1. Chapter 6 Proprietary Funds -- Internal Service and Enterprise
Essentials of Accounting for Governmental and Not-for-Profit Organizations
Chapter 6
Proprietary Funds -- Internal Service and Enterprise
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Overview of Chapter 6
Review of common characteristics of proprietary type funds
Internal Service Funds
Enterprise Funds
Review of Fund statements - Proprietary type funds

3. Review of Proprietary Type Funds
Proprietary Funds use accrual basis
Match Revenues and Expenses, including depreciation
Emphasis on income measurement
Balance sheet includes both short term and long-term assets and liabilities
Economic Resources Measurement Focus:
Can handle related construction and debt service within the proprietary funds
Typically do not record budgets or encumbrances

4. Proprietary Fund Closing Entries
All revenue and expense type accounts, as well as transfers, are closed to Net Assets
Net Assets are divided into three categories:
Invested in Capital Assets net of Related Debt
Restricted (if needed) and
Unrestricted for the remainder

5. Internal Service Funds
Used for sales of service primarily to others within the government unit on a cost reimbursement basis
The purpose is to pool resources for more efficient operations
Often it is more efficient to have a single (separate) department responsible for these types of services and charge their costs back to other departments

6. Internal Service Funds
Examples of internal service fund uses:
Motor pool,
Telecommunications,
Maintenance,
Purchasing /supplies/central stores,
Insurance/risk management

7. Self-Insurance and Risk Management
Governments have a choice of using the General Fund or an Internal Service fund for self-insurance activities
If an ISF is used, the interfund premium is treated as a revenue to the ISF and as an Expense or Expenditure to other funds provided that the amount paid is a reasonable amount calculated in a manner that will yield an amount roughly equal to the amount of average long-term claims

8. “Reasonable Premium” Requirement
The purpose of this accounting requirement is to prevent governments from managing their budgets by hiding part of government fund resources in a proprietary fund when they have a surplus and underfunding in other years
Otherwise, the payments are to be treated as Transfers

9. Enterprise Funds
Used for sales of service primarily to others outside the government unit such as the general public
Mandatory if:
Have debt backed solely by fees and charges
Legally required to charge fees that will recover the cost, including depreciation
Government policy of requiring cost recovery from fees

10. Use of Enterprise Fund Not mandatory, but is permitted if:
None of the three mandatory requirements are met, but management would like to see the activity’s “net cost” after depreciation expense
Implication—bus system or swimming pool charging fees can be handled in government or proprietary type fund

11. Common Examples of Enterprise Funds
Water utilities
Gas or electric utilities
Airports
Bus systems
Swimming pools
Hospitals, parking garage, toll roads, public housing
Civic Centers

12. Bonds in Enterprise Funds
Revenue Bonds: Revenue bonds promise bondholders that enterprise revenues will be used to make payments. These are listed as Bonds Payable in the enterprise funds.
General obligation bonds:
These are backed by the full faith and credit of the government (i.e. the taxing authority of the government.

13. Sometimes General Obligation Bonds Are Use to Finance Enterprise Activities
Purpose:
This may be done to get a better credit rating (lower interest cost)
Reporting:
If this is just a formality, the bonds are still listed as a liability in Enterprise Fund
Bonds are omitted from Enterprise Fund only if the government agrees and fully intends to pay the bonds from other resources

14. Solid Waste Landfills Enterprise Fund
Accrual basis – treatment of post-closure costs
Costs of complying with environmental protection laws after closure have to be estimated and accrued as a cost of operating the landfill during its life.
Each year accrue:
Post-closure expenses XX
Liability for post-closure expenses XX
(units of production method used to determine $)
After closure, as maintenance costs are incurred:
Liability for post-closure expenses XX
Cash XX

15. Solid Waste Landfills – Governmental Activities
Alternatively, some governments may operate landfills within the Governmental Activities.
In this case, the long-term portion of any liability for closure and post-closure care costs will appear in the government-wide statement of net assets and the periodic expense in the government-wide statement of activities.

16. Segment Disclosures
Segment disclosures help make sure information is not overly aggregated
When segment disclosures are made the government should disclose:
The type of activity/service being reported
And provide condensed financial statements for that activity

17. When Segment Disclosures Are Required
Segment disclosures are needed when business activities are combined in a single fund or in the nonmajor fund column.
They are required if:
There is a separate bond issue for a portion of the activities -- such as a bond on water only when water is in a city water and light fund.

18. Statement of Net Assets
Governments must classify assets and liabilities as current or noncurrent
Net assets 3 categories: unrestricted, restricted, and capital assets net of related debt
Restricted means restricted by external parties or by legislation, including legislation by the government’s governing body

19. Statement of Revenues, Expenses and Changes in Fund Net Assets
Format:
Revenues
- Expenses
= Operating NI
- nonoperating revenues and expenses
- capital contributions and transfers
= Change in Net Assets
+ Beginning Net Assets
= Ending Net Assets

20. Comparison of Cash Flow Statements
Commercial Statements
May use Direct or Indirect Methods for Cash Flows from Operating Activities
Interest and dividends received are reported in operating section
Interest payments are reported in operating section
Purchases or sales of long-term assets are reported in investing
The reconciliation of income and cash flows from operations starts with Net Income
Proprietary Fund Statements
Direct Method is required for Cash Flows from Operating Activities
Interest and dividend revenue is reported in investing section
Interest Payments are reported in capital or noncapital related financing section
Fixed asset transactions are reported in capital related financing
The reconciliation of income and cash flows from operations starts with Operating Income

21. Four Categories of Cash Flows
1. Operating
Interest and dividend revenue not in this section as it is in FASB’s (eg. Business) Statement of Cash Flows.
2. Capital Related Financing
FASB’s Statement of Cash Flows show only principal payments on debt in financing, GASB’s approach includes principal and interest payments here. Purchases of long-term assets are here not in investing per business Statements of Cash Flows.
3. Noncapital Related Financing
short term loans and repayments including interest
4. Investing
Investments and their associated revenues. Does not include purchase and sale of other long-term assets.

22. Proprietary Funds and the Government-Wide Statements
Enterprise Funds are “Business-Type Activities.”
They are included in the Government-Wide statements without adjustment.
Internal Service Funds are generally classified as “Governmental Activities.”
Their assets and liabilities are included in the Statement of Net Assets.
Only revenues and expenses on outside sales are reported in the Statement of Activities.