Chapter 9 Objectives: Learn why governments engage in business activities Learn about proprietary funds Learn about the unique accounting issues of enterprise funds and regulated funds

Accounting Full accrual Full accrual, full costing, economic resources No budget recorded, budgets are internal Capitalized interest required when used Incomeearned Income recognized as earned Expensesincurred Expenses recognized as incurred Recognize long term assets and liabilities on the balance sheet Net assets Has Net assets May pay “contribution” to state in lieu of property taxes

Why use Proprietary? When exchange transactions are predominant Government wants to control the activity Can provide more inexpensively than for- profit businesses because of tax breaks Charges in government can be less than market rates to aid less advantaged. Supports the mission of the entity Needs to capture the essence of economic activity not just financial resources

What classifies fund as Proprietary? Operates like a for profit business Resources are not legally restricted Business-like reporting more important Debt secured by net revenue of enterprise Costs covered by fees and charges

Objectives and Principles Similar to for profit Planning, control and evaluation Cash management Customer driven Capital budget often prepared Can benchmark to for-profits

Required Financial Statements Statement of Net Assets Statement of Revenues, Expenses and Changes in Net Assets Statement of Cash Flows

Statement Differences : On the Net Assets : Long term assets and associated depreciation Long Term liabilities appear Capital contribution from government Has net assets instead of fund equity Divided into unrestricted and restricted net assets

Statement Differences Statement of Revenues, Expenses And changes in net assets: Recognize expenses Calculate net income Capital contributions and other changes Show changes in net assets on the face

Statement Differences Statement of Cash Flows: Four sections instead of three Financing activities divided into two Non-capital financing activities Capital and related financing activities Order is different, operating, then financing, last is investing

Statement of Cash Flows Governmental: Four part statement: Operating Activities (Direct method) Non-Capital Financing Activities Borrowings not for acquisition of capital assets, repayments Capital and related Financing Activities Borrowings for acquisitions, etc. and repayments Investing Activities Interest paid is a financing activity in one of the above categories; Interest revenue is investing activity.

Restricted Assets Enterprise funds may still have restrictions Reserves are created only for future outflows not already offset by a liability Reported in separate section If sinking fund established to pay debt, then use an “appropriation” or restriction in retained earnings.

Entries for Restricted Assets Can be restricted to pay debt, for construction or as customer deposits When restricting assets: Cash Restricted for … Revenue Bonds payable Net Assets – unrestricted Net Assets - restricted

Efficiency ? With no “maximize shareholder value” objective do governmental units have efficiency incentive? How can you insure efficient use of resources? Government employment issues?

Enterprise Funds When government has exchange transactions with outside entities: A city utility Trash service

Environmental Cleanup Costs Cities might have a landfill and it charges for trash companies to deposit waste, so it is an enterprise fund Normal costs of operation are recognized When there are environmental issues, entities are required to accrue amounts in order to reclaim the site Once the total cost of reclamation determined, accrue as land is “used up” Landfill Expense100,000 Liability for landfill costs100,000 Liability is reduced as reclamation activities paid for

Internal Service Funds Exchange transactions with other governmental units. Use full accrual, full costing Prone to outsourcing Capital maintenance objective

Self Insurance If a separate insurance fund: Determine “set asides” based on history Actual claims represent expenditure in general fund Balance is an operating transfer Total “set aside” is revenue to internal service

Government -Wide Eliminations of Loans between funds Transactions between governmental funds but not between governmental and enterprise

Review Know how governments use proprietary funds Know the entries in the proprietary funds