State and Local Government Accounting Principles

Chapter 2

Learning Objectives
Discuss major aspects of government financial

reporting model Define fund and examine broad categories Identify MFBA found in financial statements Analyze effects of transactions Discuss budgetary accounting & reporting Understand revenue, expenditure, expense and interfund activity classifications Understand basic financial reporting requirements

GASBS 34: Basis for Financial Reporting

Issuance in 1999 marked a major

change in governmental financial reporting Created dual perspective reporting:

Government-wide financial statements, using accrual accounting Fund financial statements, using other bases of accounting

Basic Financial Statements: Overview

Fund Financial Statements 7 - 8 Financial Statements Governmental Funds Proprietary Funds Fiduciary Funds

Links [Worksheets]

Government-wide Financial Statements 2 Financial Statements

Reconciliations (Explanations)

Governmental Activities

Business-Type Activities

Total Primary Government

Notes to the Financial Statements

Minimum Requirements for External Financial Reporting: The GASBs View

Management's discussion and analysis

Government-wide financial statements

Fund financial statements

Notes to the financial statements

Required supplementary information (other than MD&A)

Classifications of Principles
1. GAAP & legal compliance
2. Fund accounting 3. Measurement focus and basis of

accounting (MFBA) 4. Capital Assets & Long-term Liabilities 5. Classification & terminology 6. Annual financial reports

Principle 1: Accounting & Reporting Capabilities

Present fairly and with full disclosure

funds and activities in conformity with GAAP Determine and demonstrate compliance with finance-related legal and contractual provisions

GAAP Requirements
Trying to assure comparability among

and between governments Full disclosure may result in much more information than adequate disclosure required by FASB

Compliance: With What?

With GAAP in most basic form
With budget requirements may be

complicated if budgetary basis is different then GAAP basis With requirements of grants received from other governments (special reports or non-GAAP basis reports)

Principle 10: Budgeting, Budgetary Control and Budgetary Reporting

Annual budget should be adopted by

every governmental unit Accounting system should allow for budgetary control Budgetary reporting should provide for comparisons for budget and actual information

Adopting an Annual Budget

Not GAAP GASB does not have

authority to make this a requirement Typically placed on cities and counties by State and on State by constitutional requirements

Accounting system allowing for budgetary control

GASB cannot require certain accounting

system designs Still, GASB can encourage governments to use system that will allow for budgetary and financial control over revenues and expenditures or expenses

Budgetary Reporting
This is a GAAP requirement
GASB requires reporting for General

Fund and major Special Revenue Funds as part of minimum reporting requirements Governments may elect to provide additional reports outside minimum requirements (other information)

Information to be provided in budgetary reporting

Original budget
Final budget for the reporting period Actual inflows and outflows on budgetary

basis if different from GAAP basis, the differences must be explained on face of statement/schedule or elsewhere in report

Principle 2: Fund Accounting Systems

Accounting system should be organized

on a fund basis Fund defined by the GASB

Accounting system
As in budgeting, GASB cannot define

capabilities of accounting system Still, if governments are to report on a fund basis, accounting system better have capabilities for accounting and reporting in this manner

What is a Fund?
Abraham Lincoln once said that America

is a government of the people, by the people, and for the people Ordinary people have traditionally run local governments they designed a system they understand

Most people have a checkbook

Cash Receipts
Checkbook

Cash Disbursements

Balance

A Fund is an adaptation of the checkbook concept Cash Receipts

Fund

Cash Disbursements

Balance

Other financial resources and related liabilities added to checkbook concept to get a governmental fund:
Cash and Other Financial Resources Related Liabilities Fund Balance

Categories and Types of Funds

GOVERNMENTAL FUNDS General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds PROPRIETARY FUNDS Enterprise Funds Internal Service Funds FIDUCIARY FUNDS Pension Trust Funds Investment Trust Funds Agency Funds Private Purpose Trust Funds

Governmental Funds
Most basic type of fund use basic fund

format defined earlier Used to account for general government activities Accounting equation does not allow for capital assets and long-term liabilities necessitates use of nonfund accounts:

General Capital Assets General Long-Term Liabilities

Nonfund accounts
General Capital Assets property, plant,

& equipment used in general operation of government General Long-term Liabilities debt used to finance capital assets and other long-term liabilities not recognized in the governmental funds

Proprietary Funds
Used to account for business-like activities of the

government: Golf courses Maintenance operations Airports Utilities May use more traditional accounting equation:
Current Assets
+ Capital Assets

Current +
Long-term Liabilities = Net Assets

Fiduciary Funds
Accounts for assets held by government

in trustee or agency capacity for others Not used to report assets held for governments own use

Principle 3: Types of Funds

Provides definition for each fund type
Permanent Fund is exception to rule

concerning Governmental Funds more on that later

Principle 4: Number of Funds

Governments should use minimum

number of funds in order to reduce complexity must still comply with rules and regulations Requires use of professional judgment

