Accounting for State and Local Governments (Part 1) Chapter Eleven Accounting for State and Local Governments (Part 1)

Governmental Accounting Focuses on financial reporting for non-profit governmental agencies. Many concepts are similar to financial accounting, but terminology and procedures differ. Governmental Accounting Standards Board (GASB) generates standards.

Governmental Accounting User Needs In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: Citizenry Legislative and oversight bodies Investors and creditors

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

Reporting Diverse Governmental Activities - Fund Accounting Governmental units have many different types of activities. No common motivation links these activities. Therefore, each activity operates quasi-independent, self-balancing sets of accounts called funds. Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions

Accountability and Governmental Accounting Governmental Accounting Statements attempt to answer 3 questions related to accountability: Where did the financial resources come from? What amount of financial resources is presently held? Where did the financial resources go?

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

Fund Accounting Classification Governmental Funds Let's Talk About Each Fund

Governmental Funds General Fund Used to account for all financial resources except those accounted for in other funds. In 2001, 60% of Baltimore’s governmental funds were accounted for in the General Fund.

Governmental Funds Special Revenue Fund Expenditures are legally restricted. Revenues that must be spent for specific purposes. St. Paul, MN, requires that money received for the sale of zoo animals, must be spent to acquire NEW animals for the zoo.

Governmental Funds Capital Projects Fund Used to account for costs to acquire or build major governmental facilities. The asset is not recorded in this account, but the funds to acquire or build it are accounted for here.

Governmental Funds Debt Service Fund Used to account for financial resources collected to pay long-term liabilities and interest. In 2001, Birmingham reported paying out $11 million in principal payments and $15 million in interest from its debt service funds.

Governmental Funds Permanent Fund (Endowments) Used to account for funds donated to the government by external donors. In 2001, Dallas reported nearly $8 million in funds donated to take care of city parks.

Fund Accounting Classification Proprietary Funds

Proprietary Funds Enterprise Fund Used to account for any government activity that is financed by user charges. An activity MUST be accounting for here if, any one of the conditions below are met . . . The the law requires costs to be recovered from user fees. Net revenues provide the security for the activity’s debts. Fees are set high enough to recover costs..

Proprietary Funds Internal Service Fund Used for any unit that provides services to the OTHER governmental departments. Inter-departmental fees are charged. Tennessee Tech University charges the departments for the use of University vehicles.

Fund Accounting Classification Fiduciary Funds

Coverage of Fund Accounting Procedures

Let’s look at an overview of the Government-Wide Statements.

Government-Wide Financial Statements Two separate statements are required: Statement of Net Assets & Statement of Activities The economic resources measurement focus requires reporting of ALL assets and liabilities.

Statement of Net Assets Exh. 11-1 Note that we keep the Governmental Activities separate from the Business-Type Activities.

Statement of Net Assets Exh. 11-1 Also note that this statement does not give information about Fiduciary Funds This is consistent with the economic resources management focus which only includes assets and liabilities that are available to use for governmental purposes.

Statement of Activities Exh. 11-2 The net for a given function is determined horizontally, while the totals for expenses and revenues are determined vertically.

Statement of Activities Exh. 11-2 The general revenues are shown separately at the bottom of the statement.

Now, let’s look at an overview of the Fund-Based Statements.

Fund-Based Financial Statements Two separate statements are required: Balance Sheet & Statement of Revenues, Expenditures, and Changes in Fund Balance Fund-Based statements include information on fiduciary funds.

Fund-Based Financial Statements These statements will differ from the Government-Wide financial statements for three reasons. The proprietary funds are reported in a separate statement. The current financial resources measurement basis is used. The modified accrual accounting approach is used. 3

Fund Accounting Balance Sheet Example Exh. 11-3

Fund Accounting Balance Sheet Example Exh. 11-3 Internal Service Funds are included in separate statements for Proprietary Funds. The “current financial resources” measurement is used. Modified accrual accounting is used.

