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FUND ACCOUNTING

Chapter Two

Chapter 2

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Thought to Ponder: Chapter 2

Chapter 2

“That government is best which governs the least, because its people discipline themselves

”Henry David Thoreau

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Learning Objectives

After studying Chapter 2, you should understand: The nature of funds The hierarchy classification of fund balances The three basic fund types of a state or local

government:

-Governmental funds,

-Proprietary funds, and

-Fiduciary funds The main components of a CAFR The primary F/S issued by governments The difference between the “current” and the “old” accounting

models.

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BusinessOne company

“Fund” used as an informal term (multiple meanings)

May refer to working capital (current net assets)May refer to cash or investments availableMay have other definitions

The company is a single fiscal and accounting entity

A = L + E (“E” usually called “Owners’ Equity”)

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Governmental Multiple “entities”

--“Fund” used as a formal term (single meaning)

“A fiscal and an accounting entity with a self-balancing set of accounts.”

Each fund is like its own “entity”

--In other words, a fund is an entity with its own set of books (i.e., chart of accounts , general journal, general ledger, trial balances, and financial statements)

Fund accounting uses the equation:

Assets = Liabilities + Fund balance (often referred to as net assets)

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GASB Statement No. 54

In February 2009, the GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, to improve the usefulness, and understandability of governmental fund balance information.

– The statement is effective for years beginning after June 15, 2010. (i.e. June 30, 2011 year ends)

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Brief Summary• Fund balances of governmental type funds are now to be

reported based on a hierarchy in five different classifications:– Nonspendable– Restricted– Committed– Assigned– Unassigned

• The reporting of Reserve for Encumbrances is eliminated• According to GASB Statement No. 54, only the Fund balance

reported on the balance sheet of Governmental type funds is affected.

• It does not affect the reporting of net assets by proprietary or fiduciary funds.

• It also does not affect the reporting of net assets of governmental activities in the government-wide financial statements.

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GASB 54 -- Exhibit 1

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GASB 54—Exhibit 2

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GASB 54 -- Cont’dFund Balance should be identified between Nonspendable

resources and Spendable resources • Nonspendable resources include amounts that are not in spendable form or

are required to be maintained intact.– Inventories and prepaids (also includes assets held for sale and long-term

receivables)

– The principal (corpus) of a Permanent Fund

Ex. In Table 2-5, pg. 48, the FB Reserved for Inventories in the GF will now be presented as FB-Nonspendable.

• Spendable resources is the remaining balance and is to be reported in a hierarchy of classification (4 categories) based on the extent to which the government is bound by restrictions/constraints on those funds

--Restricted (most constraint)

--Committed

--Assigned

--Unassigned (no constraint)

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Spendable ResourcesRestricted (most constraint) includes amounts constrained to specific

purposes by their providers, through constitutional provisions, or by enabling legislation.

Externally imposed constraints by --creditors, bondholders,

--grant providers, contributors, or

--imposed by law through constitution or enabling legislation .

Enabling legislation (imposed by law) authorizes the government to assess, levy, charge, or mandate payments of resources and includes a legally enforceable requirement that the resources be used only for the specific purpose.

Thus the level of constraint on restricted fund balance is equivalent to the level of constraint on Net Assets-Restricted in proprietary funds and the government-wide statement of net assets.

Ex. In, Table 2-5, pg. 48, the balances for State Statute, Convention Center debt service and Tourism debt service will be presented as FB Restricted

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Spendable Resources (Cont’d)Committed fund balance—here the constraints are imposed by a formal

action of the government’s highest level of decision-making authority (for ex. City council committing funds for construction contracts, rainy day fund etc).

--These funds cannot be used for any other purpose unless the government removes or changes the specified use by taking the same formal action that originally imposed the constraint.

--Committed funds include contractual obligations for which existing resources in the fund have been specifically committed for use.

--The funds may also include “rainy day” or “stabilization funds.”

Note: In contrast to fund balance that is restricted by enabling legislation, amounts in the committed fund balance can be redeployed for other purposes with appropriate due process.

Ex. In, Table 2-5, pg. 48, assuming FB reserved for Encumbrances is a contractual commitment, it will be presented as FB Committed.

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Spendable Resources (Cont’d)Assigned fund balance –Government’s intent to use the funds for a specific

purpose. Here INTENT is the key.

--Intent can be expressed by the governing body itself or another body that has the delegated authority.

--In the General Fund, assignment conveys that the intended use is narrower than the general purposes of the government itself.

--Fund Balance in other governmental funds (except General Fund) that is not restricted or committed is considered as Assigned FB in those funds. In other words it is the residual balance of these funds.

Note: the authority for making an assignment does not have to be made by the government’s highest level of decision-making authority.

Thus, constraints imposed on assigned amounts can be more easily removed or modified than those that are classified as committed.

