© The McGraw-Hill Companies, Inc., 2004 Slide 17-1 McGraw-Hill/Irwin Chapter Seventeen Accounting for State and Local Governments (Part 2)

© The McGraw-Hill Companies, Inc., 2004 Slide 17-2 McGraw-Hill/Irwin Accounting for Leases  The lease transfers ownership at the end of the lease term.  The lease contains a bargain purchase options.  The lease transfers ownership at the end of the lease term.  The lease contains a bargain purchase options. For accounting purposes, leases must be identified as either Capital or Operating. Use the same 4 criteria as identified in FASB Statement No. 13 to identify a capital lease. For accounting purposes, leases must be identified as either Capital or Operating. Use the same 4 criteria as identified in FASB Statement No. 13 to identify a capital lease.  The lease term = or > 75% of the asset’s estimated useful life.  The minimum lease payments > 90% of the PV of the asset.  The lease term = or > 75% of the asset’s estimated useful life.  The minimum lease payments > 90% of the PV of the asset.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-3 McGraw-Hill/Irwin Accounting for Operating Leases Government-Wide Financial Statements:  Do not record an encumbrance.  Record an expense when the lease payment is made. Fund-Based Financial Statements:  Record the encumbrance.  Record an expenditure when the lease payment is made. Government-Wide Financial Statements:  Do not record an encumbrance.  Record an expense when the lease payment is made. Fund-Based Financial Statements:  Record the encumbrance.  Record an expenditure when the lease payment is made.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-4 McGraw-Hill/Irwin Prepare the journal entry to record the lease agreement for government-wide statements. Accounting for Capital Leases Government-Wide Financial Statements Record the asset and the lease obligation. Government-Wide Financial Statements Record the asset and the lease obligation. On 1/1/04, Good City signs a 10-year capital lease for a $50,000 dump truck with an implied interest rate of 8%.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-5 McGraw-Hill/Irwin Prepare the journal entry to record the lease payment for government-wide statements. Accounting for Capital Leases Government-Wide Financial Statements Record interest expense & reduce the obligation. Government-Wide Financial Statements Record interest expense & reduce the obligation. At 12/31/04, Good City made a $7,452 payment that included interest of $4,000.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-6 McGraw-Hill/Irwin An entry does have to made to record the other financing source. Accounting for Capital Leases Fund-Based Financial Statements Generally, neither the asset, or the obligation, is recorded, because it does not fall within the definition of current financial resources. Fund-Based Financial Statements Generally, neither the asset, or the obligation, is recorded, because it does not fall within the definition of current financial resources. On 1/1/04, Good City signs a 10-year capital lease for a $50,000 dump truck with an implied interest rate of 8%.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-7 McGraw-Hill/Irwin Prepare the journal entry to record the lease payment for fund-based statements. Accounting for Capital Leases Fund-Based Financial Statements Record the lease payments as expenditures in the General Fund. Fund-Based Financial Statements Record the lease payments as expenditures in the General Fund. At 12/31/04, Good City made a $7,452 payment that included interest of $4,000.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-8 McGraw-Hill/Irwin Fund-Based Financial Statements Make no entry to record a liability. Record cash payments made to fund the future obligation as “expenditures”. Fund-Based Financial Statements Make no entry to record a liability. Record cash payments made to fund the future obligation as “expenditures”. Government-Wide Financial Statements Record a pro-rated portion of the expected closing costs (as a % of used capacity) each year as an expense and a liability. Government-Wide Financial Statements Record a pro-rated portion of the expected closing costs (as a % of used capacity) each year as an expense and a liability. Solid Waste Landfill The operation of a solid waste landfill creates long-term liabilities. The EPA imposes requirements that will require large outlays of resources to close that landfill in the future.

