an introduction to accounting for state and local governmental units

18 - 1©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn

An Introduction toAccounting for State and

Local Governmental Units

Chapter 18


Learning Objective 1

Learn about the historical

development of accounting

principles for state and local

governmental units.


State and Local Governmental Units

With the exception of the federalgovernment, state and local

governmental units constitutethe largest single categoryof nonprofit organizations.


Historical Development

1951 – The Municipal Finance OfficersAssociation (MFOA) National Committee

on Governmental Accounting) issuedMunicipal Accounting and Auditing.

1968 – Governmental Accounting, Auditing,and Finance Reporting (GAAFR, or Blue Book,succeeded Municipal Accounting and Auditing.



1974 – The AICPA issued its industry auditguide, Audits of State and Local Governmental

Units, in which it noted that GAAFR’s accountingand reporting principles constituted GAAPexcept when modified by the audit guide.



1979 – The MFOA National Council onGovernmental Accounting issued

Governmental Accounting andFinancial Reporting Principles, Statement 1.

1980 – AICPA issued Statement of Position80-2 amending Audits of States and Local

Government Units to recognize the principlesof NCGA Statement 1 as GAAP.


FinancialAccountingFoundation

GASBFASB


(1984)



1985 – Codification of Governmental Accountingand Financial Reporting Standards was issued.

It integrated all NCGA and AICPA and allsubsequent GASB pronouncements.

It is revised annually.


GAAP Hierarchy for Stateand Local Governmental Entities

1. GASB Statements and Interpretations

2. GASB Technical Bulletins

3. Consensus positions of GASB’sEmerging Issues Task Force (EITF)

4. Implementation Guides

5. Other accounting literature



Define fund accounting

and explain why it is used.


Fund Definition and Categories

A fund is a self-contained accounting entity.

It records its own assets, liabilities, revenues,expenditures, or expenses and fund balance.


The Proprietary FundAccounting Model

CurrentAssets

+Noncurrent

Assets–

CurrentLiabilities

–NoncurrentLiabilities

=Net

Assets


The Governmental FundAccounting Model

CurrentAssets

–Current

Liabilities=

FundBalance

Fund G Fund SRA = L + FB A = L + FB

General General Fund Long-Term Assets Debt



Perform transaction analysis using

proprietary and governmental

accounting models.


Applying the Models –Transaction Analysis

1. Incurred salary cost of $5,000.

2. Charges for services rendered, $2,500,were billed and collected immediately.

3. Borrowed $30,000 on a one-year, 6%note six months before year end.

4. Year-end accrual of interest on the note.

5. Borrowed $15,000 by issuing a three-year note.



6. Purchased computer equipment costing $2,800 for cash.

7. Sold a truck for $1,000. It was originally purchasedthree years ago for $18,000, had an estimatedresidual value of $1,200, and is fully depreciated.

8. Computed depreciation on the computer equipmentfor the year, $875.



Current assetsNoncurrent assetsCurrent liabilitiesNoncurrent liabilitiesNet assets

Current assets

Current liabilities

Fund Balance

No. 1

+5,000

–5,000

+5,000

–5,000

No. 2+2,500

+2,500

+2,500

+2,500

+30,000

+30,000

+30,000

+30,000

No. 3

+900

–900

+900

–900

No. 4Proprietary Fund

Government Fund



Current assetsNoncurrent assetsCurrent liabilitiesNoncurrent liabilitiesNet assets

Current assets

Current liabilities

Fund Balance

No. 5+15,000

+15,000

+15,000

–15,000

No. 6–2,800+2,800

–2,800

–2,800

+1,000–1,200

–200

+1,000

+1,000

No. 7

–875

–875

No. 8Proprietary Fund

Government Fund



Recognize various fund categories,

as well as their measurement

focus and basis of accounting.


Proprietary Fund Types

Internal service funds

Enterprise funds


Governmental Fund Types

Specialrevenue funds

Permanentfunds

Capitalproject funds

Debtservice funds

Generalfund


Fiduciary (Trust and Agency)Fund Types

Pensiontrust funds

Investmenttrust funds

Private-purpose

trust funds

Agencyfunds


Applying the Model UsingSpecific Funds

1. Issued general obligation bonds, par value of$3,000,000, at 101 to finance constructionof a government office building.

