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July 2002 1 Introduction to Internal Service Funds.

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Presentation on theme: "July 2002 1 Introduction to Internal Service Funds."— Presentation transcript:

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2 July 2002 1 Introduction to Internal Service Funds

3 July 2002 2 Internal Service Funds (ISFs) Instructions for this power point presentation. This button appears throughout the presentation. Click to obtain additional data. Clicking on underlined text will provide links to additional information.

4 July 2002 3 ISFs... continued Established to avoid duplication of effort. Bill clients for service. Are self supporting. Provide services more conveniently or at a lower cost.

5 July 2002 4 ISFs... continued Reflect major capital items as assets. Record depreciation to determine all costs of operating the activity. Measure the full cost of the goods or services. Operate as a business.

6 July 2002 5 Journal Entries Various journal entries record the establishment and operational activities of an Internal Service Fund. See slides 6 through 9 for these journal entries.

7 July 2002 6 Journal Entries... continued Establish an equity transfer: Debit: Cash Credit: Contributed capital from General Fund

8 July 2002 7 Journal Entries... continued Acquisition of IT equipment Debit: IT equipment Credit: Cash Supplies for the operation Debit: Computer supplies expense Credit: Cash

9 July 2002 8 Journal Entries... continued Billings for services rendered Debit: Due from State department Credit: Revenues Payment of billings Debit: Cash Credit: Due from State department

10 July 2002 9 Journal Entries... continued Depreciation Debit: Depreciation expense Credit: Accumulated depreciation

11 July 2002 10 End of the Year Internal Service Funds prepare various financial statements: Trial Balance Closing Entries Balance Sheet Revenue and Expense Statement Cash Flow Statement

12 July 2002 11 Internal Service Funds (ISFs) From here on, this presentation is on the State of California’s Internal Service Funds. How does California establish an Internal Service Fund?

13 July 2002 12 Establishing ISFs First, an Internal Service Fund is: Created Classified

14 July 2002 13 ISFs Created Legislation Administratively (Government Code Section 13306) Electorate Initiative

15 July 2002 14 ISFs Classified Funding source/appropriation to finance program activities must: Identify the resources. Specify the legal authority to expend.

16 July 2002 15 ISFs Classified... continued Fund Codes Alphabetical Numerical Fund structure Generally Accepted Accounting Principles (GAAP) Legal basis

17 July 2002 16 Uniform Codes Manual (UCM) Provides the source for coding the ISF. Provides a uniform coding system. Provides a chart of accounts for budgetary, accounting, and reporting purposes.

18 July 2002 17 UCMUCM... continued Comprehensive listing of Accounts Funds Objects of expenditures Receipts

19 July 2002 18 In California, Internal Service Funds are used to:

20 July 2002 19 Internal Service Funds (ISFs) Account for State of California activities, which provide: Goods and services to other State departments. Reimbursement of costs.

21 July 2002 20 ISFs... continued California has established over 20 ISFs. Not all of these ISFs are active. See slides 21 through 27 for some examples of California’s ISFs.

22 July 2002 21 Examples of Internal Service Funds (ISFs)... continued Water Resources Revolving Fund Accounts for charges for administrative services related to water delivery provided by the Department of Water Resources to federal, State, and local entities.

23 July 2002 22 Examples of ISFs... continued Equipment Service Fund Accounts for the purchase, maintenance, and administrative costs of equipment used by the Department of Transportation.

24 July 2002 23 Examples of ISFs... continued Service Revolving Fund Accounts for printing and procurement charges for services rendered by the Department of General Services for State departments and other public entities.

25 July 2002 24 Examples of ISFs... continued Stephen P. Teale Data Center Revolving Fund (TDC) Stephen P. Teale Data Center Revolving Fund (TDC) Accounts for charges of IT services performed for various State departments by the TDC.

26 July 2002 25 Examples of ISFs... continued Prison Industries Revolving Fund Accounts for charges for goods produced by inmates in State prisons that are sold to State departments and other entities.

27 July 2002 26 Examples of ISFs... continued Health and Human Services Agency Data Center Revolving Fund (HHSDC) Health and Human Services Agency Data Center Revolving Fund (HHSDC) Accounts for charges of IT services performed for various State departments by the HHSDC.

