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Beams, Advanced Accounting 10e, Ch. 18

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1 Beams, Advanced Accounting 10e, Ch. 18
11/6/2018 Chapter 18: An Introduction to Accounting for State and Local Governmental Units by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-1 © Pearson Education, Inc. publishing as Prentice Hall 1

2 Governmental: Objectives
Learn about the historical development of accounting principles for state and local governmental units. Understand the need for fund accounting and its basic premises. Perform transaction analysis using proprietary and governmental accounting models. Recognize various fund categories, as well as their measurement focus and basis of accounting. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-2

3 Objectives (cont.) Review basic governmental accounting principles.
Learn about the contents of a governmental entity's comprehensive annual financial report. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-3

4 An Introduction to Accounting for State and Local Governmental Units
1: History © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-4

5 Governmental Entity Popular election of officers or appointment by officials of one or more state or local governments Potential for unilateral dissolution by government Net assets revert to government Power to enact or enforce a tax © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-5

6 Developing Standards Municipal Finance Officers Association
Governmental Accounting, Auditing and Financial Reporting, 1968 AICPA Audits of State and Local Governmental Units, 1974 National Council on Governmental Accounting Governmental Accounting and Financial Reporting Principles (beginning 1979) Governmental Accounting Standards Board GASB Statements (beginning 1984) Codification (1985, updated continually) © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-6

7 Hierarchy of GAAP GAAP for local and state governmental accounting:
GASB Statements and Interpretations GASB Technical Bulletins Consensus positions of GASB's Emerging Issues Task Force Implementation Guides Other accounting literature © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-7

8 An Introduction to Accounting for State and Local Governmental Units
2: Fund Accounting © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-8

9 Accounting for Governments
Focus on continuing ability to fund and provide goods and services Not profit Types of activities Business type activities Provide services or goods to users for fees General governmental activities Provide services or goods to citizens without regard for ability to pay © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-9

10 Fund (def.) "a fiscal or accounting entity with a self balancing set of accounts recording cash and other … balances, and changes therein, which are segregated for the purpose of carrying on specific activities…" [GASB Codification] Groups of funds: Proprietary funds Governmental funds Fiduciary funds © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-10

11 Fund Accounting Each fund has Accounting equation
Journals, ledgers and other records Financial statements A single governmental unit, e.g., one city, has multiple funds each with their own financial statements. There is a comprehensive report. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-11

12 Proprietary Fund Model
Current assets + noncurrent assets current liabilities - noncurrent liabilities = net assets CA + NCA – CL – NCL = Net assets Accounting is similar to business enterprises. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-12

13 Governmental Fund Model
Current assets – current liabilities = fund balance CA – CL = Fund Balance Accounting focuses on current financial resources. Expenditures reflect the use of working capital, instead of expenses which focus on consumption of resources. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-13

14 General FA and LTD General fixed assets (FA) are not recorded in governmental funds. General fixed asset and depreciation records are maintained separately General long term debt (LTD) is not recorded in governmental funds. Separate records are also kept Both are reported in the government-wide statements © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-14

15 3: Transaction Analysis
An Introduction to Accounting for State and Local Governmental Units 3: Transaction Analysis © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-15

16 Transactions Borrowed $75 by issuing a 3-year note.
Purchased equipment costing $30 for cash. Sold a fully depreciated truck costing $80, with a residual value of $10 for $8 cash. Computed current depreciation as $15. Borrowed $30 on a six month note. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-16

17 Using Proprietary Fund Model
Model: CA + NCA – CL – NCL = Net Assets CA NCA CL NCL Net Assets 1 Borrowed long term 75 2 Bought equipment (30) 30 3 Sold truck 8 (10) (2) 4 Depreciation (15) 5 Borrowed short term © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-17

18 Using Governmental Fund Model
Model: CA – CL = Fund balance CA CL Fund balance 1 Borrowed long term 75 2 Bought equipment (30) 3 Sold truck 8 4 Depreciation 5 Borrowed short term 30 The long term borrowing is a source of current financial resources, as is the sale of the truck. Acquisition of equipment uses current financial resources © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-18

19 An Introduction to Accounting for State and Local Governmental Units
4: Fund Categories © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-19

20 Proprietary Fund Types
Internal service funds Provide goods or services on a business type basis primarily for internal customers For departments and agencies of that government Motor pools, central printing Enterprise funds Provide goods or services on a business type basis primarily for external customers For citizens and others Utilities, trash service, mass transit © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-20

21 Governmental Fund Types
Special revenue funds General governmental financial resources restricted for specific purposes Permanent funds Resources are restricted but earnings benefit government or citizens Capital projects funds Resources used to construct or acquire major governmental fixed assets © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-21

