1. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 18 Governmental Entities: Special Funds and Government-wide Financial Statements

2. 18-2 Learning Objective 1 Understand and explain the differences in financial reporting requirements of the different fund types.

3. 18-3 Big Picture  A government should establish those funds required by law and the specific operating and management needs of the government entity.  Figure 18-2 summarizes the different types of funds.

4. 18-4 Overview of Accounting and Financial Reporting for Governments

5. 18-5 The Governmental Funds: General Fund (#1 of 5)  General rule: All activities should be accounted for in the general fund unless specifically required by law or The nature of the activities is proprietary or fiduciary.  We discussed the general fund in chapter 17.

6. 18-6 The Governmental Funds: Special Revenue Funds (#2 of 5)  Purpose: To account for the proceeds of specific revenue sources that are legally restricted to expenditure for specific purposes. With the exception of inflows for Capital projects and Expendable trusts. Includes resources and expenditures for operations, such as public libraries, when a separate tax is levied for their support.  Inflows: Usually from specific taxes or nontax sources not directly related to services provided.  A General Fund “clone”—identical accounting. Thus, we don’t discuss them in detail here.

7. 18-7 Governmental Funds Worksheets  Each of the five governmental funds will report two fund-based financial statements: The Balance Sheet The Statement of Revenues, Expenditures, and Changes in Fund Balance

8. 18-8 Worksheet for the Balance Sheet for the Governmental Funds

9. 18-9 Worksheet for the Statement of Revenues, Expenditures, and Changes in Fund Balances for the Governmental Funds

10. 18-10 Practice Quiz Question #1 Which of the following statements is true about fund accounting? a.An enterprise fund is an example of fiduciary fund. b.Most transactions of a state or municipal government are accounted for in the general fund. c.A capital projects fund is an example of proprietary fund. d.Most transactions of a state or municipal government are accounted for in the internal service fund. Which of the following statements is true about fund accounting? a.An enterprise fund is an example of fiduciary fund. b.Most transactions of a state or municipal government are accounted for in the general fund. c.A capital projects fund is an example of proprietary fund. d.Most transactions of a state or municipal government are accounted for in the internal service fund.

11. 18-11 Learning Objective 2 Make calculations and record journal entries for capital projects funds.

12. 18-12 The Governmental Funds: Capital Projects Funds (#3 of 5)  Purpose: To account for financial resources used for the acquisition or construction of major capital facilities Except for those financed by: Proprietary Funds and Trust Funds

13. 18-13 The Governmental Funds: Capital Projects Funds (#3 of 5)  A temporary fund related to the acquisition or construction of a specific capital project.  At the completion of the project: The fund is closed and The project ’s cost is recorded as a capital asset in the GCA-GLTL general ledger. Outflows: Costs incurred during construction are charged to expenditures. Inflows: Bond sales and transfers from the General Fund.

14. 18-14 GCA-GLTL General Ledger GCA = General Capital Assets GLTL = General Long Term Liabilities GCA-GLTL General Ledger  Since governmental funds only report current resources and obligations, the long- term assets and liabilities are recorded in another location.

15. 18-15 The Governmental Funds: Capital Projects Funds (#3 of 5)  Things to remember: Fixed assets or depreciation are not recorded in capital projects funds Long-term debt is not recorded in capital projects funds Capital projects funds typically do not have operating budgets A capital budget is prepared as a basis for selling bonds to finance a project, and the capital budget is the control mechanism for the length of the project The capital budget for the project may, or may not, be formally recorded in the accounts The fund records capital outlays as expenditures

16. 18-16 Practice Quiz Question #2 Which of the following statements is true about capital projects funds? a.Capital projects funds record depreciation. b.Capital projects funds are permanent because long-term assets remain in the fund until disposal. c.Capital projects funds are required by law to have operating budgets. d.When a capital project is completed, the fund is closed and the asset is transferred to the GCA-GLTL general ledger. Which of the following statements is true about capital projects funds? a.Capital projects funds record depreciation. b.Capital projects funds are permanent because long-term assets remain in the fund until disposal. c.Capital projects funds are required by law to have operating budgets. d.When a capital project is completed, the fund is closed and the asset is transferred to the GCA-GLTL general ledger.

17. 18-17 Learning Objective 3 Make calculations and record journal entries for debt service funds.

18. 18-18 The Governmental Funds: Debt Service Funds (#4 of 5)  Purpose: To account for the servicing of debt initially recorded as a liability in the GCA-GLTL general ledger.  “Servicing of Debt” is the payment of (1) interest and (2) debt principal at maturity.  The accounting is the same as for the general fund.  Unusual Features: Interest is not accrued until the due date. Principal payments are not recorded as liabilities until the due date.