© The McGraw-Hill Companies, Inc., 2004 Slide 17-9 McGraw-Hill/Irwin Fund-Based Financial Statements Make an entry only for the portion of the liability that is expected to be paid from current resources. Fund-Based Financial Statements Make an entry only for the portion of the liability that is expected to be paid from current resources. Government-Wide Financial Statements Accrue the expense and a liability related to unused/accrued vacation and sick leave. Government-Wide Financial Statements Accrue the expense and a liability related to unused/accrued vacation and sick leave. Compensated Absences Employees accrue vacation and sick leave at a predetermined rate. Unused/accrued vacation and sick leave are payable upon termination or retirement, creating a liability.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Works of Art and Historical Treasures GASB No. 34 says governments “should capitalize works of art, historical treasures, and similar assets at their historical cost or fair value at date of donation.” Fund-Based Financial Statements Record an expenditure and the cash payment (if purchased). No entry is made if the item is donated. Fund-Based Financial Statements Record an expenditure and the cash payment (if purchased). No entry is made if the item is donated. Government-Wide Financial Statements Record the asset and the payment (if purchased) or revenue (if donated). Government-Wide Financial Statements Record the asset and the payment (if purchased) or revenue (if donated).

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Infrastructure Assets and Depreciation Government-Wide Financial Statements:  Record all newly acquired assets.  Show approximate cost for all previously acquired major assets that Were acquired after June 30, 1980, or that Had major renovations, restorations, or improvements since that date. Fund-Based Financial Statements:  Record the acquisition as an expenditure. Government-Wide Financial Statements:  Record all newly acquired assets.  Show approximate cost for all previously acquired major assets that Were acquired after June 30, 1980, or that Had major renovations, restorations, or improvements since that date. Fund-Based Financial Statements:  Record the acquisition as an expenditure. Depreciation For government-wide financial statements, depreciation is recorded for all assets except land, art works, and historical treasures that are inexhaustible. Depreciation For government-wide financial statements, depreciation is recorded for all assets except land, art works, and historical treasures that are inexhaustible.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin GASB Statement 34 General Purpose Statements Three distinct sections: 1.MD&A 2.Financial Statements  Government-wide Financial Statements  Fund-based Financial Statements  Notes to the Financial Statements 3.Required Supplemental Information Three distinct sections: 1.MD&A 2.Financial Statements  Government-wide Financial Statements  Fund-based Financial Statements  Notes to the Financial Statements 3.Required Supplemental Information

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Management’s Discussion & Analysis State and Local governments must file an MD&A with their financial statements. 1. A brief discussion of the basic financial statements. 2. Condensed financial information. 3. An analysis of overall financial position and results of operations.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Management’s Discussion & Analysis 4. An analysis of balances and transactions of individual funds. 6. A description of significant capital asset activity. 5. An analysis of variations between original and final budgets. State and Local governments must file an MD&A with their financial statements.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Management’s Discussion & Analysis 7. If the modified approach for depreciation is used, provide info about its application. 8. A description of currently know facts or decisions that are expected to impact the financial statements. State and Local governments must file an MD&A with their financial statements.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Governments prepare a Comprehensive Annual Financial Report (CAFR). The CAFR includes:  Introductory Section  General purpose financial statements.  Auditor’s Report  Schedules and statistical tables. Governments prepare a Comprehensive Annual Financial Report (CAFR). The CAFR includes:  Introductory Section  General purpose financial statements.  Auditor’s Report  Schedules and statistical tables. External Reporting Process

