Accounting for State & Local Governments, I Chapter 11 Accounting for State & Local Governments, I

Objectives of Gov. Reporting SGAC 1 Government financial reports should respond to needs of the citizenry, their representatives, and investors and creditors involved in the lending process Four uses of financial reports Compare actual financial results with the legally adopted budget Assess financial condition and results of operations Determine compliance with finance-related laws, rules and regulations Evaluate efficiency and effectiveness Stresses accountability

Government’s Accountability Fiscal Accountability: to justify that its actions comply with public decisions about obtaining and expending public resources in current year. Operational Accountability: to report how efficiently and effectively it achieves its objectives using available resources. Interperiod equity: Whether financial resources are sufficient for the services rendered in each period. current tax payers’ vs future tax payers’ obligation available for economic, political, and social decision-making

Corporate and Governmental Accounting Systems Corporate Accounting 1 reporting entity, 1 accounting entity Accrual accounting system Measuring economic resources Governmental Accounting 1 reporting entity, many accounting entities GASB No.14: Primary government and its component units Primary Government: separately elected body, legally separated, and fiscally independent Fund accounting system Measuring flow of financial resources Profit Motive Revenue & cost of providing services, Inflow & outflow of all resources

GASB Statement No. 34 (1999) Requires the production of two sets of financial statements: Fund Financial Statements Government-wide Financial Statements Show restrictions on the use of resources, and report current revenues and expenditures from certain activities. Report all revenues and costs with a long term focus. Of interest to creditors, to assess the likelihood of being paid. 11-5

Important DIfferences Fund Financial Statements Government-wide Financial Statements individual activities. current financial resources fiscal accountability in raising and utilizing money. modified-accrual accounting. a whole. operating accountability all economic resources. accrual accounting. Help users evaluate government’s financial decisions and its long-term stability. 11-6

Fund Accounting Classification 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 as trustee. 11-7

Various Fund Types. Governmental Funds Proprietary Funds Fiduciary Funds General Fund Enterprise Fund Pension Trust Fund Capital Project Fund Internal Service Fund Investment Trust Fund Special Revenue Fund Private-purpose Fund Debt Service Fund Agency Fund Permanent Fund MC4 (p.420) a

Fund Structure Fund Resources from Resources for General Income tax, fees administration Special Revenue Gov. grants, special taxes Particular operation specified by rules Capital Project Specific project proceeds acquisition of infra structure Debt Service Other funds, interest earned on investment Payment for interest and principal Permanent Earnings from trust, legal agreements As specified by trust agreement Enterprise Revenues from customers Business activities Internal service Charges to other city department Operating expense, capital expenditure….

Two statements are required: Government-Wide F/S Two statements are required: Statement of Net Assets 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). 11-10

Statement of Net Assets Note: The Statement of Net Assets reports Governmental Activities separate from the Business-Type Activities. 11-11

Statement of Net Assets Also note this statement does not give information about Fiduciary Funds. This is consistent with the “economic resources management focus” -- only include assets and liabilities that are available to use for governmental purposes. 11-12

Statement of Activities On the Statement of Activities, the net for a given function is determined horizontally, while the totals for expenses and revenues are determined vertically. 11-13

Statement of Activities The general revenues are shown separately at the bottom of the statement. 11-14

Fund Financial Statements Two statements are required: Balance Sheet Statement of Revenues, Expenditures, and Changes in Fund Balance Fund-Based statements will include information on fiduciary funds. 11-15

Fund 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. 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. 11-16

Fund Accounting – Balance Sheet Example Separate column for each “major” fund (where a fund total > 10% of all funds in the same category, or > 5% of all funds). Separate column for each “major” fund (where a fund total > 10% of all funds in the same category, or > 5% of all funds). 11-17

Statement of Revenues, Expenditures, & Changes in FB Also reports each “major” fund (where a fund total > 10% of all funds in the same category, or > 5% of all funds) in separate columns. Also reports each “major” fund (where a fund total > 10% of all funds in the same category, or > 5% of all funds) in separate columns. 11-18

Statement of Revenues, Expenditures, & Changes in FB Statement continued. . . Statement continued. . . 11-19

Governmental Activities Issued general obligation bonds, par value of $300 at101 to finance a Gov. office construction Fund ? CA = CL + FB 2. Transferred the premium to the fund for repaying liability. Fund ? CA = CL + FB CPF 303 CPF -3 - 3 DSF +3