22 Governmental Funds (cont.)
Debt service funds Resources to be used to pay principle, interest and charges on long term debt General fund Working capital available for general governmental use Governmental offices, police, fire, library © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-22

23 CA + NCA – CL – NCL = Net Assets
Fiduciary Fund Types Basic proprietary model: CA + NCA – CL – NCL = Net Assets Pension trust funds Investment trust funds Private purpose trust funds An abbreviated model: CA = CL Agency funds © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-23

24 Apply Model to Specific Funds
Issued general obligation bonds, par value of $3,000, at 101 to finance construction of a government office building. Transferred the premium on the bonds to the fund used to account for payment of principal and interest on the bonds. Incurred and paid construction costs of $125 on the building. Levied and collected sales taxes restricted to use for economic development, $60. Paid general governmental employees’ salaries, $450. Another $50 of salaries accrued but has not been paid. Borrowed $7,500 on a six-month note to finance general operating costs of the government. © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-24

25 Transactions in Governmental Type Funds
Model: CA – CL = Fund balance Specific Fund: CA CL Fund balance 1Capital projects fund 3,030 2a Capital projects fund (30) 2b Debt service fund 30 3 Capital projects fund (125) 4 Special revenue fund 60 5 General fund (450) 50 (500) 6 General fund 1,500 © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-25

26 Bases of Accounting Governmental type funds
Modified accrual basis of accounting Focus on flow of current financial resources Record expenditures Proprietary & fiduciary type funds Accrual basis of accounting Focus on economic resources Record expenses © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-26

27 5: Governmental Accounting Principles
An Introduction to Accounting for State and Local Governmental Units 5: Governmental Accounting Principles © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-27

28 Revenue Recognition Exchange or exchange-like transactions
Nonexchange transactions Derived tax revenues (sales or income tax) Imposed nonexchange (property tax) Government mandated nonexchange (federal mandates) Voluntary nonexchange (donations) Recognize revenue in governmental funds Transaction is substantially complete Funds are measurable and available Not more than 60 days Net revenue approach (net of uncollectibles) © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-28

29 Expenditures and Expenses
Cost of assets or services used Recognize in period incurred Expenditures Cost of goods or service acquired, whether or not consumed Maturing of long term debt principal Recognized in period current liability is incurred Except: interest on long term debt is recognized when due © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-29

30 Interfund Activity Interfund loans Interfund transfers
Operating or residual equity Nonreciprocal Government funds Other financing sources and uses Proprietary funds Nonoperating revenues or expenses Reciprocal Seller has revenues Purchaser has expense or expenditure © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-30

31 Budget When approved by the legislative body, the budget for expenditures becomes a spending ordinance that has the force of law. An approved revenue plan also has the force of law. Appropriations Approved or authorized expenditures Allotment Appropriation for a specific time period © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-31

32 Financial Reporting Entity
Primary government City, town, state Special purpose government Water district, hospital, transit authority Treated as primary government Separately elected body, legally separate, fiscally independent Component unit Legally separate, but primary government is financially accountable © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-32

33 6: Comprehensive Annual Financial Report (CAFR)
An Introduction to Accounting for State and Local Governmental Units 6: Comprehensive Annual Financial Report (CAFR) © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-33

34 Primary Government Reporting
Annual report called Comprehensive Annual Financial Report (CAFR) Includes primary government and blended component units GASB Statement No. 34 Government wide financial statements Fund financial statements © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-34

35 CAFR – Introductory Section
Table of contents Letter of transmittal Principal officers Organizational chart © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-35

36 CAFR – Financial Section
Management's Discussion & Analysis Auditor's report Government-wide financial statements Statement of Net Assets Statement of Activities Fund financial statements (detailed later) Notes and required supplementary information © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-36

37 Statement of Net Assets
© 2009 Pearson Education, Inc. publishing as Prentice Hall 18-37

38 © 2009 Pearson Education, Inc. publishing as Prentice Hall
18-38

39 Statement of Activities
© 2009 Pearson Education, Inc. publishing as Prentice Hall 18-39

40 © 2009 Pearson Education, Inc. publishing as Prentice Hall
18-40

41 Fund Financial Statements
Balance sheet – Governmental funds (GF) Statement of revenues, expenditures, and changes in fund balance – GF Statement of net assets – Proprietary funds (PF) Statement of revenues, expenses and changes in net assets – PF and similar trust funds Statement of cash flows – PF and similar trust funds Statement of fiduciary net assets Statement of fund changes in fiduciary net assets © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-41

42 CAFR – Statistical Section
Includes social and economic data Financial trends Fiscal capacity Comparative, multi-period Accounting and non-accounting data © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-42

43 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc.   Publishing as Prentice Hall © 2009 Pearson Education, Inc. publishing as Prentice Hall 18-43

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