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Must be included in general purpose financial statements. Can be discretely presented on the fund-based statements or “blended” with the funds of the primary government. Must be included in general purpose financial statements. Can be discretely presented on the fund-based statements or “blended” with the funds of the primary government. Safety Commission Component Units Includes any unit that is legally separate from the primary government, but where financial accountability still exists.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Government-Wide Statements Statement of Net Assets Include all assets, capital assets, and liabilities (current and long-term). Report capital assets net of accumulated depreciation. Divide the primary government into governmental activities and business-type activities. Show all offsetting internal balances resulting from interactivity transactions. Include all assets, capital assets, and liabilities (current and long-term). Report capital assets net of accumulated depreciation. Divide the primary government into governmental activities and business-type activities. Show all offsetting internal balances resulting from interactivity transactions. Report Investments at fair market value. Group all discrete component units and show separately from the primary government figures. Assets – Liabilities = Net Assets (not equity) Show restrictions. Capital Assets less related debt is reported separately within Net Assets. Report Investments at fair market value. Group all discrete component units and show separately from the primary government figures. Assets – Liabilities = Net Assets (not equity) Show restrictions. Capital Assets less related debt is reported separately within Net Assets.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Government-Wide Statements Statement of Activities Expenses are shown by function. Expenses are shown by function. Interest on general long-term debt is normally an indirect expense. Frequently shown as a separate “function”. Interest on general long-term debt is normally an indirect expense. Frequently shown as a separate “function”. Related program revenues should be shown for each “function”. Related program revenues should be shown for each “function”. Show the net revenue figure for each function. Show the net revenue figure for each function. General revenues are shown at the bottom of the statement. General revenues are shown at the bottom of the statement. Expenses are shown by function. Expenses are shown by function. Interest on general long-term debt is normally an indirect expense. Frequently shown as a separate “function”. Interest on general long-term debt is normally an indirect expense. Frequently shown as a separate “function”. Related program revenues should be shown for each “function”. Related program revenues should be shown for each “function”. Show the net revenue figure for each function. Show the net revenue figure for each function. General revenues are shown at the bottom of the statement. General revenues are shown at the bottom of the statement.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Fund-Based Financial Statements Governmental Funds Balance Sheet Balance Sheet Does not include proprietary funds, component units, or internal service funds. Does not include proprietary funds, component units, or internal service funds. No capital assets or long- term liabilities are reported. No capital assets or long- term liabilities are reported. Separate columns for the General Fund and each major fund. Separate columns for the General Fund and each major fund. In the Fund Balance section, identify both the “reserved” and “designated” amounts. In the Fund Balance section, identify both the “reserved” and “designated” amounts. Balance Sheet Balance Sheet Does not include proprietary funds, component units, or internal service funds. Does not include proprietary funds, component units, or internal service funds. No capital assets or long- term liabilities are reported. No capital assets or long- term liabilities are reported. Separate columns for the General Fund and each major fund. Separate columns for the General Fund and each major fund. In the Fund Balance section, identify both the “reserved” and “designated” amounts. In the Fund Balance section, identify both the “reserved” and “designated” amounts. Statement of Revenues, Expenditures, & Changes in Fund Balances Net revenues are not identified for specific functions. Report Expenditures rather than expenses. Other financing sources and uses are shown to reflect long- term debt, sale of property, and transfers between funds. Reconcile the ending fund balance and the ending change in net assets. Statement of Revenues, Expenditures, & Changes in Fund Balances Net revenues are not identified for specific functions. Report Expenditures rather than expenses. Other financing sources and uses are shown to reflect long- term debt, sale of property, and transfers between funds. Reconcile the ending fund balance and the ending change in net assets.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Fund-Based Financial Statements Proprietary Funds Statement of Net Assets Statement of Net Assets Show the combined internal service funds. Show the combined internal service funds. Assets and liabilities are classified as current and noncurrent. Assets and liabilities are classified as current and noncurrent. Statement of Net Assets Statement of Net Assets Show the combined internal service funds. Show the combined internal service funds. Assets and liabilities are classified as current and noncurrent. Assets and liabilities are classified as current and noncurrent. Statement of Revenues, Expenditures, & Changes in Fund Net Assets Same rules as for governmental funds. Capital contributions and transfers are reported here. Statement of Revenues, Expenditures, & Changes in Fund Net Assets Same rules as for governmental funds. Capital contributions and transfers are reported here. Statement of Cash Flows There are Four categories: 1.Operating Activities 2.Noncapital Financing Activities 3.Capital and Related Financing Activities 4.Investing Activities. Statement of Cash Flows There are Four categories: 1.Operating Activities 2.Noncapital Financing Activities 3.Capital and Related Financing Activities 4.Investing Activities.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Fiduciary Funds Separate general purpose financial statements are prepared for the fiduciary funds.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin Public Colleges and Universities Public colleges and universities must follow the same guidelines as state and local governments. Their statements will differ from those of private colleges and universities. Public colleges and universities must follow the same guidelines as state and local governments. Their statements will differ from those of private colleges and universities.

© The McGraw-Hill Companies, Inc., 2004 Slide McGraw-Hill/Irwin... and if elected, I promise to make the financial reports so confusing, no one will be able to figure out what I am doing! End of Chapter 17