The What and Why of Fund Accounting May 15, 2014 GFOAz 1

Overview Who are the users and what are the uses of governmental financial information? What is fund accounting? Why do we need fund accounting? Accounting principals and the types of funds Measurement Focus and Basis of Accounting (MFBA) 2

Users of financial information Private Sector Investors SEC Lenders Internal Management Public Sector Taxpayers Governing Bodies Donors Bond Rating Agencies Grantors Investors 3

Environmental Differences (Uses) Private Sector Profit motive Return on investment Budget is a financial plan Public Sector Service motive Stewardship Budget carries the force of law 4

Fund Accounting 5

What is accounting? “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results….” 6

What is a fund? “a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations” 7

What is fund accounting? Accounting & financial reporting that focuses on how resources are segregated for purpose of carrying on a specific activity or attaining certain objectives in accordance with special regulations, restrictions, or limitations 8

Types of financial reporting Internal Financial Reporting Special Purpose External Financial Reporting General Purpose Financial Reporting 9

Why do we need fund accounting? Publicly accountable & transparent Information to the taxpayers & stakeholders Assess service levels Evaluate operating results Financial condition Compliance Budgetary compliance Debt covenants Fund restrictions 10

Accounting Principles & Funds 11

Principles & Standards Who establishes principles and standards? Federal Government – FASAB State & Local Governments – GASB Businesses & nonprofits – FASB Who designated these three bodies? 12 Who has the “sole legal authority” to set financial reporting standards?

Governmental Funds State and local governments must 1.Present financial activities in accordance with GAAP AND 2.Determine and demonstrate compliance Fund accounting meets the need of #2 13

Number of Funds Principle Only the minimum number of funds consistent with legal and operating requirements should be established Financial reporting (suitable for decision making) The number of funds for financial reporting is less than the number for accounting purposes What is the total number of fund types available? 14

Fund Categories PurposeTypes Governmental Funds Primarily supported by taxes, grants & similar revenue sources 1.General Fund 2.Special Revenue Funds 3.Capital Projects Funds 4.Debt Service Funds 5.Permanent Funds Proprietary Funds Receive significant support from fees & charges 1.Enterprise Funds 2.Internal Service Funds Fiduciary Funds Accounts for resources that a governments holds as a trustee or agent of an outside party 1.Agency Funds 2.Pension Trust Funds 3.Investment Trust Funds 4.Private Purpose Trust Funds 15

Interfund Activity Financial transactions between funds of the primary government Two types 1.Reciprocal – interfund loans, interfund services 2.Non-reciprocal – interfund transfers, interfund reimbursements 16

MFBA Measurement Focus Determines what is measured Basis of Accounting Determines when recognition takes place 17

MFBA Measurement Focus Governmental funds focus = current financial resources Focus is near term liquidity of assets & liabilities Proprietary & fiduciary funds focus = all economic resources Difference between the two = measurement focus 18

MFBA 19 Governmental Funds Proprietary & Fiduciary Funds Measurement Focus Current Financial ResourcesAll Economic Resources Basis of AccountingModified AccrualFull Accrual Statement of Position Financial Assets – cash or converted to cash in the near term Liabilities – liquidates with current available financial resources (excludes long-term debt) All Assets All Liabilities Statement of Resource Flows Revenue – recognized if measurable & available Expenditures – Recognized when a fund liability is incurred Revenue – when earned Expense – when incurred

Budgetary Accounting Budgets for the private sector are essentially management tools Budgets for the public sector Are also essential management tools, AND Must be legally approved Impose legal restraints on spending Public sector management must be in a position to ensure budgetary compliance (ensure spending is within the legally appropriated amounts) 20

Encumbrances What are encumbrances? Expenditure is not recognized until a good/service is received Encumbrances are “virtual” expenditures between the issuance of a contract or P.O. and the actual receipt of the good or service Prevents inadvertent overspending of appropriation 21

Example: Vehicle Purchases AppropriationExpendituresEncumbrances Unencumbered Balance 1. YTD Activity($1,000,000)$250,000$-0-($750,000) 2. P.O. Issued (2)($1,000,000)$250,000$400,000($350,000) 3. 1 Vehicle Rec’d($1,000,000)$450,000$200,000($350,000) 4. Question: Can a $500,000 fire truck be purchased? 5. 1 Vehicle Rec’d($1,000,000)$650,000$-0-($350,000) 22

The Reporting Entity Primary Government + Component Units = Financial Reporting Entity Special Purpose Must Meet ALL to qualify as a primary government, otherwise a component unit Separate Legal Status Separately Elected Governing Body Fiscal Independence 23

The Reporting Entity If not a primary government, then the entity is a potential component unit (PCO) If a PCO is financially accountable to the primary government, then it is normally a component unit 24 Primary FactorSecondary Factor Fiscal dependence + Financial benefit or burden relationship = Financial accountability Board appointment + Financial benefit or burden relationship = Financial accountability Board appointment +Ability to impose will= Financial accountability

The Reporting Entity Blended Component Unit Integral part of the primary government Treated as funds of the primary government General Fund of a Blended Component Unit is reclassified as a special revenue fund of the primary government Discretely Presented Component Unit Not an integral part of the primary government Presented separately in the government-wide financial statements 25

Beyond Fund Financial Reporting Government-Wide Financial Reporting Single, integrated financial reporting unit Users could see the big picture Are the government-wide financial statements being utilized? CAFR Popular Annual Financial Reporting Performance Reporting 26

Questions? Tom Duensing, Executive Financial Services Director City of Glendale (623)