advanced financial accounting 7e (baker lembre king).chap018

8/7/2019 Advanced Financial Accounting 7e (Baker Lembre King).Chap018

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McGraw-Hill/Irwin 2008 The McGraw-Hill Companies, Inc. All rights reserved.

18

Governmental Entities: Special Funds and Government-wide

Financial Statements


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Governmental Entities

In addition to the general fund (discussed inChapter 17) governments have a number of

other funds.

This chapter presents the accounting andfinancial reporting requirements for:

The four remaining governmental funds.

The two proprietary funds.

The fiduciary funds.


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A local governmental uses as many of thesefunds as necessary for its operations or as

required by law.

In practice, the funds and account groups

are often identified with the acronyms fromthe first letters of their titles as found in thenext two slides.


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Governmental Funds

GF General Funds SRF Special Revenue Funds

DSF Debt Service Funds

CPF Capital Projects Funds PF Permanent Funds


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Proprietary Funds

EF Enterprise Funds ISF Internal Service Funds


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Fiduciary Funds

PTF Pension Trust Funds

ITF Investment Trust Funds

P-PTF Private-Purpose Trust Funds

AF Agency Funds


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A government should establish those fundsrequired by law and the specific operating andmanagement needs of the government entity.

Unnecessary, additional funds add unneeded

complexity and do not enhance the operationalefficiency of the government.


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A general rule followed in many governmentalentities is that all activities should be accounted

for in the general fund unless specificallyrequired by law or the GAAP to be accountedfor in another fund.

This rule does not prohibit the creation ofadditional funds but places a reasonablerestraint on the proliferation of additional funds.


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One event may require entries in several funds.For example, the construction of a new

municipal building through the issuance ofgeneral obligation bonds may require entries inboth a capital project fund and a debt servicefund.

In addition, interfund activities require entries intwo or more funds.


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Special Revenue Funds

Current governmental resources may berestricted for specific purposes, such as

construction of the state highway system,maintenance of public parks, or operationof the public school system, city libraries,and museums.


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The necessary revenue often comes from

special tax levies or federal or stategovernmental grants.


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Some minor revenue may be earned throughuser charges, but these charges are usually

not sufficient to fully fund the service.

Special revenue funds are used to accountfor such restricted resources.

The governmental entity usually has a separatespecial revenue fund for each different activityof this type.


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Accounting for special revenue funds is thesame as for the general fund.

The modified accrual basis of accounting isused, no fixed assets or depreciation are

recorded in a special revenue fund, theoperating budget is typically recorded in theaccounts, and no long-term debt is recordedin a special revenue fund.


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Capital Projects Funds

Capital projects funds account for theacquisition or construction of major

capital facilities or improvements thatbenefit the public.

Examples are the construction of libraries,civic centers, fire stations, courthouses,bridges, major streets, and city municipalbuildings.


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A separate capital projects fund is createdat the time the project is approved and ceases

at the completion of the project.

Each project or group of related projects usually

is accounted for in a separate capital projectsfund.


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Accounting for capital projects funds is similarto accounting for the general fund.

The modified accrual basis of accounting isused, no fixed assets or depreciation arerecorded in the capital projects funds, and nolong-term debt is recorded in these funds.

Capital projects funds, however, typically donot have annual operating budgets.


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Debt Service Funds

Debt service funds account for the accumula-tion and use of resources for the payment ofgeneral long-term debt principal and interest.

A government may have several types ofgeneral long-term debt obligations, as follows:


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Debt Service Funds

Serial Bonds.

Term Bonds.

Special Assessment Bonds.

Notes and Warrants.

Capital Leases.


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Serial Bonds

Serial bonds

The most common form of debt issued bygovernments is in the form of serial bonds.

The bonds are repaid in installments overthe life of the debt.

A serial bond is called regular if theinstallments are equal, irregular if theyare not equal.


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Term Bonds

Term bonds

This form of debt is less frequentnow than in the past.

The entire principal of the debt is

due at the maturity date.


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Special Assessment Bonds

Special assessment bonds are secured bytax liens on the property located within the

special assessment tax district. The governmental unit may also become

obligated in some manner to assume thepayment of the debt in the event of defaultby the property owners.

Continued on next slide.


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Special assessment bonds may be used tofinance capital projects, or to acquire other

assets, such as ambulances or fire engines,necessary to operate the governmental unit.


