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18 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn An Introduction to Accounting for State and Local.

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Presentation on theme: "18 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn An Introduction to Accounting for State and Local."— Presentation transcript:

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2 18 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn An Introduction to Accounting for State and Local Governmental Units Chapter 18

3 18 - 2 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Learn about the historical development of accounting principles for state and local governmental units.

4 18 - 3 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn State and Local Governmental Units With the exception of the federal government, state and local governmental units constitute the largest single category of nonprofit organizations.

5 18 - 4 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Historical Development 1951 – The Municipal Finance Officers Association (MFOA) National Committee on Governmental Accounting) issued Municipal Accounting and Auditing. 1968 – Governmental Accounting, Auditing, and Finance Reporting (GAAFR, or Blue Book, succeeded Municipal Accounting and Auditing.

6 18 - 5 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Historical Development 1974 – The AICPA issued its industry audit guide, Audits of State and Local Governmental Units, in which it noted that GAAFR’s accounting and reporting principles constituted GAAP except when modified by the audit guide.

7 18 - 6 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Historical Development 1979 – The MFOA National Council on Governmental Accounting issued Governmental Accounting and Financial Reporting Principles, Statement 1. 1980 – AICPA issued Statement of Position 80-2 amending Audits of States and Local Government Units to recognize the principles of NCGA Statement 1 as GAAP.

8 18 - 7 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Accounting Foundation GASB FASB Historical Development (1984)

9 18 - 8 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Historical Development 1985 – Codification of Governmental Accounting and Financial Reporting Standards was issued. It integrated all NCGA and AICPA and all subsequent GASB pronouncements. It is revised annually.

10 18 - 9 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GAAP Hierarchy for State and Local Governmental Entities 1. GASB Statements and Interpretations 2. GASB Technical Bulletins 3. Consensus positions of GASB’s Emerging Issues Task Force (EITF) 4. Implementation Guides 5. Other accounting literature

11 18 - 10 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Define fund accounting and explain why it is used.

12 18 - 11 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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.

13 18 - 12 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Proprietary Fund Accounting Model Current Assets + Noncurrent Assets – Current Liabilities – Noncurrent Liabilities = Net Assets

14 18 - 13 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Governmental Fund Accounting Model Current Assets – Current Liabilities = Fund Balance Fund G Fund SRA = L + FB General FundLong-Term Assets Debt

15 18 - 14 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3 Perform transaction analysis using proprietary and governmental accounting models.

16 18 - 15 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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.

17 18 - 16 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Applying the Models – Transaction Analysis 6. Purchased computer equipment costing $2,800 for cash. 7. Sold a truck for $1,000. It was originally purchased three years ago for $18,000, had an estimated residual value of $1,200, and is fully depreciated. 8. Computed depreciation on the computer equipment for the year, $875.

18 18 - 17 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Applying the Models – Transaction Analysis Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net assets Current assets Current liabilities Fund Balance No. 1 +5,000 –5,000 +5,000 –5,000 No. 2 +2,500 +30,000 No. 3 +900 –900 +900 –900 No. 4Proprietary Fund Government Fund

19 18 - 18 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Applying the Models – Transaction Analysis Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net assets Current assets Current liabilities Fund Balance No. 5 +15,000 –15,000 No. 6 –2,800 +2,800 –2,800 +1,000 –1,200 –200 +1,000 No. 7 –875 No. 8Proprietary Fund Government Fund

20 18 - 19 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 4 Recognize various fund categories, as well as their measurement focus and basis of accounting.

21 18 - 20 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Proprietary Fund Types Internal service funds Enterprise funds

22 18 - 21 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Governmental Fund Types Special revenue funds Permanent funds Capital project funds Debt service funds General fund

23 18 - 22 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fiduciary (Trust and Agency) Fund Types Pension trust funds Investment trust funds Private- purpose trust funds Agency funds

24 18 - 23 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Applying the Model Using Specific Funds 1. Issued general obligation bonds, par value of $3,000,000, at 101 to finance construction of a government office building. 2. Transferred the premium on the bonds to the fund used to account for payment of principal and interest on the bonds. 3. Incurred and paid construction costs of $12,500 on the building.

25 18 - 24 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Applying the Model Using Specific Funds 4. Levied and collected sales taxes restricted to use for economic development, $6,000. 5. Paid general government employees’ salaries, $4,500. Another $500 of salaries accrued but has not been paid. 6. Borrowed $7,500 on a six-month note to finance general operating costs of the government.