19. 18-19 Debt Service Funds  Examples of general long-term debt obligations: Serial bonds Term bonds Special assessment bonds Notes and warrants Capital leases

20. 18-20 Special Assessments  Special Assessments are Assessments made against taxpayers (citizens or businesses) that directly benefit from improvements. Examples: sidewalks, street lighting, gutters  Special Assessment Bonds are usually issued to initially pay for the improvements. Over time, the special assessments levied against taxpayers are used to pay off the bonds. All construction activity takes place in a Capital Projects Fund.

21. 18-21  Purpose of GCA-GLTL General Ledger: Accounts for capital assets (at historical cost) and Long-term debt not accounted for in Enterprise Funds, Internal Service Funds, or Trust Funds.  The GCA-GLTL General Ledger is not a fund It has no cash for paying liabilities.  It is a self-balancing set of accounts. The GCA-GLTL General Ledger

22. 18-22 General Capital Assets  Categories of Assets Land Buildings Improvements other than buildings Equipment Construction work in progress (being performed by Capital Projects Funds) Infrastructure assets (see next slide)

23. 18-23 General Capital Assets: Infrastructure Assets  Capitalization is mandatory for public domain or “infrastructure” capital assets such as: Streets and roads Sidewalks Bridges and tunnels Water and sewer systems Lighting systems  Characteristics of infrastructure Stationary in nature Normally preserved longer than other capital assets.

24. 18-24 General Capital Assets: Post-capitalization Periods  Depreciation is mandatory— except for certain infrastructure assets: Depreciation Expense is never reported in the operating statement of governmental funds. It is reported only in the two government-wide statements.  Sales of Assets: record proceeds as other financing sources in General Fund.

25. 18-25 General Long-term Liabilities  Examples of Debt Recorded in GCA-GLTL general ledger General obligation bonds (usually issued to pay for capital projects). Claims and judgments. Compensated absences (vacation & sick pay). Unfunded pension contributions. Capital leases payable. Special assessment debt having government commitment (explained earlier).

26. 18-26 General Long-term Debt Liabilities  Liquidation of GLTL Debt Issuance Liabilities: at the maturity date, the liability is transferred to a Debt Service Fund. Nondebt Issuance Liabilities: at the payment date, the liability is transferred to the General Fund.  Note that the GLTL is not removed from the GCA-GLTL general ledger when it becomes a current liability (due within 12 months).

27. 18-27 Practice Quiz Question #3 Which of the following statements is true? a.Long-term debt resides permanently in the debt service fund. b.The GCA-GLTL General Ledger services interest payments on long-term debt. c.Special assessments are levied against the general population. d.A debt service fund only makes interest and principal payments. e.Debt service funds accrue liabilities as incurred. Which of the following statements is true? a.Long-term debt resides permanently in the debt service fund. b.The GCA-GLTL General Ledger services interest payments on long-term debt. c.Special assessments are levied against the general population. d.A debt service fund only makes interest and principal payments. e.Debt service funds accrue liabilities as incurred.

28. 18-28 Learning Objective 4 Make calculations and record journal entries for permanent funds.

29. 18-29 The Governmental Funds: Permanent Funds (#5 of 5)  Permanent Funds: Are established when there is a donor restriction requiring that the fund principal be preserved and the income from these permanent funds be used to benefit the government’s programs or its general citizenry.  The accounting for permanent funds is similar to that of the general fund.

30. 18-30 Practice Quiz Question #4 Which of the following is NOT true about permanent funds? a.The principal of permanent funds is usually required to be preserved. b.The income from permanent funds is usually allowed to be spent for the benefit of the governmental entity and its citizens. c.Permanent funds are accounted for in the general fund. d. The accounting for permanent funds is similar to the accounting in the general fund. e. Permanent funds usually have donor restrictions. Which of the following is NOT true about permanent funds? a.The principal of permanent funds is usually required to be preserved. b.The income from permanent funds is usually allowed to be spent for the benefit of the governmental entity and its citizens. c.Permanent funds are accounted for in the general fund. d. The accounting for permanent funds is similar to the accounting in the general fund. e. Permanent funds usually have donor restrictions.

31. 18-31 Learning Objective 5 Understand and explain how governmental funds are reported and rules for separate reporting as major funds. Understand and explain how governmental funds are reported and rules for separate reporting as major funds.

