1. © Pearson Education, Inc. publishing as Prentice Hall20-1 Chapter 20: Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10 th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

2. © Pearson Education, Inc. publishing as Prentice Hall20-2 Proprietary and Fiduciary Funds: Objectives 1.Review the appropriate accounting and financial reporting for proprietary funds. 2.Recognize the proper treatment of internal service funds in the government-wide statements. 3.Introduce the differences between a proprietary fund statement of cash flows and its commercial business counterpart. 4.Prepare journal entries and fund financial statements for fiduciary funds. 5.Learn about GASB guidance for pension fund accounting.

3. © Pearson Education, Inc. publishing as Prentice Hall20-3 1: Proprietary Funds Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds

4. © Pearson Education, Inc. publishing as Prentice Hall20-4 Accounting for Proprietary Funds Model CA + NCA – CL – NCL = Net assets Use accrual accounting Net assets –Invested in capital assets net of related debt –Restricted net assets –Unrestricted net assets Two types –Internal service funds –Enterprise funds

5. © Pearson Education, Inc. publishing as Prentice Hall20-5 Internal Service Funds Use for government activities that provide goods and services to other departments or agencies of that same governmental unit Central stores/ purchasing Motor pools Print shop Might be started with transfers from general fund and/or contributed capital from other sources Main source of revenues is other funds Use "Due from …" rather than accounts receivable

6. © Pearson Education, Inc. publishing as Prentice Hall20-6 ISF – Entries (1 of 3) A village begins a central motor pool with $200 from the general fund and a contribution of vehicles –The Other financing source and Contributed capital increase the ISF's net assets Cash200 Motor vehicles120 Other financing source - nonreciprocal transfer from general fund 200 Contributed capital from municipality 120

7. © Pearson Education, Inc. publishing as Prentice Hall20-7 ISF – Entries (2 of 3) It provides motor pool services to the general fund and special revenue fund and bills them $100 and $30 The general fund and special revenue fund will record the bills received as expenditures Due from general fund100 Due from special revenue fund30 Service revenues 130 Expenditures100 Due to internal service fund 100 Expenditures30 Due to internal service fund 30 ISF GF SRF

8. © Pearson Education, Inc. publishing as Prentice Hall20-8 ISF – Entries (3 of 3) The internal service fund collects the $100 due from the general fund The general fund will record the payment of its liability Cash100 Due from general fund 100 Due to internal service fund100 Cash 100 ISF GF

9. © Pearson Education, Inc. publishing as Prentice Hall20-9 ISF – Other Transactions Most other transactions parallel those of businesses –Use expenses, not expenditures –Record acquisition, disposition, and depreciation of fixed assets –Income is closed to unrestricted net assets

10. © Pearson Education, Inc. publishing as Prentice Hall20-10 Enterprise Funds Use for governmental activities –Financed and operated like a business –Provide goods and services to general public Utilities, civic centers, golf clubs Might start with funds transferred and contributions Main revenues from general public, but some from other departments of the government Use "Accounts Receivable" for general public and others and "Due from …" for other funds of this governmental unit

11. © Pearson Education, Inc. publishing as Prentice Hall20-11 EF – Entries (1 of 4) Utility-type enterprise funds often charge customer deposits –Amounts given as deposits are restricted cash, not included in current assets –Customer deposits are liabilities, may be current or long term Deposits may be returned or applied against the customers accounts receivable Restricted cash10 Customer deposits 10

12. © Pearson Education, Inc. publishing as Prentice Hall20-12 EF – Entries (2 of 4) Grants to acquire or enhance capital assets are recorded as contributed capital Grants to help fund operating activities are non- operating revenue The three entries represent: –Notice of grant to fund new equipment –Acquire equipment, eligible to receive cash –Receive grant monies Due from other governments50 Contributed capital - capital grant 50 Equipment65 Cash 65 Cash50 Due from other governments 50

13. © Pearson Education, Inc. publishing as Prentice Hall20-13 EF – Entries (3 of 4) Provide services and bill general public $500 and its own governmental unit $40 General fund records the bill of $40 Accounts receivable500 Due from general fund40 Service revenues 540 Expenditures40 Due to internal service fund 40 EF GF

14. © Pearson Education, Inc. publishing as Prentice Hall20-14 EF – Entries (4 of 4) Collect from general public and the general fund The general fund records the payment The enterprise fund will use allowances for uncollectibles and bad debt expense, like business enterprises Cash490 Accounts receivable 450 Due from general fund 40 Due to internal service fund40 Cash 40 EF GF

15. © Pearson Education, Inc. publishing as Prentice Hall20-15 EF – Other Transactions Most follow that of businesses Income is closed to unrestricted net assets Enterprise funds may issue bonds –General obligation or revenue bonds Record as bonds payable Use effective interest method Premiums or discounts Capital leases –Record leased assets and lease obligation

16. © Pearson Education, Inc. publishing as Prentice Hall20-16 2: Internal Service Funds in Government-wide Statements Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds

17. © Pearson Education, Inc. publishing as Prentice Hall20-17 Proprietary Fund Financial Statements Three statements 1.Statement of net assets (balance sheet) 2.Statement of revenues, expenses, and changes in net assets 3.Statement of cash flows Use separate columns for each significant enterprise fund, other enterprise funds, total enterprise funds and total internal service funds –Internal service funds are not added to enterprise funds –ISFs are governmental activities –EFs are business type activities Columnar presentation is not included for brevity

