each etaile item. the cit$ manager /or other chie& e9ecutive0 can !hi&t re!ource! 4ithin the categorie! a##rove 4ithout legi!lative a##roval( An a##ro#riation %$ e#artment. &or e9am#le. #ermit! a cit$ manager to !hi&t a##ro#riation! &or #olice !u##lie! to #olice eDui#ment or overtime #a$ 4ithout legi!lative a##roval( Un er GAS" J-. the governmental an government inclu e the &ollo4ing; #ro#rietar$ &un &inancial !tatement! o& a general6#ur#o!e

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Fun &inancial !tatement! Governmental Funds "alance !heet 5 governmental &un ! /mo i&ie accrual %a!i!0 Statement o& revenue!. e9#en iture!. an change! in &un %alance! /mo i&ie accrual %a!i!0 Proprietar Funds Statement o& net a!!et! /accrual %a!i!0 Statement o& revenue!. e9#en!e!. an change! in net a!!et! /accrual %a!i!0 Statement o& ca!h &lo4! /accrual %a!i!. irect metho 0 18 19 A reci#rocal tran!&er i! one 4hich i! e9#ecte to %e re#ai %$ the &un %orro4ing the mone$? 4herea! 4ith a nonreci#rocal tran!&er re#a$ment i! not e9#ecte ( The GAA' Gui eline!. li!te in e!cen ing or er o& authorit$ are a! &ollo4!;

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GASB Statements and GASB "nterpretations( Thi! categor$ al!o inclu e! AIC'A an FAS" #ronouncement! ma e a##lica%le to !tate an local government! %$ a GAS" Statement or Inter#retation( GASB $echnical Bulletins( Thi! categor$ al!o inclu e! AIC'A In u!tr$ Au it an Accounting Gui e! an Statement! o& 'o!ition i& !#eci&icall$ ma e a##lica%le to !tate an local government! %$ the AIC'A an cleare %$ the GAS"( Consensus positions o& GAS":! Emerging I!!ue! Ta!) Force /EITF0 an AIC'A 'ractice "ulletin! i& !#eci&icall$ ma e a##lica%le to !tate an local government! %$ the AIC'A an cleare %$ the GAS"( "mplementations Guides #u%li!he %$ the GAS" !ta&& an in u!tr$ #ractice! that are 4i el$ recogni>e an #revalent in !tate an local government( (ther accounting literature /inclu ing FAS" !tan ar ! not ma e a##lica%le to government! %$ a GAS" !tan ar 0(

GAS" !tatement! are the mo!t authoritative( 2 #nterfund loans are loan! that are ma e %$ one &un to another an mu!t %e re#ai ( #nterfund transfers occur 4hen one &un #rovi e! re!ource! to another &or legall$ authori>e #ur#o!e! /an o#erating tran!&er0 or 4hen one &un hel#! to e!ta%li!h or enhance another /a re!i ual eDuit$ tran!&er0( #nterfund services provided and used inclu e !ale! an #urcha!e! %et4een &un ! at a##ro9imate e9ternal mar)et value( An interfund reim%ursement i! nece!!ar$ 4hen an e9#en iture a##lica%le to one &un i! ma e %$ a i&&erent &un ( &'penses re&lect the co!t o& a!!et! or !ervice! u!e %$ an entit$. an the$ are recogni>e in the #erio incurre ( &'penditures. uniDue to government accounting. t$#icall$ re&lect the u!e o& governmental &un 4or)ing ca#ital( 'ro#rietar$ &un ! recogni>e e9#en!e!. 4herea! governmental &un ! recogni>e e9#en iture!( A comprehensive annual financial report /CAFR0 contain! three ma=or !ection!Eintro uctor$. &inancial an !tati!tical( The intro uctor$ !ection o& a CAFR inclu e! a ta%le o& content!. a letter o& tran!mittal. a li!t o& #rinci#al o&&icer!. an an organi>ational chart( The &inancial !ection inclu e! the management:! i!cu!!ion an anal$!i!. the au itor:! re#ort. the government64i e &inancial !tatement!. an the &un &inancial !tatement!( The !tati!tical !ection contain! !tati!tical ta%le! 4ith com#arative ata &rom !everal #erio ! o& time( Fiscal accounta%ility i! the re!#on!i%ilit$ o& a government to emon!trate com#liance 4ith #u%lic eci!ion! regar ing the u!e o& &inancial re!ource!( (perational accounta%ility mea!ure! the e9tent o& a government:! !ucce!! at meeting o#erating o%=ective! e&&icientl$ an e&&ectivel$ an it! a%ilit$ to meet o#erating o%=ective! in the &uture( )(*+,#(-) ,( &.&/0#)&) &1911 1 2 3 4 5 c a c &1912 23#0P3 adapted4 1 2 c 3 c 4 a 5 c &1913 1 2 3 4 5 % a a %

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19-" 8 Current a!!et! Current lia%ilitie! Fun %alance At the !ame time a memo entr$ 4ill %e ma e noting a lia%ilit$ in the long6term e%t recor !( Thi! i! u!e to #re#are the government64i e !tatement! 4here long6term e%t! are recor e in governmental &un !( &1918 1 Current a!!et! Noncurrent a!!et! Current lia%ilitie! Long6term lia%ilitie! Net A!!et! Current a!!et! Noncurrent a!!et! Current lia%ilitie! Long6term lia%ilitie! Net A!!et! Actuall$. the net a!!et increa!e i! re#orte a! a K*88.888 increa!e /revenue!0 an a K7.888 ecrea!e /uncollecti%le account! e9#en!e0( Further. it i! relativel$ uncommon to have ta9 revenue! in #ro#rietar$ activitie! Current a!!et! Noncurrent a!!et! Current lia%ilitie! Long6term lia%ilitie! Net A!!et! A!!ume! re#a$ment uring the !ame $ear %orro4e ( I& the note ha not mature %$ the en o& the $ear o& the %orro4ing. intere!t e9#en!e an intere!t #a$a%le 4oul %e accrue ( Current a!!et! Noncurrent a!!et! Current lia%ilitie! Long6term lia%ilitie! Net A!!et! Current a!!et! Noncurrent a!!et! Current lia%ilitie! Long6term lia%ilitie! Net A!!et! Intere!t e9#en!e !houl %e accrue on #ro#rietar$ &un long6term e%t a! 4ell a! on #ro#rietar$ &un !hort6term e%t( Current a!!et! Noncurrent a!!et! Current lia%ilitie! Long6term lia%ilitie! Net A!!et! 2011 Pearson Education, Inc. publishing as Prentice Hall 6J8.888 66 I7.188 66 6J7.188 I+,.888 66 66 66 I+,.888 66 66 66

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