Fund Accounting Balance Sheet Example Exh. 11-3 Two criteria determine whether a fund is classified as “major”: Total assets, liabilities, revenues, or expenditures are at least 10% of the corresponding total for all funds of the same category. Total assets, liabilities, revenues, or expenditures are at least 5% of the corresponding for all other funds combined. Note that the statement has a separate column for the General Fund and for each fund identified as a “major” fund.

Statement of Revenues, Expenditures, & Changes in Fund Balances - Example Exh. 11-4 Continue

Statement of Revenues, Expenditures, & Changes in Fund Balances - Example Exh. 11-4

Let’s look at the accounting procedures for the Governmental Accounts for both the Fund-Based and Government-Wide Statements.

Recording Budgetary Entries Purposes of the budget, per the GASB: Expresses public policy. Serves as an expression of financial intent. Provides control by establishing spending limits. Offers a means of evaluating performance. Budget information for the General Fund and for each of the major Special Funds must be presented.

Recording Budgetary Entries For example, assume a town enacts a motel excise tax to promote tourism and conventions. For 2004, the tax is expected to generate $490,000 in Special Revenues. Of the total, $200,000 is designated for salaries, $30,000 for utilities, $80,000 for advertising, and $90,000 for supplies. Prepare the journal entry to record the Special Revenue Fund budget.

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”. Budget Encumbrance Actual

Encumbrances For Fund-Based Financial Statements: An entry is required to record the encumbrance. An entry is required when the bill is received. For Government-Wide Financial Statements: No entry is required to record the encumbrance.

Encumbrances – Example Fund-Based Statements Drye Township has budgeted office supplies for $180,000 for 2004. On May 15, Drye Township places an order for $16,000 office supplies with Ye Olde Office Supplies. Remember, this entry is only recorded for Fund-Based Financial Statements. Record the order in Drye Township’s books.

Encumbrances – Example Fund-Based Statements On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16, and the city was given the sale price). Record the receipt of the supplies in Drye Township’s books for the Fund-Based Statements. This is the account title typically used in governmental accounting in place of Accounts Payable.

Encumbrances – Example Government-Wide Statements On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16, and the city was given the sale price). Record the receipt of the supplies in Drye Township’s books for the Government-Wide Statements. Note that with the Government-Wide Financial Statements, no entry is necessary for the encumbrances used with the Fund-Based Statements.

Fund-Based Statements Fixed Assets While the expenditure for a fixed asset is usually recorded in the General Fund . . . . . . the fixed asset itself is recorded in the General Fixed Assets Account Group. Depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units.

Government-Wide Statements Fixed Assets Historically, recording of fixed assets in the General Fixed Assets Account Group was optional. GASB Statement No. 34 requires a record of ALL capital assets in the Statement of Net Assets in the government-wide statements. Depreciation expense is recorded. Governments have 4 years to capitalize previously acquired assets.

Recognition of Revenues Nonexchange Transactions Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions For Government-Wide Statements, record the revenues at the “time of eligibility”. For Fund-Based Statements, record the revenues when they become “available for recognition”.

Issuance of Bonds Government-Wide Financial Statements Increase the Cash and the Debt. Fund-Based Financial Statements Increase Cash and Other Financing Sources. Drye Township issues $50,000 in bonds for new sidewalks. Prepare the journal entry to record the bonds for government-wide statements.

Issuance of Bonds Government-Wide Financial Statements Increase the Cash and the Debt. Fund-Based Financial Statements Increase Cash and Other Financing Sources. Drye Township issues $50,000 in bonds for new sidewalks. Prepare the journal entry to record the bonds for fund-based statements.

Payment of Long-Term Liabilities Government-Wide Financial Statements Record principle and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. Drye Township makes a $10,000 payment on a loan that includes $1,000 in interest. Prepare the journal entry to record the loan payment for government-wide statements.

Payment of Long-Term Liabilities Government-Wide Financial Statements Record principle and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. Drye Township makes a $10,000 payment on a loan that includes $1,000 in interest. Prepare the journal entry to record the loan payment for fund-based statements.

Ms. Chairperson, what fund should we charge your Paris trip to? End of Chapter 11 Ms. Chairperson, what fund should we charge your Paris trip to? Since I voted for a balanced budget, let’s charge it to the Debt Service Fund.