Trick Questions:
What is the minimum number of funds? One Which is it? The General Fund Some believe the answer is two: Additional fund is Debt Service Fund used to hide money from governing council to keep them from spending it

Principle 5: Reporting Capital Assets

Must know which fund type is using capital assets: Proprietary fund reported at fund and government-wide level Fiduciary fund reported only at fund level Governmental Fund reported only at government-wide level and in notes to financial statements

Principle 6: Valuation of Capital Assets

Report at historical cost (may use

estimated cost of historical cost cannot be determined) Cost of capital asset included charges to get it to intended location and ready for use Donated capital assets reported at fair value at time of donation, plus charges to get it to intended location and ready for use

Principle 7: Depreciation of Capital Assets

Capital assets depreciated over useful

lives Inexhaustible capital assets (land and some land improvements) should not be depreciated Infrastructure assets may be accounted for using the modified approach

Reporting depreciation depends on fund category

Proprietary fund reported at fund and

government-wide level Fiduciary fund reported only at fund level Governmental Fund reported only at government-wide level and in notes to financial statements

Principle 8: Accounting for Long-Term Liabilities

Must know type of fund incurring liability Proprietary Fund report at fund and government-wide level Fiduciary Fund report only at fund level Governmental Fund:

Unmatured report at government-wide level & in the notes Matured report as fund liabilities

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA)

Government-Wide Financial Statements Measurement focus is on economic [all] resources Basis of accounting is accrual Revenues, expenses, gains, losses, assets, & liabilities recognition depends on transaction:

Exchange when exchange takes place Nonexchange according to GASBS 33

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA)

Governmental Fund Financial Statements Measurement focus is on current financial resources Basis of accounting is modified accrual Revenues recognized in period they become available and measurable Expenditures recognized when liability is incurred, except for interest on long-term debt which is recognized when due

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA)

Proprietary Fund Financial Statements Measurement focus is on economic [all] resources Basis of accounting is accrual Revenues, expenses, gains, losses, assets, & liabilities recognition depends on transaction:

Exchange when exchange takes place Nonexchange according to GASBS 33

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA)

Fiduciary Fund Financial Statements Measurement focus is on economic [all] resources Basis of accounting is accrual Exception for certain liabilities of defined benefit pension plans and certain postemployment healthcare plans

Principle 9: Measurement Focus (MF) and Basis of Accounting (BA)

Internal interfund transfers should be reported in the accounting period in which the [related] interfund receivable and payable arise.

Revenue Recognition Rules Must be:

Earned or levied
Measurable Available

Collected in current period or soon enough thereafter to pay liabilities of the current period usually considered to be 60 days If not collected within this period, reported as deferred revenues in current period and revenues in year when they become available

Expenditure Recognition Rules

For current operations & capital outlay,

when liabilities to be paid currently by governmental funds are incurred For debt service (principal and interest) when payments on long-term liabilities are due

Expenditure / Expense Comparison

Expenditures Operating Capital Outlay Debt Service Expenses

Salaries, supplies, utilities, etc.

Acquisition Principal & interest

Salaries, supplies, utilities, etc.

Depreciation Interest

Principle 11: Transfer, Revenue, Expenditure, & Expense Classification

At a minimum, [government-wide] Statement of Activities should present: Activities accounted for in Governmental Funds by function with level of detail determined by GF operating statement Activities accounted for in Enterprise Funds by different identifiable activities

Principle 11: Transfer, Revenue, Expenditure, & Expense Classification

Governmental Funds Revenues reported by fund & major sources Expenditures reported by fund, function (or program), organizational unit, activity, character, or principal classes of objects

Principle 11: Transfer, Revenue, Expenditure, & Expense Classification

Proprietary Funds Revenues reported by major source Expenses should be classified in same manner as a similar private sector business Both revenues and expenses should be reported as either operating or nonoperating

Principle 11: Transfer, Revenue, Expenditure, & Expense Classification

Proceeds of general long-term debt

issues should be reported separately from revenues and expenditures in the governmental fund financial statements Contributions, special items, extraordinary items, & transfers should be reported separately from revenues and expenditures/expenses

Reporting Interfund Activity: Reciprocal interfund activity

Interfund loans (asset / liability)

Short-term (due from / due to) Long-term (advance to / advance from)

Interfund services provided and used

recognized as revenue in providing fund and expenditure/expense in using fund

Reporting Interfund Activity: Nonreciprocal interfund activity

Interfund transfers

Reported in governmental funds as Other Financing Sources / Uses Reported in proprietary funds after nonoperating revenues and expenses Repayment from one fund to another increases expenditures / expenses in paying fund while decreases them in receiving fund Not separately reported in financial statements

Interfund reimbursements

Principle 12:
Common Terminology & Classification

A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports of each fund or activity.