Ex. In, Table 2-5, pg. 48, the Unreserved balances in Debt Service, Capital Projects and Special revenue funds will be presented as FB Assigned

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Spendable Resources (Cont’d)Unassigned fund balance –this is the residual

classification of the General Fund

--includes amounts that are available for any purpose

--only the GF can report this positive Unassigned FB

--for other governmental funds, this category is used to report only a negative fund balance (i.e. when expenditures have exceeded the revenues).

Ex. In, Table 2-5, pg. 48, the Unreserved FB in the General Fund will be presented as FB Unassigned.

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A crosswalk

Governmental-type funds Non

spen

dabl

e*

Rest

ricte

d

Com

mitt

ed

Ass

igne

d

Neg

ative

U

nass

igne

d

Posi

tive

Una

ssig

ned

Special Revenue Funds x¹ x x x x NODebt service funds x¹ x x x x NOCapital project funds x¹ x x x x NOPermanent funds x x² x² x² x³ NOGeneral fund x x x x x⁴ x

Level of Constraints (GASB 54)

X =allowable

NO = prohibited

* Nonspendable amounts associated with long-term receivables or property acquired for resale that are restricted, committed or assigned are included in that category instead of the nonspendable category. For permanent funds, the corpus of gifts which must be maintained in perpetuity are designated nonspendable in governmental-type funds but as restricted-nonexpendable in the government-wide financial statements.

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A CROSSWALK (Cont’d)• 1 Items like inventory and prepaids would be reported as nonspendable. • 2 Depends on the terms of the legal or contractual requirement. If the earnings of a

permanent fund can be used only for the purpose the donor stipulates, then the earnings would be restricted. If the donor does not place limitations on how the earnings can be used, the government certainly could take action to commit them. In the absence of a restriction or commitment, the earnings in the permanent fund are presumed to be assigned to the purpose of the fund.

• 3 This is probably less likely to occur, but technically possible. One’s first reaction might be to think a negative unassigned in a permanent fund indicates that the government violated the legal or contractual requirement to maintain the corpus. But it more likely means that the government spent more for the purpose of the fund than was available in expendable earnings, and therefore must have spent unassigned general fund resources as well.

• 4 However, negative unassigned fund balance in the general fund cannot be caused by assignment (see par. 15).

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Not-for-profit• NFP may use fund accounting internally to ensure control of

funds, but they do not report these funds externally.• Classifies Net Assets into 3 groups:

--Unrestricted--Temporarily restricted – used for specific purpose--Permanently restricted -explained further on later slides

• FASB regulates NFP reporting for nongovernmental organizations and only requires 6 totals – Total assets– Total liabilities – Total net assets– Total unrestricted net assets– Total temporarily restricted net assets– Total permanently restricted net assets.

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Basis of Accounting

Full Accrual: Revenues recognized when earned; expenses recognized when incurred

Cash: Revenues recognized when available; expenses/expenditures recognized when paid

Modified Accrual: revenues are

recognized when measurable and available; expenditures when incurred

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Measurement Focus

What is measured? Where is the focus of an entity? Economic resources measurement focus

-Report on the determination of net income, financial position, and cash flows (i.e. capital maintenance)

-To measure operational accountability Current financial resources measurement focus

-Report on the inflows and outflows of current financial resources (i.e. cash or other items expected to be converted into cash during the current period)

-To measure fiscal accountability; meet the legal and budget needs of government

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Measurement Focus and Basis of Accounting

Measurement Focus

Basis of Accounting

Government-wide statements (GASB 34)

Economic resources

Accrual

Governmental fund statements

Current financial resources

Modified accrual

Proprietary fund statements

Economic resources

Accrual

Fiduciary fund statements

Economic resources

Accrual

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Types of Local Governments

Counties 3,033

Municipalities 19,492

Townships 16,519

School districts 13,051

Special districts 37,381

Total 89,476Source:• U.S. Bureau of the Census, Government Organizations, 2007

Census of Government, July 2007.

• http://www.census.gov/govs/www/cog2007.html

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Activities of Government Governmental Activities

Core governmental services like police and fire protection, streets, highways, etc. – Chapters 3-6. These activities are accounted under governmental funds.

Proprietary Activities Public utilities, toll roads (Sam Houston Tollway) and

toll bridges, airports (ex. Houston’s new Toyota Center, Hobby, IAH) – Chapter 9. These activities are accounted under proprietary funds.

Fiduciary Activities Sometimes known as Trust & Agency Funds. Accounts

for resources for which the government is acting in a trustee capacity (ex. Houston Foundation, MacGregor Parks Endowment) – Chapter 10. These activities are accounted under fiduciary funds.