32. 18-32 Governmental Funds Financial Statements  Required financial statements 1. The Governmental Funds Balance Sheet 2. The Governmental Statement of Revenues, Expenditures, and Changes in Fund Balance.  These statements are prepared for each individual governmental fund These individual fund statements are the foundation for the financial statements prepared for the governmental entity.

33. 18-33 Governmental Funds Financial Statements  Major funds must be reported in separate columns  GASB 34 specifies that the general fund is always a major fund.  Major funds: revenues, expenditures or expenses, assets, or liabilities >= 10% of the total for their fund category or type (governmental or enterprise) and 5% of the aggregate amount for all governmental and enterprise funds  Nonmajor funds are Aggregated and reported in a separate column (labeled “other governmental funds”).

34. 18-34 Practice Quiz Question #5 Which of the following is NOT true about governmental reporting? a.The special revenues fund is always a major fund. b.Non-major funds are aggregated and reported in a single column. c.The general fund is always a major fund. d.Major funds are defined as those that constitute at least 10% of their fund category or 5% of all funds. Which of the following is NOT true about governmental reporting? a.The special revenues fund is always a major fund. b.Non-major funds are aggregated and reported in a single column. c.The general fund is always a major fund. d.Major funds are defined as those that constitute at least 10% of their fund category or 5% of all funds.

35. 18-35 Learning Objective 6 Make calculations and record journal entries for enterprise funds.

36. 18-36 The Proprietary Funds: Enterprise Funds  Enterprise Funds account for activities that provide services primarily to the public Examples: Gas, electric, water utilities  Accounting like business accounting. Measurement focus on all economic resources and the accrual basis of accounting. Report fixed assets, which are depreciated, and long-term debt. Focus on income determination and capital maintenance.

37. 18-37 Practice Quiz Question #6 Which of the following statements is true about enterprise funds? a.The activities accounted for in enterprise funds primarily benefit other government units. b.The accounting for enterprise funds is similar to the accounting for businesses. c. Enterprise never report long-term assets or depreciation. d. A maintenance service center for public busses other city vehicles is an example of an activity accounted for in an enterprise fund. Which of the following statements is true about enterprise funds? a.The activities accounted for in enterprise funds primarily benefit other government units. b.The accounting for enterprise funds is similar to the accounting for businesses. c. Enterprise never report long-term assets or depreciation. d. A maintenance service center for public busses other city vehicles is an example of an activity accounted for in an enterprise fund.

38. 18-38 Learning Objective 7 Understand and explain the financial reporting of proprietary funds.

39. 18-39 The Financial Statements of Proprietary Funds  Financial statements for the proprietary funds Can be major funds If a governmental entity has more than one enterprise fund, each must be individually assessed Must meet either the 10 percent criterion or the 5 percent criterion.

40. 18-40 The Financial Statements of Proprietary Funds  The financial statements for proprietary funds are very similar to those for commercial entities 1.The statement of net assets (balance sheet) 2.The statement of revenues, expenses, and changes in fund net assets (income statement) 3.The statement of cash flows  Budgeting in the proprietary funds also has the same role as in commercial entities

41. 18-41 The Financial Statements of Proprietary Funds  Statement of net assets Proprietary funds report their own fixed assets, investments, and long-term liabilities GASB 34 specifies that the net assets section be separated into three components: 1.Invested in capital assets, net of related debt 2.Restricted because of restrictions beyond the government’s control 3.Unrestricted

42. 18-42 The Financial Statements of Proprietary Funds  Statement of Revenues, Expenses, and Changes A separation of operating and nonoperating revenues and expenses is made to provide more information value regarding the operations of the proprietary funds.

43. 18-43 The Financial Statements of Proprietary Funds  Statement of Cash Flows Because of the large number of capital asset acquisition and financing transactions, the GASB specified four sections: 1.Cash flows from operating activities 2.Cash flows from noncapital financing activities 3.Cash flows from capital and related financing activities 4.Cash flows from investing activities

44. 18-44 Practice Quiz Question #7 Which of the following statements is true about the financial reporting of proprietary funds? a.The financial statements are identical to those of the general fund. b.Proprietary funds do not need to meet the 10% or 5% tests to be major funds. c.Enterprise funds are always major funds. d. Internal service funds are not required to provide a statement of cash flows. e. Proprietary funds provide financial statements very similar to those of commercial businesses. Which of the following statements is true about the financial reporting of proprietary funds? a.The financial statements are identical to those of the general fund. b.Proprietary funds do not need to meet the 10% or 5% tests to be major funds. c.Enterprise funds are always major funds. d. Internal service funds are not required to provide a statement of cash flows. e. Proprietary funds provide financial statements very similar to those of commercial businesses.