28 July 2002 27 Examples of ISFs... continued Other Internal Service Funds Account for all other goods or services provided to other agencys, departments, or governments on a cost reimbursement basis.

29 July 2002 28 Examples of ISFs... continued Let’s look more closely at the Health and Human Services Agency Data Center (HHSADC), an Internal Service Fund.

30 July 2002 29 Health and Human Services Agency Data Center (HHSADC) Created in 1972. Provides centralized IT services for State departments. Centralizes IT at reduced costs. Eliminates of duplication of work. Ensures optimum capacity.

31 July 2002 30 HHSADC... continued Self supporting. No General Fund appropriation. Costs recovered through user charges. User charges set at the beginning of each fiscal year. Goal is to break even. Uneven demand for services makes it difficult to predict billing rates. Shortages or surpluses often occur.

32 July 2002 31 HHSADC... continued Uses a standard costing system. Costs are categorized under separate group or cost pools related to an activity. Cost centers represent a billable service. Expenses are assigned a cost center. Expenses are totaled at the end of year to determine the cost for each service.

33 July 2002 32 HHSADC... continued Example of some cost centers at HHSADC : Cost center number DescriptionCosts capturedMeasurement unit to allocate costs to clients 001MainframeAll CPU costsPer CPU hour 038Printing Services All print support costsPer line printed 060Internet Service Internet provider costPer Internet user 300Disk StorageDisk storage costsPer track stored

34 July 2002 33 HHSADC... continued Each cost center has a billing rate: Projected Annual Cost Billing Rate = ----------------------- Projected Annual Usage

35 July 2002 34 HHSADC... continued Utility system records the usage for each client. Calculates a bill based on actual usage of each services. Monthly an invoice is sent to the client listing service usage multiplied by the billing rate. Client pays invoice.

36 July 2002 35 HHSADC... continued Analysis of Costs Quarterly review of rates. Annual adjustments. Invoice adjustment for refunds. Financing impacts rates charged to clients. Click on button to see types of financing.

37 July 2002 36 HHSADC... continued Clients receiving federal funds bill the federal government for these charges. Over/under collections result in over/under billings to the federal government.

38 July 2002 37 HHSADC... continued Why should anyone care if the federal government is over or under charged? Or any other fund, State department, entity? Let’s look at some items for background to this issue.

39 July 2002 38 Cost Plans Statewide Cost Allocation Plan (SWCAP) recovers central service costs from federal funds. SWCAP plan has two sections.

40 July 2002 39 Cost Plans... continued Both Section I and Section II of the SWCAP follow the regulations and guidelines of... Office of Management and Budget, Federal Circular A-87 “Cost Principles for State and Local Governments”. Department of Health and Human Services guideline ASMB C-10.

41 July 2002 40 Cost Plans... continued SWCAP Section I is the allocated central service costs distributed to State departments. State departments transfer SWCAP recoveries to the General Fund from reimbursements received from the federal government.

42 July 2002 41 Cost Plans... continued SWCAP Section II includes data for each ISF with an operating budget over $5 million, including: Rates Billings Policies Refunds

43 July 2002 42 Cost Plans... continued SWCAP Section II Costs for operating the ISF are included in billings by the State department (indirect cost rate proposals, cost allocation plans) to the federal government. Yearly, the federal government reviews these ISFs.

44 July 2002 43 Cost Plans... continued For each ISF, SWCAP Section II includes: Description of Service Balance Sheet Revenue and Expense Statement Cost recovery and billing methodology Cost center billing rates Other information

45 July 2002 44 State Requirements State’s requirements are: Full Cost Recovery Government Code 11010 Government Code specific to an ISF HHSDC Fund Balance billing rate Government Code 11755 State Administrative Manual Rates reviewed by audit groups

46 July 2002 45 Federal requirements are: Rates reviewed annually. Allowable A-87 retained earnings. Include only reasonable costs as defined in A-87 and ASMB C-10. Federal Requirements

47 July 2002 46 Federal Requirements... continued After issuance of the Comprehensive Annual Financial Report (CAFR) each ISF in the SWCAP prepares a Reconciliation of Retained Earnings Balance to Federal Guidelines. Reconciliation of Retained Earnings Balance to Federal Guidelines SCO website for CAFR: California Comprehensive Annual Financial Report

48 July 2002 47 Federal Requirements... continued Retained earning reconciliation determines the excess retained earnings. A portion is owed to the federal government, based upon the federal financial participation of the clients.