18. © Pearson Education, Inc. publishing as Prentice Hall20-18 Statement of Net Assets Cash$720 Receivables, net261 Due from other funds32 Supplies62 Total current assets $1,075 Restricted cash$185 Land95 Buildings and equipment1,990 Vehicles220 Accumulated depreciation (1,005) Total noncurrent assets $1,485 Total assets $2,560 Accounts payable$68 Due to other funds4 Other current liabilities129$201 Customer deposits$185 Compensated absences295 Bonds and notes payable465945 Total liabilities $1,146 Net assets: Invested in capital assets, net of related debt$575 Restricted270 Unrestricted569 Total net assets $1,414

19. © Pearson Education, Inc. publishing as Prentice Hall20-19 Operating revenues$1,220 Operating expenses(936) Operating income $284 Nonoperating revenues (expenses): Miscellaneous revenue2 Interest expense(19) Income (loss) before contributions and transfers $267 Capital contributions50 Transfers in1 Transfers out(19) Change in net assets $299 Total net assets, 7/1/081,200 Total net assets, 6/30/09$1,499 Statement of Revenues, Expenses and Changes in Net Assets

20. © Pearson Education, Inc. publishing as Prentice Hall20-20 Government-wide Statements Internal service funds are included with governmental funds –All represent governmental activities Enterprise funds displayed in a single column labeled Business-type activities ISF and EF already use accrual accounting Interfund balances: either Eliminate Show interfund balances separate from other assets/ liabilities No reconciliations needed for ISF and EF

21. © Pearson Education, Inc. publishing as Prentice Hall20-21 ISF in Financial Statements In the Proprietary fund statements: –Internal service funds are in a separate column Separately, to the side of the total for business-type/ enterprise funds Not added to those enterprise funds In the Government-wide statements: –Internal service funds plus governmental funds are shown as one total Labeled as governmental-type activities Governmental-type and business-type activities are the added together

22. © Pearson Education, Inc. publishing as Prentice Hall20-22 3: Proprietary Funds Statement of Cash Flows Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds

23. © Pearson Education, Inc. publishing as Prentice Hall20-23 Cash Flow Categories Four cash flow categories: 1.Cash flows from operations 2.Cash flows from noncapital financing activities 3.Cash flows from capital and related financing activities 4.Cash flows from investing activities Compared to for-profit enterprises –Capital expenditures are removed from other investing activities –Their related financing activities are taken from other financing activities –Capital expenditures and related financing have their own category

24. © Pearson Education, Inc. publishing as Prentice Hall20-24 Cash flows from operations: Cash received from customers$1,161 Cash paid to suppliers(326) Cash paid for other expenses(471) Net cash provided by operations $364 Cash flows from noncapital financing activities: Cash from general fund 3 Cash flows from capital and related financing activities: Purchase of equipment($18) Payment on capital debt(87) Net cash provided by capital and related financing (105) Cash flows from investing activities: Interest and dividends 1 Net increase in unrestricted cash $263 Cash balance, 7/1/08 457 Cash balance, 6/30/08 $720 Statement of Cash Flows

25. © Pearson Education, Inc. publishing as Prentice Hall20-25 4: Fiduciary Funds Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds

26. © Pearson Education, Inc. publishing as Prentice Hall20-26 Accounting for Fiduciary Funds Account for assets held in a trust or agency capacity –Not used for government's own programs Fiduciary funds –Private purpose trust funds –Investment trust funds –Pension trust funds –Agency funds Focus on demonstrating fulfillment of fiduciary responsibilities –Accrual accounting

27. © Pearson Education, Inc. publishing as Prentice Hall20-27 Agency Funds For funds held in custodial capacity –County government acts as agent collecting tax for local government –Collections on special assessments from taxpayers and repayment of special assessment bonds if local government is not obligated on bonds Agency Model: Assets = Liabilities

28. © Pearson Education, Inc. publishing as Prentice Hall20-28 Agency Transactions New County collects property taxes for two cities, A and B. New County uses an agency fund to record the assessment and collections It deducts a 1% commission for acting as agent –The 1% commission is transferred to the general fund, and recorded as revenue there For simplicity, assume all taxes assessed are collected Entries for New County follow

29. © Pearson Education, Inc. publishing as Prentice Hall20-29 Agency Entries – for New County Taxes receivable300 Liability to City A 200 Liability to City B 100 Cash300 Taxes receivable 300 Liability to City A2 Liability to City B1 Due to general fund 3 3 Liability to City A198 Liability to City B99 Cash 300 Only asset and liability accounts are used!

30. © Pearson Education, Inc. publishing as Prentice Hall20-30 CA + NCA – CL – NCL = Net assets Assets: cash, receivables, investments Liabilities: payables Net assets –Net assets held in trust, expendable –Net assets held in trust, nonexpendable Temporary accounts –Contributions (in) –Distributions (out) –Investment income, expenses Use Accrual accounting Trust Funds

31. © Pearson Education, Inc. publishing as Prentice Hall20-31 Fiduciary Fund Financial Statements Fund Statements –Statement of fiduciary net assets –Statement of changes in fiduciary net assets Fiduciary funds are not included in the government-wide statements

32. © Pearson Education, Inc. publishing as Prentice Hall20-32 5: Pension Funds Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds

33. © Pearson Education, Inc. publishing as Prentice Hall20-33 Pension Trust Fund Account for Public Employee Retirement Systems (PERS) GASB Statement No. 25, 27 and 50 Do not apply FASB pension accounting Disclosures –Scheduled of funding progress for defined benefit, single and multiple employer plans Also disclose –Other post-employment benefits

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