45. 18-45 Learning Objective 8 Make calculations and record journal entries for internal service funds.

46. 18-46 The Proprietary Funds: Internal Service Funds  Purpose: to account for activities that provide services solely to other departments.  These services are not available to the general public, making it different from the enterprise fund.  Accounting like business accounting. Measurement focus on all economic resources and the accrual basis of accounting. Report fixed assets, which are depreciated, and long-term debt.

47. 18-47 Practice Quiz Question #8 Which of the following an example of an activity that would be accounted for in an internal service fund? a.A public swimming pool. b.A municipal golf course with a club house used for weddings and other public gatherings. c.A maintenance department that provides services to various government offices. d. A state beach or park. e. A city recreation center with weight rooms, a workout facility, and a pool available to citizens of the community. Which of the following an example of an activity that would be accounted for in an internal service fund? a.A public swimming pool. b.A municipal golf course with a club house used for weddings and other public gatherings. c.A maintenance department that provides services to various government offices. d. A state beach or park. e. A city recreation center with weight rooms, a workout facility, and a pool available to citizens of the community.

48. 18-48 Learning Objective 9 Make calculations and record journal entries for trust funds.

49. 18-49 The Fiduciary Funds  Two categories (four types of funds) Trust Funds Pension (and other employee benefit) Trust Funds Investment Trust Funds Private-Purpose Trust Funds Agency Funds

50. 18-50 The Fiduciary Funds: Trust Funds  Purpose: to account for the investing and using of money in accordance with stipulated provisions of trust indenture agreements or statutes. Pension (and other employee benefit) Trust Funds Investment Trust Funds (created by GAS 31) Private-Purpose Trust Funds

51. 18-51 The Fiduciary Funds: Trust Funds  Private-purpose Trust Funds account for property held under trust arrangements which benefit: Individuals Private organizations Other governments

52. 18-52 The Fiduciary Funds: Trust Funds  Trust funds use the accrual basis of accounting.  Financial statements required: The statement of fiduciary net assets includes all trusts and agency funds the statement of changes in fiduciary net assets. includes only the trust funds because agency funds do not have a net asset balance.

53. 18-53 Practice Quiz Question #9 Which of the following is NOT true trust funds? a.Trust funds use the accrual basis of accounting. b.Trust funds can account for money that belongs to employees. c. Trust funds are not required to provide financial statements. d. Pension funds are an example of a trust fund. Which of the following is NOT true trust funds? a.Trust funds use the accrual basis of accounting. b.Trust funds can account for money that belongs to employees. c. Trust funds are not required to provide financial statements. d. Pension funds are an example of a trust fund.

54. 18-54 Learning Objective 10 Make calculations and record journal entries for agency funds.

55. 18-55 The Fiduciary Funds: Agency Funds  Agency Funds serve as conduits for the transfer of money. This role is purely custodial in nature.  Since the assets belong to someone else, assets always equal liabilities.  The following items do not exist for agency funds: A fund balance/equity An operating statement A = L

56. 18-56 The Fiduciary Funds: Agency Funds  Agency funds account for resources held by a governmental unit as a custodial agent for individuals, private organizations, other funds, or other governmental units.  Agency funds use the accrual basis of accounting.  The financial statement for agency funds is the statement of fiduciary net assets.

57. 18-57 Practice Quiz Question #10 Which of the following is a good example of an activity that would be accounted for in an agency fund? a.A public parking lot available to all citizens that charges a fixed daily or monthly rate. b.A county tax assessment agency that collects property taxes for all cities in the county. c.A county owned ski resort that is available to both county residents and non- residents. d.A public water utility providing services to all residents of the county. Which of the following is a good example of an activity that would be accounted for in an agency fund? a.A public parking lot available to all citizens that charges a fixed daily or monthly rate. b.A county tax assessment agency that collects property taxes for all cities in the county. c.A county owned ski resort that is available to both county residents and non- residents. d.A public water utility providing services to all residents of the county.

58. 18-58 Learning Objective 11 Understand and explain the preparation of government-wide financial statements.

59. 18-59 The Government Reporting Model  GASB 34 specifies the reporting model  What organizations comprise the reporting entity? The primary government A component unit for which the primary government is financially accountable Any organization that has a significant relationship with the primary government

60. 18-60 The Government Reporting Model  What constitutes financial accountability? Financial accountability is evidenced when the primary government appoints a majority of the organization’s governing board. Financial accountability may also exist if the organization has a separately elected or appointed board but fiscally depends on the primary government for the financial resources required to operate.