2. Transferred the premium on the bonds tothe fund used to account for payment ofprincipal and interest on the bonds.

3. Incurred and paid construction costsof $12,500 on the building.



4. Levied and collected sales taxes restrictedto use for economic development, $6,000.

5. Paid general government employees’salaries, $4,500. Another $500 of salariesaccrued but has not been paid.

6. Borrowed $7,500 on a six-month note tofinance general operating costsof the government.



Current Current FundNo. Fund Assets Liabilities Balance1 Capital projects + 3,030,000 – 3,030,0002a Capital projects – 30,000 – 30,0002b Debt service + 30,000 + 30,0003 Capital projects – 12,500 – 12,5004 Special revenue + 6,000 + 6,0005 General – 4,500 + 500 – 5,0006 General + 7,500 + 7,500


Bases of Accounting

Accrual

ModifiedAccrual

Economic resourcesMeasuring focus

Measuring focus Flow of currentfinancial resources


Financial Reporting

In June 1999, the GASB issuedGASB Statement No. 34,

“Basic Financial Statements andManagement’s Discussion and Analysis –

for State and Local Governments.”

The statement establishes standards forpreparing government-wide financial

statements and fund-level financial statements.


Financial Reporting

Management’s discussion and analysisGovernment-wide financial statements

Statement of net assets (accrual basis)Statement of activities (accrual basis)

Fund financial statementsGovernmental funds

Statement of net assets (modified accrual basis)Statement of revenues, expenditures, and changes in fund balances (modified accrual basis)


Financial Reporting

Fund financial statements (cont’d.)Proprietary funds

Statement of net assets (accrual basis)Statement of revenues, expenses, and changes in net assets (accrual basis)Statement of cash flows (accrual basis, direct method)

Fiduciary fundsStatement of net assets (accrual basis)Statement of changes in net assets (accrual basis)



Review basic governmental

accounting principles.


Revenue Recognition

Revenue recognition within governmentalentities is determined by the nature of

the underlying transaction.

GASB Statement No. 33,“Accounting and Financial Reporting

for Nonexchange Transaction,”characterizes revenue transactions.


Government-mandatednonexchangetransactions

Voluntarynonexchangetransactions

Imposednonexchangetransactions

Derivedtax

revenues

Revenue Recognition

GASB Statement No. 33 established fourcategories of nonexchange transactions.


Expense and ExpenditureRecognition

Expenses reflect the cost of assetsor services used by an entity.

Expenditures typically reflect the useof governmental fund working capital.

Expenditures normally reflect the cost of goodsor services acquired during a period and the

maturing of general long-term debt principal.


Interfund Activity

Loans

Transfers

Reimbursements


The Role of the Budget

2003 2004 2005 2006 2007

Capital Program

2003CapitalBudget

2003Operating

Budget

2003CurrentBudget


The Financial Reporting Entity

GASB Statement No. 14, “The FinancialReporting Entity,” explains that the financial

reporting entity is made up of the primarygovernment and its component units.

Each state and general-purpose localgovernment is a primary government.


Primary Governments

Separately elected governing body

Legally separated

Fiscally independent


Component Units

These are legally separate organizationsfor which the primary government

is financially accountable.

BlendingDiscrete

Presentation



Learn about the contents of

a governmental entity’s

comprehensive annual

financial report under

GASB 34.


Accountability

Operational accountability measures the extentof a government’s success at meeting operating

objectives efficiently and effectively and itsability to meet operating objectives in the future.

Fiscal accountability is the responsibility of agovernment to demonstrate compliance with

public decisions.


Prior to GASB 34

General purpose financial statementswere prepared using the appropriate

basis of accounting.

The combined balance sheet includedcolumns for each fund type.


CAFR Major Sections

Table of contents

Letter of transmittal

List of officers

Organizational chart


CAFR Major Sections

Management’s discussion and analysis

Auditor’s report

Government-wide financial statements

Fund financial statements


CAFR Major Sections

Statistical tables


Financial Section

Management’s discussion and analysis isrequired supplementary information (RSI)

that is presented before the financial statements.

The Board requires that MD&Aprecede the statements.


Financial Section

Governmental and proprietary fundsare consolidated and reported in a single

set of government-wide financial statements.

Statement ofnet assets

Statement ofnet assets

Statement ofactivities

Statement ofactivities


Statement of Net Assets

City of Davie Statement of Net AssetsDecember 31, 2003

Primary GovernmentGovernmental

ActivitiesBusinessActivities Total

Assets(Liabilities)Net Assets


Statement of Activities

Expenses Revenues Net FunctionsPrimaryGovernment

GovernmentalActivitiesFunction 1Function 2Business TypeActivitiesActivity 1


Fund Financial Statements

Governmental funds

Proprietary funds

Fiduciary funds


Generalfund

Each majorgovernmental

fund

Totalfunds

All nonmajorgovernmental

funds

Major Fund Reporting


Each majorenterprise

fund

All non-majorenterprise

funds

All internalservicefunds

Total

Major Fund Reporting


Conversion

Fund-basedstatement

Government-widestatements


Other Issues

Budgetary comparisons

Required supplemental information

Notes to the financial statements

Infrastructure

Combining and individual fund statements


End of Chapter 18

an introduction to accounting for state and local governmental units

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