1. Chapter Twelve Accounting for State and Local Governments, Part II McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 12-2 Accounting for Leases  The lease transfers ownership at the end of the lease term.  The lease has a bargain purchase option.  The lease term ≥75% of the asset’s estimated useful life.  The minimum lease payments > 90% of the PV of the asset. For accounting purposes, leases must be identified as either Capital or Operating. GASB has adopted the same four criteria applied by FASB to identify a capital lease. LO 1

3. Accounting for Capital Leases Government-Wide Financial Statements: Record an asset and a liability at the present value of the minimum lease payments initially. Record an expense for interest and a reduction in the liability when the lease payment is made. Fund Financial Statements: Record the expenditure and other financing source to record the lease. Record an expenditure for interest and the lease principal when the payment is made. 12-3

4. 12-4 Prepare the journal entry to record the lease agreement for government-wide statements. Accounting for Capital Leases Government-Wide Financial Statements Record both the asset and the lease obligation. Assume a city signs an 8-year capital lease for a truck with a 10-year estimated life at an interest rate of 8%.

5. 12-5 Prepare the journal entry to record the lease payment for government- wide statements. Accounting for Capital Leases Government-Wide Financial Statements Record interest expense & reduce the obligation. On December 31 st, year 1, the city made a $10,000 lease payment that included interest of $4,868.

6. 12-6 Prepare the journal entry to record the lease payment for government- wide statements. Accounting for Capital Leases Government-Wide Financial Statements Recognize depreciation expense at end of year 1. Assuming straight-line depreciation is used, the city recognizes depreciation expense for year 1 of $7,335 = ($58,680/8).

7. 12-7 Accounting for Capital Leases Fund Financial Statements Unless it is for a proprietary fund, the asset and obligation are not recorded. It does not fall under the definition of current financial resources.

8. 12-8 Accounting for Capital Leases Fund Financial Statements (Governmental Funds) Record the lease payments as expenditures in the General Fund.

9. Solid Waste Landfill The operation of a solid waste landfill creates long-term liabilities. The EPA imposes requirements that will require large outlays of resources to close a landfill in the future and to deal with such post closure activities as groundwater monitoring. LO 2 12-9

10. Fund Financial Statements Make no entry to record a liability. Record cash payments made to fund the future obligation as “expenditures”. Government-Wide Financial Statements Record a portion of the expected closing costs, pro-rated as a % of capacity used, each year as an expense and a liability. Solid Waste Landfill 12-10

11. Fund Financial Statements Record only the portion of the liability that is expected to be paid from current resources. Government-Wide Financial Statements Accrue the expense and liability related to unused/accrued vacation and sick leave. Compensated Absences Employees accrue vacation and sick leave at a predetermined rate. Unused/accrued vacation and sick leave are payable upon termination or retirement, creating a liability. 12-11

12. Works of Art and Historical Treasures Although optional reporting is allowed, governments “should capitalize works of art, historical treasures, and similar assets at their historical cost or fair value at date of donation.” Fund Financial Statements Record an expenditure and the cash payment (if purchased). No entry is made if the item is donated. Government-Wide Financial Statements Record the asset and the payment (if purchased) or revenue (if donated). LO 3 12-12

13. Works of Art and Historical Treasures 1. Item is held for public exhibition, education, or research in furtherance of public service, rather than financial gain, 2. Item is protected, kept unencumbered, cared for, and preserved, and 3. Item is subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections GASB makes capitalization optional if the following three criteria are met: 12-13

14. Infrastructure Assets Government-Wide Financial Statements:  Record all newly acquired assets.  Show approximate cost for all major assets previously acquired that  Were acquired after June 30, 1980, or that  Had major renovations, restorations, or improvements since that date. Fund Financial Statements:  Record the acquisition as an expenditure. LO 4 12-14

15. Infrastructure Depreciation For government-wide financial statements, depreciation is recorded for all assets except land, art works, and historical treasures that are inexhaustible. GASB provides an alternative, known as the “modified” approach, which eliminates the need for depreciating qualifying infrastructure (assets that have virtually an unlimited life). 12-15