61. 18-61 The Government Reporting Model  What other organizations should be included in the reporting entity? GASB 14 specifies a third category of organizations to be evaluated to determine if they are part of the reporting entity with the primary government. These are legally separate, tax-exempt entities for which the primary government is not financially accountable.

62. 18-62 The Government Reporting Model  How should the financial results of the component units be reported? A choice between two methods: Discrete presentation in a separate column of the primary government’s financial statements Blended presentation by combining the organization’s results into the primary government’s financial results

63. 18-63 The Government Reporting Model  The Comprehensive Annual Financial Report (CAFR)  The CAFR Government-wide statements (2) Fund-based statements (7)

64. 18-64 The Government Reporting Model  Two government-wide statements: The Statement of Net Assets includes all GCA and GLTL. The Statement of Activities includes depreciation expense.  Presented on the accrual basis.  Measure the flow of economic resources Like statements for a commercial enterprise.  These two statements are presented in addition to the 7 Fund-Based Financial Statements.

65. 18-65 The Government Reporting Model  The two government-wide statements must distinguish between: 1.Governmental activities and 2.Business-type activities.  The total primary government must be discretely presented in addition to the component units reported in separate columns.  Fiduciary activities are excluded from the government-wide statements if their resources are not available to finance the government’s programs.

66. 18-66 The Government Reporting Model  Important features of the government-wide Statement of Net Assets: Reports all “general capital assets”—including infrastructure. Reports all debt—including GLTL. Reports net assets in 3 categories: 1.Invested in capital assets, net of related debt 2.Restricted 3.Unrestricted In general, interfund balances (loans, advances, and due to and due from accounts) are eliminated.

67. 18-67 The Comprehensive Annual Financial Report

68. 18-68 Government-wide Statement of Net Assets

69. 18-69 Government-wide Statement of Activities

70. 18-70 Practice Quiz Question #11 Which of the following is NOT true about the CAFR? a.Government-wide financial statements are similar to the balance sheet and income statement disclosed by businesses. b.Government-wide financial statements are based on the modified accrual basis of accounting. c.Since governments provide the two government-wide financial statements, they are not required to provide fund statements. d.Governmental reporting requires a government-wide statement of cash flows. Which of the following is NOT true about the CAFR? a.Government-wide financial statements are similar to the balance sheet and income statement disclosed by businesses. b.Government-wide financial statements are based on the modified accrual basis of accounting. c.Since governments provide the two government-wide financial statements, they are not required to provide fund statements. d.Governmental reporting requires a government-wide statement of cash flows.

71. 18-71 Learning Objective 12 Understand and explain the additional disclosures that accompany government-wide financial statements. Understand and explain the additional disclosures that accompany government-wide financial statements.

72. 18-72 The Government Reporting Model  Reconciliation schedules Required to reconcile the net change in the total amounts reported on the governmental funds statements with the amounts reported on the government-wide statements Reconciliation schedule for Statement of Net Assets Reconciliation schedule for Statement of Activities  Budgetary comparison schedule This should be presented as required supplementary information for the general fund and for each special revenue fund that has a legally adopted annual budget.

73. 18-73 The Government Reporting Model  Management’s Discussion and Analysis MD&A should be included in the required supplementary information of the government- wide financial statements to provide an analytical overview of the government’s financial and operating activities.  Notes to the government-wide financial statements GASB 34 specified a number of required note disclosures.

74. 18-74 The Government Reporting Model  Interim reporting Governmental entities generally are not required to publish interim reports, although many prepare monthly or quarterly reports Internal management control instrument  Auditing governmental entities Most entities are audited annually Different from the audit of a commercial entity Single Audit Act of 1984

75. 18-75 Additional Considerations  Special-purpose governmental entities  Financial reporting for pensions and OPEB plans  Employer accounting for pensions and OPEB plan benefits  Accounting for termination benefits

76. 18-76 Practice Quiz Question #12 Which of the following is true about required supplemental disclosures of governmental entities? a.Governments are autonomous and need not provide any specific disclosures. b.The CAFR must include management discussion and analysis. c.No one reads governmental financial reports, so it doesn’t really matter what is disclosed. d.Governments must provide quarterly interim reports as part of the CAFR. Which of the following is true about required supplemental disclosures of governmental entities? a.Governments are autonomous and need not provide any specific disclosures. b.The CAFR must include management discussion and analysis. c.No one reads governmental financial reports, so it doesn’t really matter what is disclosed. d.Governments must provide quarterly interim reports as part of the CAFR.

77. Conclusion The End 18-77