49 July 2002 48 State and Federal Differences State and federal government differ on the calculation of working capital. Differences are shown on the next slides.

50 July 2002 49 State and Federal Differences... continued Working Capital 2001-02State of CaliforniaFederal government Definition Current Assets minus Current Liabilities 60 days worth of cash expenses, a portion of retained earnings that functions as a reserve AuthorityFASB and AICPAOMB Circular A-87 Complies with GAAPYesNo Excess RE balance$0

51 July 2002 50 Other Differences Different statements Governmental funds Only current assets and current liabilities are accounted and reported. ISF funds All assets and liabilities are accounted and reported.

52 July 2002 51 Other Differences... continued Governmental funds Modified accrual basis Expenditures No gain or loss Spending ISFs funds Full accrual Expenses Gain or loss recognized Income determination

53 July 2002 52 State’s Working Capital Defined in Accounting Research Bulletin No. 43 issued by the AICPA.

54 July 2002 53 Federal Working Capital Calculation Total Expenses per audited financial statements. Less Non-cash expenses such as depreciation. Equals total cash expenses for year. Calculation continued on next slide.

55 July 2002 54 Federal Working Capital Calculation... continued Divide by 360 days equals total average cash expenses per day. Multiply by 60 equals 60 days worth of cash expenses. Deduct from retained earnings to arrive at the excess level of retained earnings.

56 July 2002 55 Working Capital Impact Comparison State and federal working capital comparison is shown in the following spreadsheet. Re.xls

57 July 2002 56 State Controller’s Office Reports SCO presents financial data on activities similar to the private sector. Per GASB (Governmental Accounting Standards Board) statement number 20, the State applies all applicable GASB and FASB (Financial Accounting Standards Board) pronouncements issued on or before November 30, 1989, with one exception.

58 July 2002 57 Exception Prison Industry Authority, an ISF, follows FASB pronouncements issued after November 30, 1989, unless they conflict with or contradict GASB pronouncements.

59 July 2002 58 Auditors review of ISFs Some points auditors look at when reviewing ISFs: Users billed at the same rate for the same service. Identification of outside users, such as other governmental entities (local governments). Treatment of past profit/loss.

60 July 2002 59 Auditor’s review of ISFs... continued Some points auditors look at when reviewing ISFs:... continued Procedures followed for billings that exceed original amounts. Review of rate base to determine equal distribution of costs for services. In the future, selectively reviewed.

61 July 2002 60 Reconciling Budgetary Basis with Generally Accepted Accounting Principles (GAAP) Perspective difference Fund classification

62 July 2002 61 Reconciling Budgetary Basis with GAAP... continued Perspective difference - continued State basis Governmental General Fund and other governmental cost fund.

63 July 2002 62 Reconciling Budgetary Basis with GAAP... continued Perspective difference... continued State basis Non-governmental Not subject to annual appropriation Monies other than General Fund and special taxes, fees, etc.

64 July 2002 63 Reconciling Budgetary Basis with GAAP... continued Perspective difference... continued GAAP Classified as governmental, proprietary, or fiduciary funds.

65 July 2002 64 Reconciling Budgetary Basis with GAAP... continued Basis difference Advances and Loans Budgetary basis -- recorded as expenditures GAAP -- recorded as assets

66 July 2002 65 Reconciling Budgetary Basis with GAAP... continued Basis difference... continued Encumbrances Budgetary basis -- not recorded GAAP -- recorded

67 July 2002 66 Reconciling Budgetary Basis with GAAP... continued Basis difference... continued Contributed capital Budgetary basis -- not recorded GAAP -- recorded

68 July 2002 67 Additional Information http://www.dof.ca.gov/fisa/fisa.htm Provides information or links to a variety of items: UCM CALSTARS Budgets Pro Rata and SWCAP State Administrative Manual Federal websites

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74 July 2002 73 Establish Funds Administratively Necessary to... Properly manage the State ’ s assets Account for the financial activities Deposit resources of the State

75 July 2002 74 Establish Funds Administratively... continued Comply with legal requirements “ Generally Accepted Accounting Principles ” Effective financial administration

76 July 2002 75 Financing ISF must find ways to buy new equipment or other assets. How? General Fund appropriations Capital contributions Debt financing

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