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Special assessment bonds sold to acquire

enterprise fund assets, however, should beaccounted for within the enterprise fund.

The special assessment feature simply

states the source of financing and meansof repayment.


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Notes and Warrants

Notes and Warrants:

These consist of debt typicallyissued for one or two years.

These debts are usually securedby specific tax revenue, which maybe used only to repay the debt.

Property tax anticipation warrantsare an example.


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Capital Leases

Capital Leases

Governmental units must account forcapital leases in accordance withgenerally accepted accountingprinciples.

These leases then become long-termliabilities of the governmental unit.


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Permanent Funds

Permanent funds are in the governmental funds

group and are established in those cases inwhich the fund principal must be preserved butthat the income from these permanent funds isused for the benefit of the governmentsprograms or its general citizenry.


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Permanent Funds

The modified accrual basis of accounting is

used to measure income.

The financial reports for the permanent fundsare the same as for all other governmental

funds.


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Two levels of financial statements are prepared for

For each individual fund for internalmanagement use.

Major funds are separately reported in the fund-

based section of the governments general-purpose financial reports.


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GASB 34 requires two financial statementsfor the governmental funds.

The first is the governmental funds balancesheet. The second is the governmentalstatement of revenues, expenditures, andchanges in fund balance.


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Note that the periodic financial reports for the

governmental entity separately report only majorgovernmental funds, not necessarily individuallyeach of the five governmental funds.


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The general fund is always considered a major

fund; but some of the other governmental fundsmay not be considered major funds and thesenon-major funds are aggregated and reported ina single column as other governmental funds.


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Major Funds

GASB 34 specifies the general fund as always amajor fund.

In addition, GASB 34 established criteria thatalso encompass the enterprise funds.

To determine which of the other governmental orenterprise funds are major, GASB 34 specifiesthat both of the following criteria must be met(see next two slides).


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Major Funds

10 Percent Criterion:

Total assets, liabilities, revenues, orexpenditures/expenses of that individualgovernmental or enterprise fund are atleast 10 percent of the corresponding total

(assets, liabilities, revenues, or expenditures/expenses) for all funds of that category ortype (i.e., total governmental funds or totalenterprise funds).


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Major Funds

5 Percent Criterion:

Total assets, liabilities, revenue, orexpenditures/expenses of the individualgovernmental or enterprise fund are atleast 5 percent of the corresponding total

for all governmental and enterprise fundscombined.


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Enterprise Funds

Governments sometimes offer goods or servicesfor sale to the public.

The amounts charged to customers are intendedto recover all or most of the cost of these goodsor services.


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Enterprise Funds

For example, a city may operate electric, gas,and water utilities; transportation systems such

as buses, trains, and subways; airports; sportsarenas; parking lots and garages; and publichousing.

Such operations are accounted for in enterprisefunds.


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Enterprise Funds

Enterprise funds differ from special revenuefunds in that the costs of enterprise fund

activities are generally recovered by usercharges.

Therefore, the primary difference betweenestablishing a special revenue fund and anenterprise fund is the extent of revenue.


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Enterprise Funds

Enterprise funds are proprietary funds, and thebasis of accounting is the same as for

commercial entities; that is, the accrual methodis used to measure revenues and expenses.

Proprietary funds report fixed assets, which aredepreciated, and long-term debt, if issued, andthey focus on income determination and capitalmaintenance.


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The financial statements for proprietary fundsare very similar to those for commercial entities:

The Statement of Net Assets (BalanceSheet).

The Statement of Revenues, Expenses,

and Changes in Fund Net Assets (IncomeStatement).

Statement of Cash Flows.

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Enterprise Funds-Budgets

Budgeting in the proprietary funds also hasthe same role as in commercial entities.

A budget may be prepared for managementplanning purposes; however, the budget isnormally not entered into the accounts.

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Internal Service Funds

Internal service funds account for the financingof goods or services provided by one

department or agency to other departments oragencies, on a cost reimbursement basis.

These services are not available to the generalpublic, making the internal service fund differentfrom the enterprise fund.

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Internal Service Funds

Examples are motor vehicle pools, centralcomputer facilities, printing shops, and

centralized purchasing and storage facilities.

Separate internal service funds are establishedfor each of these functions maintained by thelocal governmental unit.

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Accounting and financial reporting for internalservice funds are the same as for enterprise

funds or for commercial entities.

