11-1 Chapter Eleven Accounting for State and Local Governments, Part I McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

11-2 Government-wide Financial Statements GASB Statement No. 34 Requires the production of two sets of statements: Fund-Based Financial Statements Report all revenues and costs of providing services each year and all resources available to the governmental unit. Show restrictions on the use of resources, and measures, in the short term, revenues and expenditures from certain activities.

Important Difference in Focus  Fund-based financial statements  Focus on specific activities  Primary measurement focus is on flow and amount of current resources  Utilize modified accrual accounting  Assess fiscal accountability  Government-wide financial statements  Report on activities as a whole  Assess operational accountability  Focus on all economic resources  Utilize accrual accounting  Comparable to ‘corporate’ accounting 11-3

Governmental Funds Accounting for activities related to serving the public. Proprietary Funds Accounting for business- type activities. Fiduciary Funds Accounting for financial resources held for others as trustee. Fund Accounting Classification All funds fall into one of three broad classifications. 11-4

Governmental Funds - General Fund  Used to account for all financial resources except those accounted for in other funds.  In 2008, 58% of Baltimore’s governmental funds (over $1.2 Billion) were accounted for in the General Fund.  Used to account for all financial resources except those accounted for in other funds.  In 2008, 58% of Baltimore’s governmental funds (over $1.2 Billion) were accounted for in the General Fund. 11-5

Governmental Funds - Special Revenue Fund  Expenditures are legally restricted.  Resources must be spent for specific purposes.  St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.”  Expenditures are legally restricted.  Resources must be spent for specific purposes.  St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.” 11-6

Governmental Funds - Capital Projects Fund  Accounts for costs incurred to acquire or build major governmental facilities.  The actual asset is not recorded in this account, but the money to finance its purchase or construction is.  Accounts for costs incurred to acquire or build major governmental facilities.  The actual asset is not recorded in this account, but the money to finance its purchase or construction is. 11-7

Governmental Funds - Debt Service Funds  Record financial resources accumulated to pay long-term liabilities and interest when due.  Does not account for the actual debt  In 2008, Birmingham, Alabama, reported paying out $16 million in principal payments and $17 million in interest payments from its debt service funds. 11-8

Governmental Funds - Permanent Funds (Endowments)  Account for assets donated to the government by external donors with stipulation that the principal cannot be spent.  In 2008, Dallas, Texas reported nearly $9 million in funds to maintain four different parks. 11-9

Proprietary Funds - Enterprise Funds  May be used to account for any government activity that is financed, at least in part, by user charges.  An activity MUST be accounted for here if, any one of the conditions below are met...  Costs are recovered from user fees  Fees are set high enough to recover costs  Net revenues generated by the activity provide the sole security for the activity’s debts  May be used to account for any government activity that is financed, at least in part, by user charges.  An activity MUST be accounted for here if, any one of the conditions below are met...  Costs are recovered from user fees  Fees are set high enough to recover costs  Net revenues generated by the activity provide the sole security for the activity’s debts 11-10

Proprietary Funds - Internal Service Funds  Account for any operation that provides services to OTHER governmental departments.  Inter-departmental fees are charged on a cost-reimbursement basis.  Accounted for similar to for-profit operations in the private sector.  Account for any operation that provides services to OTHER governmental departments.  Inter-departmental fees are charged on a cost-reimbursement basis.  Accounted for similar to for-profit operations in the private sector

Fiduciary Funds   Investment Trust   Investments held on behalf of others   Private-Purpose Trust   Principal and interest are both for the benefit of parties outside the government   Pension Trust   Employee retirement   Agency Funds   Any resources held by the government as an agent for others (some taxes and tolls fall into this category)   Investment Trust   Investments held on behalf of others   Private-Purpose Trust   Principal and interest are both for the benefit of parties outside the government   Pension Trust   Employee retirement   Agency Funds   Any resources held by the government as an agent for others (some taxes and tolls fall into this category) Account for assets that are held in a Trustee Capacity for External Users 11-12

11-13 Government-Wide Financial Statements Two statements are required: 1) 1)Statement of Net Assets 2) 2)Statement of Activities Two statements are required: 1) 1)Statement of Net Assets 2) 2)Statement of Activities Reporting is separated into governmental activities (government funds and most internal service funds) and business-type activities (enterprise funds and remaining internal service funds).

11-14 Fund-Based Financial Statements Fund-Based statements will include information on fiduciary funds. Two statements are required: 1) 1)Balance Sheet 2) 2)Statement of Revenues, Expenditures, and Changes in Fund Balance Two statements are required: 1) 1)Balance Sheet 2) 2)Statement of Revenues, Expenditures, and Changes in Fund Balance

Fund-Based Financial Statements These statements will differ from the Government- Wide financial statements for three reasons.  The Internal Service Funds are included in separate statements for Proprietary Funds.  The current financial resources measurement basis is used.  The modified accrual accounting approach is used

Procedures – Importance of Budgets  The budget serves several purposes:  Expresses public policy  Expresses financial intent  Provides spending limits  Compares actual results to the budget as a means of evaluating performance  Indicates proposed deficits  The budget is recorded in the books as a DEBIT to estimated revenues, and a CREDIT to each “appropriation” approved

Budget Encumbrance Actual Procedures – Encumbrances  In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities.  A recorded commitment or contract is called an “encumbrance.” 11-17