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Types of Funds“Funds divide a government into units to control resources or

attain objectives, not functional department or operations.” Governmental Funds (5)

General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds

Proprietary Funds (2) Internal Service Funds Enterprise Funds

Fiduciary Funds (2) Agency Funds Trust Funds

• Pension (and other employee benefit) • Investment Trust Funds• Private purpose Trust Funds

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Definition of Fund Types Governmental Funds

A generic classification used by GASB to refer to all funds other than proprietary or fiduciary

No guarantee that the funds will be reimbursed for services rendered

Proprietary Funds Government generally makes initial contribution but thereafter

the fund is expected to “pay its own way” through fees for services rendered. Also referred to as business-like or commercial-type funds.

Fiduciary Funds Any fund held by a government in a fiduciary capacity. Simply, the gov’t. holds someone else’s money

in trust and acts as a custodian. Since it is not the government’s money, it is not expendable for the government’s own programs.

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Overview Basis of Accounting:

--Modified Accrual Measurement Focus:

--Current Financial Resources Other names: “financial flow” focus or spending focus Only current assets and liabilities are generally included on

their balance sheet (i.e. Capital assets and long-term liabilities are not included)

Reports expenditures (not expenses) of appropriations

Fund Balance (net current assets) measures “available spendable resources” Fund Balance = Current Assets – Current Liabilities Increased by revenues and other financing sources Decreased by expenditures and other financing uses Governmental fund operating statements present these

increases and decreases in net current assets.

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Required Financial Statements

Balance Sheet

Statement of Revenues, Expenditures, and Changes in Fund Balances

Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level.

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(1) - General Fund (GF) The operating fund of the government-embraces most major

governmental functions Accounts for all resources that are not required to be accounted

for in other funds; in essence, it accounts for all unassigned resources.

Only one per government and is the most significant single fund

General Activities of city government (ex. Fire, police)

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(2) - Special Revenue Funds (SRF) Accounts for financial resources that are restricted or

committed (does not include assigned) to expenditure for specific purposes other than debt service or capital projects.

Accounting and budgeting usually identical to GF

Ex. City of Houston maintains over 17 SRF

-Examples include Public Safety Special Fund (9-1-1 Emergency Network)

Public Works Special Fund Health and Housing Special Fund Parks and Recreation Special Fund Other Special Revenue Fund (Cable Television)

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(3) - Capital Projects Funds (CPF) Accounts for financial resources that are

restricted, committed, or assigned to expenditure for capital outlays.

Ex. Astrodome, Toyota Center, GRB

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(4) - Debt Service Funds (DSF)

Accounts for financial resources that are restricted, committed, or assigned for the payment of interest and principal on long-term debt.

Ex. City of Houston reports as of 6/30/2009 Total fund balance in DSF

$161,414,000. Total outstanding debt

$14.55 Billion ($13.8 B in 2008).

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(5) - Permanent Funds

Accounts for resources provided that are legally restricted so that only earnings, not principal, may be used to support the government’s programs.

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(1) - Internal Service Funds (ISF) Accounts for activities in which goods are services are provided to

(1) other departments of the same government

(2) other governments for a charge on a cost reimbursement basis

Examples include central stores, central computing, motor pools, and printing.

ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government.

--ex. City of Houston’s employees Health Benefits and

Long -Term disability.

These funds are covered in depth in Chapter 9.

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(2) - Enterprise Funds (EF) Accounts for activities in which goods or

services are provided to the general public for a charge

Reported as business-type activities in the government-wide financial statements

Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores

Ex. City of Houston’s EF Airport System Convention & Entertainment facilities Combined Utility system Nonmajor Enterprise funds (Houston Area

Water Corporation, Parking Management)

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Overview Basis of Accounting:

Full Accrual Operated like a “normal for-profit” business

--ex. City of Houston operates its Airports under a Proprietary fund

Measurement Focus:Economic Resources

All assets and liabilities (both current and noncurrent) are included in the balance sheet

Accounts for expenses (not expenditures)--Depreciation expense is reported

Fund Equity (Total Net Assets) Net Assets = Assets – Liabilities Increased by revenues and other financing sources Decreased by expenses and other financing sources Segregated into contributed capital and retained earnings

components

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Required Financial Statements

Similar to those of for-profit entities

Statement of Net Assets

Statement of Revenues, Expenses, and Changes in Net Assets (i.e. operating statement)

Statement of Cash Flows

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Fiduciary Funds - Agency Funds

Accounts for financial resources in which the government is acting in an “agency” capacity

Agent - Government holds assets on behalf of another government

Accounting is simple: assets = liabilities.

No revenue and expense to accrue

No fund equity account

Examples are tax agency funds, certain special assessment funds, and pass-through agency funds

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Overview

Both Trust funds and Agency funds account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations, other governments, and/or other funds. Therefore, the government cannot include

these funds in the government-wide statements.