Governmental Activities 3. Incurred and paid construction costs of $100 on the building (10yr life, residual val=0) Fund ? CA = CL + Fund Balance 4. Received $100, a federal grant for the building construction. Fund ? CA = CL + Fund Balance CPF -100 CPF +100

Governmental Activities 5. Paid general government employees’ salaries, $45. Another $5 of salaries accrued but has not been paid Fund ? CA = CL + Fund Balance 6. Borrowed $75 on a six-month note to finance general operating costs of the government. Fund ? CA = CL + Fund Balance GF - 45 +5 -50 GF 75

Government Acctg Cycle Budgetary Entry Estimated Revenues <-->Appropriation Execution Taxes Receivable Taxes Revenues, & Allowance Encumbrances Reserved for Encumbrances Expenditure Vouchers Payable or Cash Cash Taxes Receivable Reserved for Encumbrances Encumbrances …. Closing Appropriation<--> Estimated Revenues Revenues <--> Expenditures & Encumbrances

Procedures – Recording Budgetary Entries A town enacts a motel excise tax to promote tourism and conventions. For 2013, the tax is expected to generate $490 in Special Revenues. The city council authorizes expenditures of $420 including $200 for salaries, $30 for utilities, $110 for supplies, and $80 for advertising. A town enacts a motel excise tax to promote tourism and conventions. For 2013, the tax is expected to generate $490,000 in Special Revenues. The city council authorizes expenditures of $420,000 including $200,000 for salaries, $30,000 for utilities, $110,000 for supplies, and $80,000 for advertising. 11-24

Procedures –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. Procedures – 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. 11-25

Procedures – Encumbrances Assume a city’s police department ordered $18 worth of equipment. This amount has been committed even though no formal liability exists until the equipment is received. Procedures – Encumbrances – Example Assume a city’s police department ordered $18,000 worth of equipment. This amount has been committed even though no formal liability exists until the equipment is received. Remember, this entry is only recorded for Fund-Based Financial Statements. 11-26

Procedures –Encumbrances The equipment arrives with an invoice for $19. Sales tax, price adjustments, and other costs may cause the actual invoice to differ from the estimated amount. General Fund – Police Department The account title typically used in place of Accounts Payable. The equipment arrives with an invoice for $18,160. Sales tax, price adjustments, and other costs may cause the actual invoice to differ from the estimated amount. 11-27

Procedures – Fixed Assets The expenditure for fixed assets is recorded in the General Fund for fund-based statements. But, depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. However, GASB requires a record of ALL capital assets in the Statement of Net Assets in government-wide statements. And, depreciation expense is recorded. Procedures – Fixed Assets The expenditure for fixed assets is recorded in the General Fund for fund-based statements. But, depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. However, GASB requires a record of ALL capital assets in the Statement of Net Assets in government-wide statements. And, depreciation expense is recorded. 11-28

Procedures –Recoging Revenues Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions For Fund Statements, record the revenues when they become “available for recognition”. For Government-Wide Statements, record the revenues when “eligibility requirements have been met”. 11-29

Procedures –Issuance of Bonds The town of Ruark issues $9,000 in bonds for the construction of new school building. The following journal entry is prepared to reflect the sale of the bonds. 11-30

Pay FOR Long-Term LIability The town makes a $500 bond payment and pays 3 months of interest amounting to $10. Government-Wide Financial Statements Record principal and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. 11-31

Special Assessments Governments may provide improvements or services that benefit particular properties. They may assess the costs, in total or in part, to the property owners. Examples Paving Curbing Sidewalks Sewers and drains Water lines Usually financed by debt issuance and liens on the benefited property (to ensure reimbursement). 11-32

Special Assessments - Acctg Government-wide financial statements Debt and subsequent construction handled as for-profit enterprises do Asset recorded at cost Taxes assessed and collected Tax receipts used to settle debt Fund-based financial statements Infrastructure not recorded Debt not recorded Reported in Capital Projects Fund and Debt Service Fund (tagged as special assessment in both) 11-33

Interfund Transactions Commonly used, particularly monetary transfers from the General Fund Normally reported as “other financing source” and “other financing use” within the fund-based financial records Many of these are not reported in the government-wide financial statements because they create no net impact (intra-activity transactions) Interactivity transactions occur between governmental and enterprise funds and are reported on government-wide financial statements 11-34