©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter 18 Governmental Entities: Other Governmental Funds and Account Group

2 Scope of the Chapter To describe and illustrate the accounting and reporting of Governmental funds other than General Fund Accounting and reporting for account groups

3 Types of other Governmental Funds Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds

4 Types of Account Groups a.General capital assets account group b.General long-term debt account group Capital leases Special assessment bonds

5 Other Governmental Fund incorporates many Accounting Standards of General Fund Modified accrual basis of accounting is appropriate for all governmental funds Recording budget is applicable to Special revenue funds and may be useful for other funds. Recording of Encumbrance accounting is appropriate for all funds.

6 Special Revenue Funds Such Funds are established to account for revenues and expenditures earmarked for specified governmental operations or are legally restricted for specific purposes. Examples are Sales tax, Empowerment zones, Gasoline tax, Parking Fees, Rubbish collection, Traffic violation fines etc.

7 Special Revenue Funds Budgetary processes for Special Revenue Fund are similar to those of general fund. All accounting entries, Ledger accounts and Financial reports for a special revenue fund are the same as those for the general fund. Closing entries are similar to those of general fund.

8 Capital Projects Funds Established for the construction or purchase of significant fixed assets. Funds record the receipt and payment of cash for the construction of plant assets of a governmental entity other than those financed by proprietary funds or trust funds.

9 Capital Projects Funds Examples are: - Municipal stadium - County courthouse - Constructions of special assessment projects (such as streets and street lights etc) Resources and Accounting This fund accounts for the proceeds received from the sale of general obligation bonds or grants from other governmental units to finance construction or purchase of major capital facilities. Resources may also come from grants or shared revenues or from current tax revenue of general fund.

10 Capital Budget for Capital Projects Funds A capital budget is the control device appropriate for a capital projects fund. Capital budget deals with both the authorized expenditures for the project and the bond proceeds or other financing sources for the project.

11 Budgetary control for Capital Projects Funds Budgetary accounting is essential where numerous construction projects are financed through a capital projects fund Projects are constructed by government’s labor force. Projects adequately controlled by contracts with contractor, formal budgetary accounting might not be necessary.

12 Revenues and other financing for Capital Projects Funds Bond Issuance Bond liability is not recorded in the capital project fund. Bond issue proceeds is presented on the statement and expenditure as other financing sources. Government grants Reported as Revenue when earned General fund contributions Reported as Other Financing Sources Short term borrowing Reported as Current Liabilities

13 Example of Bond Issue: Assume that a bond issue for $600,000 was authorized to build a new government building. To record the bond proceeds in capital project fund Dr Cash610,000 CrOther Financial sources-bond issue proceeds600,000 CrPremium on Bonds 10,000 To record transfer of premium to debt service fund Dr Transfer to debt service fund 10,000 CrCash 10,000 Proceeds may be invested. (assume 600,000 invested in CD that earned 60,000 ) Dr Investment in CD600,000 CrCash 600,000 To record interest revenue earned on investment Dr Cash 60,000 CrRevenue 60,000

14 Journal entries for Capital Projects Fund Encumbrances are recorded. Closing Entries at year end. Budget if recorded in the beginning, is closed at year end. Actual activity is closed at year end to Unreserved and Undesignated Fund Balance account. Encumbrances are closed at year end. On Completion of the Project, the Capital Project Fund is terminated by a transfer of any unused cash to Debt Service Fund or General Fund as appropriate. This is called a residual equity transfer.

15 Financial Statements for Capital Projects Fund (Same financial statements as General fund) The capital projects fund merely acts as an asset account, recording project resources received and expending the amounts to complete the project. Actual payment of principal and interest on the long-term debt is made from the debt service fund

16 Debt Service Fund (created for) Created to account for – Accumulation of resources (cash and investments) and – Payment of interest and principal on “long term general obligation debt” (not recorded by the general fund or by a relevant enterprise fund)

17 Debt Service Fund (types of bonds) Two types of of general obligation bonds recorded here 1. Serial bonds : Principal payable in annual installments over the term of the bond issue. 2. Term bonds : Principal payable in total on maturity date. (Generally proceeds of sinking fund)

18 Debt Service Fund Budgetary processes for Debt Service Fund are similar to those of general fund. Encumbrances are not applicable to the Debt service fund.

19 Debt Service Fund (resources) This fund’s resources are derived from allocated portions of taxes or receipt or transfer from other fund. Entry – Dr Cash Cr Other financing sources or Cr Transfer from other fund

20 Debt Service Fund (investment income) Any income from the investment of resources is recorded as revenue. Entry DrCash Cr Revenue

21 Debt Service Fund (expenditures) Fund makes actual expenditures associated with the principal and interest on general obligation long term debt Entry when interest is legally due DrExpenditure Cr Cash

22 Debt Service Fund (closing entries) The budget, if created in the beginning, is closed at year end. (reverse for the same amount) Actual activity is closed to fund balance at year end.

23 Debt Service Fund (financial statements) Balance Sheet And Statement of Revenues,Expenditures and Changes in Fund Balance. (Budgeted amounts, actual amounts and variances from budgeted amounts are included in this statement)

24 General Capital Assets and General Long Term Account Groups Account groups are used to record capital (plant) assets and long term debt not recorded in Funds. They are memorandum accounts and not funds. Their purpose is to record entity’s plant assets and long term liabilities not recorded in on of the entity's fund.

25 General Capital Assets Account Group Plant assets are recorded in the General Capital Assets Account Group at their cost (fair value if donated) to Government Entity. The offsetting credit is to memorandum ledger account. Depreciation must be recorded in this Account Group.

26 General Long Term Debt Account Group General obligation bonds and other long term liabilities not recorded in any fund are recorded as memorandum credit here. The offsetting debit entry is to the Amount to be provided ledger account.

27 General Long Term Debt Account Group Also possibly recorded in the general long-term debt account group are – the noncurrent portion of claims, judgments, and compensated absences; – the noncurrent portion of a liability under a capital lease; – and – special assessment bonds for which the governmental entity is obligated in some manner. The general long-term debt account group is not a fund; it is a memorandum record only.

28 Capital Leases of Governmental Entities. If a capital lease is not recorded in a proprietary fund : – The property is recorded in the general capital assets account group and – The lease liability is recorded in the general long term debt account group.

29 Special Assessment Bonds (purpose) Sometimes are issued by a governmental entity to finance construction projects pending the receipt of special assessments payable in annual installments.

30 Special Assessment Bond (Reporting) Should be reported only if Government is obligated in some manner. If Government is not obligated in any manner should not be displayed in the government’s financial statements.

31 Special Assessment Bond (Reporting) Portion that will be repaid from property owner assessments should be reported as ‘special assessment debt with governmental commitment. Portion that will be repaid from general resources should be reported like other general long term liability. Portion that is related to and expected to be paid from proprietary funds should be reported as liabilities of those funds in the proprietary fund statement of net assets. All other should be reported general long term liabilities in the government-wide statement of net assets.