The accrual basis is used to measure revenueand expenses, and the balance sheet mayinclude fixed assets, which are depreciated,and long-term debt, if issued.

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The statement of revenue, expenses, andchanges in fund net assets reports the funds

income for the period.

The statement of cash flows is also required.

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Trust Funds

Trust funds account for resources held bya government unit in a trustee capacity.

The governmental unit acts as a fiduciaryfor monies or properties held on behalf ofindividuals, employees, or other governmentalagencies.

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Trust Funds

The trust fiduciary funds cannot be used tosupport the governments own programs but

rather are for the benefit of specific individuals,organizations, or other governmental units.

The three main types of fiduciary trust funds are:

Pension and Other Employee Benefit TrustFunds.

Investment Trust Funds.

Private-Purpose Trust Funds.

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The accrual basis of accounting is used for the

fiduciary funds, and the financial statementsrequired for fiduciary funds are: the statement offiduciary net assets, and the statement ofchanges in fiduciary net assets.

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The statement of fiduciary net assets includes

all trusts and agency funds. The statement ofchanges in fiduciary net assets includes only thetrust funds because agency funds do not have anet asset balancetheir assets must equal their

liabilities.

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Agency Funds

Agency funds account for resources held by a

governmental unit as an agent for individuals,private organizations, other funds, or othergovernmental units.

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Agency Funds

Examples are tax collection funds that collect

property taxes and then distribute them to localgovernmental units, and employee benefit fundsfor such items as dental insurance or charitablecontributions that employees authorize as

withholdings from their paychecks.

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The accrual basis of accounting is used toaccount for agency funds.

The financial statement for agency funds is thestatement of fiduciary net assets.

Because agency funds are custodial in nature,assets always equal liabilities and there is nofund equity; therefore, no statement of changesin fiduciary net assets is required for agencyfunds.

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The Government Reporting Model

GASB 34 specifies the reporting model for

governmental entities. It requires the separatedisclosure of the net assets invested in capitalassets, net of related debt which reports thebook value invested in capital assets.

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All general-purpose units such as states,counties, and municipalities must provide all thefinancial statements required in GASB 34.

These statements include both the fund-basedfinancial statements presented earlier in this

chapter plus the government-wide financialstatements.

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The government-wide financial statementsinclude the (a) statement of net assets, and

(b) statement of activities.

GASB 34 requires that government-widefinancial statements be prepared on theeconomic resources measurement focuswith the accrual basis of accounting.

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The government-wide financial statementspresent both the long-term capital assets,

including infrastructure assets, and long-termdebt.

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Government entities must include required

supplemental information (RSI) in their annualreports, as specified by GASB 34.

This RSI includes Reconciliation Schedules anda Budgetary Comparison Schedule.

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Some special-purpose government units suchas cemetery associations that are engaged in a

single governmental activity are not required toprovide the government-wide financialstatements but must still provide fund-basedfinancial statements.

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Four major issues:

1. What organizations comprise the Reporting

Entity? 2. What constitutes Financial Accountability?

3. What other organizations should be includedin the reporting entity?

4. How should the financial results of thecomponent units be reported?

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GASB 14

GASB 14 provides guidance for:

Defining component units to be includedin the reporting entity.

Whether the financial results of the

component unit should be discretelyreported in a separate column orblended into the financial statementsof the primary government unit.

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Auditing Governmental Entities

Most governmental units are audited annuallybecause of state or federal requirements or

because long-term creditors demand auditedstatements as part of the debt agreements.

The audit of a governmental unit is differentfrom the audit of a commercial entity.

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The auditor not only must express an opinionon the fairness of the audited entitys financial

statements in conformity with applicableaccounting principles.

They must also assess the audited entityscompliance with legal or contractual provisions

of state law, debt covenants, terms of grantsfrom other governmental entities, and otherrestrictions on the governmental unit.

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The Single Audit Act of 1984 is a federal

law specifying the audit requirements forall state and local governments receivingfederal financial assistance.

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The Single Audit Act does not apply to

all governmental units receiving federalassistance. For example, a governmental unitreceiving less than $25,000 in any one year isexempt from the provisions of the act.

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You Will Survive This Chapter !!!

The fun is overat least for now !

(HINT: Fund Accounting)


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18

Governmental Entities: Special Funds and Government-wide


End of Chapter

advanced financial accounting 7e (baker lembre king).chap018

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