Basis of Accounting:Full Accrual

Measurement Focus:Economic Resources

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Required Financial Statements

Statement of Fiduciary net assets

Statement of Changes in Fiduciary net assets

Only Trust Funds may have a change in net assets

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Trust Funds

Each trust is classified for accounting measurement purposes as either a governmental fund or a proprietary fund (ex. Houston Firefighters Relief and Retirement and Police Officers’ Funds).

Funds can be either expendable or nonexpendable. Three types of trust funds

(i) Pension (and other employee benefits)Trust Funds (one or more)

(ii) Investment Trust Funds (iii) Private Purpose Trust Funds

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Trust Funds (i) Pension (and other employee benefits) Trust Fund

Accounts for financial resources in which the government (or other designated trustee) is acting in a trustee capacity for the employees of the government to provide retirement benefits.

Uses business-type accounting practices.

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Trust Funds (ii) Investment Trust Funds

Accounts for external investment pools in which the assets are held for other (external) governments, along with funds of the sponsoring government

Reports the assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants

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Trust Funds (iii) Private-purpose Trust Funds

Encompasses all trust funds other than pension and investment trust funds

Accounts for financial resources in which the government is acting in a trustee capacity for the benefit of individuals, other organizations, or other governments (e.g., an endowment in which the principal amount must be kept intact)

Accounting is virtually identical to that for an enterprise fund.

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GASB Statement No. 34

Government-wide Statements1)Statement of Net Assets

2)Statement of Activities Address questions that have not been easily answered

by fund accounting “What do government services really cost, e.g., public

safety or recreation?” “How much debt for current services are we shifting to

the next generation?” “ How much of the cost of government is borne by

citizens in the form of general revenues?”

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Reporting Model-Statement 34

Fund Presentation Major funds Non-major funds presented in a single column by

category Concept does not apply to fiduciary funds and

internal service funds

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Comprehensive Annual Financial Report - CAFR

Review from Ch. 1The CAFR is the recommended annual report of

a governmental unit. It has 3 sections. Introduction section Financial section Statistical section

The minimum requirements for general purpose external reporting include:

MD&A Basic financial statements RSI other than MD&A

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Comprehensive Annual Financial Report - CAFR

Every government should prepare interim statements as needed for sound management

The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Houston for CAFR for the fiscal year ended June 30, 2009.

Note: Please also refer to Chapter 1 slides on CAFR.

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CAFRReviewing again, a CAFR has Introduction section:

Letter of transmittal – presents overview of financial and economical conditions. General information about how the government is organized.

Financial Section: MD&A – brief overview of financial performance of the government. Basic financial statements and Notes Required Supplementary Information Combining and individual fund financial statements.

Statistical section: Contains current and historical data. Supplemental information to

the basic financial statements

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Component Units (CU)• Entities that are economically intertwined with the government albeit

legally separate• Criteria to determine whether a primary government (PG) is

financially accountable for another government. (1) PG appoints a voting majority of unit’s governing body(2) A majority of unit’s governing body is composed of PG’s officials(3) The PG is able to “impose its will” upon the unit(4) Unit can cause the PG financial benefits or burdens

• If it meets these criterion, then unit is a CU of PG.• Two Presentations of CU

(1) Blended – CU consolidated with PG in government-wide statementsPresented this way if CU “provides services exclusively or almost exclusively for

the city” (City of Houston CAFR)(2) Discrete – CU shown in a separate column in government-wide

statements

This topic is discussed in depth as part of Ch. 11.

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City of HoustonBlended Component Unit Examples

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City of HoustonDiscrete Component Unit Examples

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Not-for-Profits revisited

Financial Reporting:

NFPs classify and report both current and non current assets & liabilities based on three different donor mandated restriction categories (i.e. 12 different categories (2x2x3 = 12)).

(1) unrestricted

(2) temporarily restricted

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Classification of Assets and Liab.(12 categories)

• “Current unrestricted” Analogous to general fund

• “Current temporarily restricted” Analogous to special revenue funds

• “Current permanently restricted” **Doesn’t exist because it would mean you have available resources

you can never use• “Noncurrent unrestricted”

Property, Plant, and Equipment used for operations Accounts Receivables which, once collected, may be used Long-term Liabilities

• “Noncurrent temporarily restricted” Assets analogous to capital projects fund Accounts Receivable which, once collected, are restricted for a specific

use or time period Liabilities analogous to debt service fund and fiduciary funds

• “Noncurrent permanently restricted” Assets analogous to permanent fund All Liabilities are either unrestricted or temporarily restricted never

permanently restricted

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Summary

Fund financial statements for governmental funds utilize the modified accrual basis of accounting and a current financial resources measurement focus.

GASB Std. # 34 requires both government-wide financial statements and fund financial statements.

Government-wide financial statements and fund financial statements for proprietary and fiduciary funds follow the full accrual basis of accounting and the economic resources measurement focus (similar to commercial accounting).

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