26 18 - 25 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Applying the Model Using Specific Funds Current Current Fund No.Fund Assets Liabilities Balance 1Capital projects+ 3,030,000– 3,030,000 2aCapital projects – 30,000 – 30,000 2bDebt service + 30,000 + 30,000 3Capital projects – 12,500 – 12,500 4Special revenue + 6,000 + 6,000 5General – 4,500 + 500 – 5,000 6General + 7,500+ 7,500

27 18 - 26 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Bases of Accounting Accrual Modified Accrual Economic resources Measuring focus Flow of current financial resources

28 18 - 27 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Reporting In June 1999, the GASB issued GASB Statement No. 34, “Basic Financial Statements and Management’s Discussion and Analysis – for State and Local Governments.” The statement establishes standards for preparing government-wide financial statements and fund-level financial statements.

29 18 - 28 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Reporting Management’s discussion and analysis Government-wide financial statements Statement of net assets (accrual basis) Statement of activities (accrual basis) Fund financial statements Governmental funds Statement of net assets (modified accrual basis) Statement of revenues, expenditures, and changes in fund balances (modified accrual basis)

30 18 - 29 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn 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 funds Statement of net assets (accrual basis) Statement of changes in net assets (accrual basis)

31 18 - 30 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 5 Review basic governmental accounting principles.

32 18 - 31 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Revenue Recognition Revenue recognition within governmental entities is determined by the nature of the underlying transaction. GASB Statement No. 33, “Accounting and Financial Reporting for Nonexchange Transaction,” characterizes revenue transactions.

33 18 - 32 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Government-mandated nonexchange transactions Voluntary nonexchange transactions Imposed nonexchange transactions Derived tax revenues Revenue Recognition GASB Statement No. 33 established four categories of nonexchange transactions.

34 18 - 33 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Expense and Expenditure Recognition Expenses reflect the cost of assets or services used by an entity. Expenditures typically reflect the use of governmental fund working capital. Expenditures normally reflect the cost of goods or services acquired during a period and the maturing of general long-term debt principal.

35 18 - 34 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Interfund Activity Loans Transfers Reimbursements

36 18 - 35 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Role of the Budget 20032004200520062007 Capital Program 2003 Capital Budget 2003 Operating Budget 2003 Current Budget

37 18 - 36 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn The Financial Reporting Entity GASB Statement No. 14, “The Financial Reporting Entity,” explains that the financial reporting entity is made up of the primary government and its component units. Each state and general-purpose local government is a primary government.

38 18 - 37 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Primary Governments Separately elected governing body Legally separated Fiscally independent

39 18 - 38 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Component Units These are legally separate organizations for which the primary government is financially accountable. Blending Discrete Presentation

40 18 - 39 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 6 Learn about the contents of a governmental entity’s comprehensive annual financial report under GASB 34.

41 18 - 40 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accountability Operational accountability measures the extent of a government’s success at meeting operating objectives efficiently and effectively and its ability to meet operating objectives in the future. Fiscal accountability is the responsibility of a government to demonstrate compliance with public decisions.

42 18 - 41 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Prior to GASB 34 General purpose financial statements were prepared using the appropriate basis of accounting. The combined balance sheet included columns for each fund type.

43 18 - 42 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn CAFR Major Sections Table of contents Letter of transmittal List of officers Organizational chart

44 18 - 43 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn CAFR Major Sections Management’s discussion and analysis Auditor’s report Government-wide financial statements Fund financial statements

45 18 - 44 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn CAFR Major Sections Statistical tables

46 18 - 45 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Section Management’s discussion and analysis is required supplementary information (RSI) that is presented before the financial statements. The Board requires that MD&A precede the statements.

47 18 - 46 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Section Governmental and proprietary funds are consolidated and reported in a single set of government-wide financial statements. Statement of net assets Statement of net assets Statement of activities Statement of activities

48 18 - 47 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Statement of Net Assets City of Davie Statement of Net Assets December 31, 2003 Primary Government Governmental Activities Business ActivitiesTotal Assets (Liabilities) Net Assets

49 18 - 48 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Statement of Activities ExpensesRevenuesNet Functions Primary Government Governmental Activities Function 1 Function 2 Business Type Activities Activity 1

50 18 - 49 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fund Financial Statements Governmental funds Proprietary funds Fiduciary funds

51 18 - 50 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn General fund Each major governmental fund Total funds All nonmajor governmental funds Major Fund Reporting

52 18 - 51 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Each major enterprise fund All non-major enterprise funds All internal service funds Total Major Fund Reporting

53 18 - 52 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Conversion Fund-based statement Government-wide statements

54 18 - 53 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Other Issues Budgetary comparisons Required supplemental information Notes to the financial statements Infrastructure Combining and individual fund statements

55 18 - 54 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 18

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