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Accounting for State and Local Governments (Part 2)

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1 Accounting for State and Local Governments (Part 2)
Chapter Twelve Accounting for State and Local Governments (Part 2)

2 Accounting for Leases 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 transfers ownership at the end of the lease term. The lease contains a bargain purchase options. The lease term = or > 75% of the asset’s estimated useful life. The minimum lease payments > 90% of the PV of the asset.

3 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.

4 Accounting for Capital Leases
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%. Prepare the journal entry to record the lease agreement for government-wide statements.

5 Accounting for Capital Leases
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. Prepare the journal entry to record the lease payment for government-wide statements.

6 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. 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%. An entry does have to made to record the other financing source.

7 Accounting for Capital Leases
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. Prepare the journal entry to record the lease payment for fund-based statements.

8 Government-Wide Financial Statements Fund-Based Financial Statements
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. 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. Fund-Based Financial Statements Make no entry to record a liability. Record cash payments made to fund the future obligation as “expenditures”.

9 Government-Wide Financial Statements Fund-Based Financial Statements
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. Government-Wide Financial Statements Accrue the expense and a liability related to unused/accrued vacation and sick leave. Fund-Based Financial Statements Make an entry only for the portion of the liability that is expected to be paid from current resources.

10 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.” Government-Wide Financial Statements Record the asset and the payment (if purchased) or revenue (if donated). Fund-Based Financial Statements Record an expenditure and the cash payment (if purchased). No entry is made if the item is donated.

11 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. Depreciation For government-wide financial statements, depreciation is recorded for all assets except land, art works, and historical treasures that are inexhaustible.

12 GASB Statement 34 General Purpose Statements
Three distinct sections: MD&A Financial Statements Government-wide Financial Statements Fund-based Financial Statements Notes to the Financial Statements Required Supplemental Information

13 Management’s Discussion & Analysis
State and Local governments must file an MD&A with their financial statements. 2. Condensed financial information. 1. A brief discussion of the basic financial statements. 3. An analysis of overall financial position and results of operations.

14 Management’s Discussion & Analysis
State and Local governments must file an MD&A with their financial statements. 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.

15 Management’s Discussion & Analysis
State and Local governments must file an MD&A with their financial statements. 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.

16 External Reporting Process
Governments prepare a Comprehensive Annual Financial Report (CAFR). The CAFR includes: Introductory Section General purpose financial statements. Auditor’s Report Schedules and statistical tables.

17 Component Units Includes any unit that is legally separate from the primary government, but where financial accountability still exists. 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

18 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. 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.

19 Government-Wide Statements Statement of Activities
Expenses are shown by 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”. Show the net revenue figure for each function. General revenues are shown at the bottom of the statement.

20 Fund-Based Financial Statements Governmental Funds
Balance Sheet Does not include proprietary funds, component units, or internal service funds. No capital assets or long-term liabilities are reported. Separate columns for the General Fund and each major fund. 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.

21 Fund-Based Financial Statements Proprietary Funds
Statement of Net Assets Show the combined internal service funds. 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 Cash Flows There are Four categories: Operating Activities Noncapital Financing Activities Capital and Related Financing Activities Investing Activities.

22 Fiduciary Funds Separate general purpose financial statements are prepared for the fiduciary funds.

23 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.

24 End of Chapter 12 . . . and if elected, I promise to make the financial reports so confusing, no one will be able to figure out what I am doing!

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