16. Infrastructure Depreciation  Maintenance costs are immediately expensed in lieu of depreciation.  Information must be accumulated about particular infrastructure items,  A minimum acceptable condition level must be met and documented,  An asset management system must monitor the network or subsystem.  The cost and record-keeping have so far limited adoption of the modified approach. Under the “Modified” Approach: 12-16

17. General Purpose Financial Statements Three distinct sections: 1.Management’s Discussion and Analysis (MD&A) 2.Financial Statements – Government-wide Financial Statements – Fund Financial Statements – Notes to the Financial Statements 3.Required Supplementary Information LO 5 12-17

18. Management’s Discussion and Analysis (MD&A) Should provide an objective and easily readable analysis Should provide both a short- and long-term analysis of the government’s activities Should compare current and prior year results Use of charts, graphs and tables encouraged to enhance understandability 12-18

19. External Reporting Process Governments prepare a Comprehensive Annual Financial Report (CAFR). GASB Stipulates that the CAFR Include: 1.Introductory Section 2.Financial Section 3.Statistical Section 12-19

20. Primary Government and Component Units  Reporting entities must produce CAFRs. These units start with a primary government unit (town, city, county or state)  Primary government must then include all funds, activities, organizations, agencies, offices and departments that are not legally separate from it  May be difficult to determine whether certain activities should be included  The major criterion for inclusion is “financial accountability” LO 6 12-20

21. Component Units  Includes any unit that is legally separate from the primary government, but where financial accountability still exists.  Must be included in general purpose financial statements.  Can be discretely presented on the fund- based statements or “blended” with the funds of the primary government. 12-21

22. 12-22 Government-Wide Statements - Statement of Net Assets  Designed to report the economic resources of the government as a whole (except for fiduciary funds that serve a purpose outside the primary government).  Include all assets, capital assets, and liabilities (current and long-term).  Report investments at fair market value.  Assets – Liabilities = Net Assets (not equity)  Show restrictions. LO 7 12-22

23. Government-Wide Statements - Statement of Activities  Expenses are shown by function.  Interest on general long-term debt is normally an indirect expense, frequently shown as a separate “function”.  Related program revenues should be shown for each “function”.  Show the net revenue figure for each function.  General revenues are shown at the bottom of the statement. 12-23

24. 12-24 Fund Financial Statements - Governmental Funds Balance Sheet  Does not include proprietary funds, component units, or fiduciary funds.  Reports only current financial resources and uses modified accrual accounting.  Separate columns for the General Fund and each major fund.  In the Fund Balance section, identify both the “reserved” and “designated” amounts.

25. 12-25 Fund Financial Statements - Governmental Funds Statement of Revenues, Expenditures, & Changes in Fund Balances  Net revenues are not identified for specific functions.  Report ‘expenditures,’ not expenses.  Other financing sources and uses are shown to reflect long-term debt, sale of property, and transfers between funds.  Reconcile the ending fund balance and the ending change in net assets.

26. 12-26 Statement of Net Assets  Combined internal service funds.  Assets and liabilities are classified as current and noncurrent. Statement of Revenues, Expenses, & Changes in Fund Net Assets  Same rules as for governmental funds.  Capital contributions and transfers are reported here. Fund Financial Statements - Proprietary Funds

27. 12-27 Statement of Cash Flows Four sections… 1)Operating Activities 2)Noncapital Financing Activities 3)Capital and Related Financing Activities 4)Investing Activities. 5)Note that the Direct Method is required for presentation. Fund Financial Statements - Proprietary Funds

28. Public Colleges and Universities  Public colleges and universities must follow the same guidelines as state and local governments. (GASB retains primary reporting authority)  Their statements will differ from those of private colleges and universities, who are following FASB accounting standards. LO 8 12-28

29. Summary  Governments may lease assets and use the same rules as for-profit enterprises to distinguish capital from operating leases.  Liabilities created by landfills are accrued in government-wide statements but not recorded in fund statements until claims are actually made.  The possession of historical treasures or works of art, and compensated absences of employees, create accounting issues.  Governments are required to report MD&A’s and CAFRs.  Public colleges and universities must follow GASB rules rather than FASB. 12-29