Like, what else would you do?

Principle 13: Annual Financial Reports

Appropriate interim reports should be

prepared to facilitate management control One problem no GAAP for this requirement Some governments have very formal process most dont

Principle 13: Annual Financial Reports

Comprehensive Annual Financial Report (CAFR)
Should be prepared for all governmental

entities Sections include:

Introductory little GAAP for this section Financial most GASB standards apply to this section Statistical see recently issued GASBS 44

Principle 13: Annual Financial Reports

MD&A

FR ME

GovernmentWide Financial Statements

S BF

CA FR

Major Fund & CU Financial Statements Notes Other RSI Nonmajor Fund Combining Financial Statements Individual Fund Financial Statements & Schedules Transaction Data (the accounting system)

CAFR--Comprehensive Annual Financial Report BFS--Basic Financial Statements MEFR--Minimum External Financial Reporting
C Copyright 2001, G. Robert Smith, Jr.

Principle 13: Annual Financial Reports

Minimum reporting requirements Managements Discussion & Analysis Basic Financial Statements

Government-wide financial statements Fund financial statements Notes to the financial statements

Required supplementary information

other than MD&A

Principle 13: Annual Financial Reports

Financial Reporting Entity consists of Primary government (PG) Organizations for which the PG is financially accountable Other organizations whose omission would cause financial statements to be misleading or incomplete

Principle 13: Annual Financial Reports

Government-wide financial statements should include separate columns for Governmental Activities, Business-Type Activities, Total column for PG, and discretely presented component units

Principle 13: Annual Financial Reports

Managements Discussion & Analysis Brief discussion of financial statements Condensed government-wide financial information Analysis of position & results of operations Analysis of individual funds Budget analysis Significant capital assets and LTL events Modified approach Description of currently known facts

Principle 13: Annual Financial Reports

Fund Financial Statements include major funds individually and nonmajor funds in the aggregate. Fiduciary fund statements are not included in the basic financial statements.

Principle 13: Annual Financial Reports

Financial Reporting Entity Nucleus is the PG Other activities include:

Discretely presented component units Blended component units Joint ventures Jointly governed organizations Related organizations

Principle 13: Annual Financial Reports

Government-wide Financial Statements Statement of Net Assets Statement of Activities

Principle 13: Annual Financial Reports

Governmental Fund Statements (Schedules)
Balance Sheet Statement or Revenues, Expenditures, &

Changes in Fund Balance Statement or Revenues, Expenditures, & Changes in Fund Balance Budget-toActual (may be either BFS or RSI)

Principle 13: Annual Financial Reports

Proprietary Fund Statements Statement of Net Assets / Balance Sheet Statement of Revenues, Expenses, & Changes in Net Assets Statement of Cash Flows

Principle 13: Annual Financial Reports

Fiduciary Fund Financial Statements Statement of Fiduciary Fund Net Assets Statement of Changes in Fiduciary Fund Net Assets

Preparation Process: Step 1

Transaction Data

Start with the transaction data the basic building blocks for everything in the Comprehensive Annual Financial Report (CAFR),

Preparation Process: Step 2

From the transaction data, prepare the individual fund financial statements and schedules. Also, some of the transaction data will be used later in the CAFR preparation process.

Individual Fund Statements

Transaction Data

Schedules 1

Preparation Process: Step 3

Determine the major funds (this process will be discussed later). Also, information from the individual fund statements and schedules will be used later in the process.

Individual Fund Statements

Major Fund Determination

Transaction Data

Schedules 1

Preparation Process: Step 4

Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2

Transaction Data

Schedules 1

Once the major funds have been determined, the non-major fund combining statements can be prepared. The total column from these statements becomes a single column in the major fund statements along with a separate column for each major fund.

Preparation Process: Step 5

Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 CU Statements Schedules 1 3 Govt.-wide Statements Conversion Process

Transaction Data

The major funds statements undergo a conversion process and are combined with the component units financial statements to complete the government-wide statements.

Preparation Process: Step 6

Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 CU Statements Schedules 1 3 Govt.-wide Statements 3

2 Conversion Process

Notes

Transaction Data

Information from all the financial statements and the schedules are used to prepare the notes to the financial statements. This process completes the Basic Financial Statements (BFS).

Preparation Process: Step 7

1 Non-Major Fund Combining Statements Individual Fund Statements Major Fund Determination Major Fund Statements 2 CU Statements Schedules 1 Budget Personnel 3 Govt.-wide Statements Other RSI 3

2 Conversion Process

Notes

Transaction Data

MD&A

Information from the transaction data, individual fund statements, and schedules are used to complete the Other RSI. Then information from all sources combine to provide data for the MD&A.

Dept. Heads

Program Managers