Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 8 Government-Wide Financial Statements; Capital Assets and Long-term Debt Copyright © 2015 McGraw-Hill Education. All rights reserved.

8-2 Chapter 8 – Learning Objectives Perform the steps necessary to prepare government-wide financial statements: Prepare worksheet entries to convert the governmental funds records to the accrual basis of accounting Prepare worksheet entries to include internal service funds with governmental activities Prepare required schedules reconciling the government- wide and fund-basis statements Record events and transactions related to general capital assets and long-term debt

8-3 Overview of Entity-Wide Conversion Process Entity-wide statements are prepared at year end by converting government type funds to the accrual basis; including inclusion of depreciation, long-term assets and long-term liabilities, Adding in the asset and liability balances from internal service funds along with any income earned through transactions with external parties, consolidating fund statements (other than fiduciary funds).

Fiduciary Funds are not included in government- wide Enterprise funds are entered directly into the business activities columns of the government-wide statements. Governmental funds are converted to the Accrual Basis and Economic Resource Measurement Focus through worksheet entries and then appear in the Governmental Activities columns of the government- wide statements. Internal Service Funds are added to Governmental Activities through worksheet entries. Government-wide Statement of Net Position and Statement of Activities

8-5 Worksheet Approach Enter amounts from governmental funds fund- basis statements here Enter journal entries to convert to the accrual basis here Enter journal entries to incorporate internal service funds here Carry these amounts into the governmental activities column of the government- wide statements

8-6 Worksheet Approach Long-term assets and liabilities now appear Expenditures for Capital Assets and Principal Repayments are eliminated Interfund balances are eliminated

8-7 Conversion Adjustments: Capital Assets 1. Beginning of the year capital assets of governmental activities (net of accumulated depreciation) are recorded through worksheet entry. 2. The balance in “Capital expenditures” is eliminated and replaced with assets acquired during the year. 3. Depreciation for the current period is recorded. 4. The balance in “Proceeds from sale of capital assets” is eliminated, the assets and accumulated depreciation are removed, and the resulting gain or loss is recorded.

8-8 Conversion Adjustments: Capital Assets 1Capital Assets (net)Dr. Net Position beginning of yearCr. 2Capital Assets (net)Dr. Capital ExpendituresCr. 3Depreciation ExpenseDr. Capital Assets (net)Cr. 4Proceeds from sale of capital assetsDr. Capital Assets (net)Cr. Gain on sale of capital assetsCr.

8-9 Conversion Adjustments: Long-Term Debt 1. Beginning of the year long-term liabilities of government activities are recorded through worksheet entry. 2. Convert this year’s “bond proceeds” to bond liability (and premium if applicable) 3. Eliminate balance in “expenditure - bond principal” and reduce the balance of the liability 4. Amortize premium/discount on bonds

8-10 Conversion Adjustments: Long-term Debt 1Net Position beginning of yearDr. Bonds PayableCr. 2Proceeds from sale of bondsDr. Proceeds from bond premiumDr. Bonds payableCr. Bond PremiumCr. 3Bonds payableDr. Expenditure - principle on bondsCr. 4Bond premiumDr. Interest expense Cr.

8-11 Conversion Adjustments: Other 1. Deferred Inflows of Resources – Property taxes = Property taxes deferred under the 60 day rule may need to be recognized under the accrual basis (and prior year’s accrual reversed) 2. Expenses not recorded in government funds under their current economic resources model may need to be accrued (e.g. the long-term portion of compensated absences ) 3. Accrue interest on bonds outstanding and other accruals as necessary 4. Eliminate interfund transfers

8-12 Conversion Adjustments: Other 1.Deferred Inflows - property taxesDr. Property tax revenueCr. (current year deferred taxes) Property tax revenueDr. Net Position beginning of yearCr. (reverse previous year deferred taxes) 2.ExpendituresDr. Liability for compensated absencesCr.

8-13 Conversion Adjustments: Other 3.Interest expenseDr. Interest payableCr. (current year accrual) Net Position –beginning of yearDr. Interest expense (prior year accrual – reversal)Cr. 4.Transfers InDr. Transfers outCr.

8-14 What to Do with Internal Service Funds Internal Service Funds: Generally they are included with the Governmental Activities. However… Although internal service funds are reported as proprietary funds, the activities accounted for in them are usually more governmental than business-type in nature. If enterprise funds are the predominant or only participant in an internal service fund, however, the government should report that internal service fund’s residual assets and liabilities with the business-type activities. (GASB 34)

8-15 Worksheet entries for internal service funds included in governmental activities 1. Add Internal Service Fund’s Assets and Liabilities to the Governmental Activities section of the Government-wide Statement of Net Position 2. Income of the Internal Service Fund with entities external to the governmental activities should be brought into the Statement of Activities. Most commonly this is interest expense or investment income. 3. Reduce (increase) governmental expenditures by the amount of ISF operating income (deficit) 4. Eliminate Interfund activities between the Internal Service Fund and other Funds represented within Governmental Activities.

8-16 Worksheet entries: Internal Service Funds 1.CashDr. Due from other fundsDr. Supplies InventoryDr. Capital Assets (net)Dr. Accounts payableCr. Note payableCr. Net PositionCr. 2Net PositionDr Investment incomeCr. 3.Net PositionDr. General government expensesCr. 4Net PositionDr. Transfers InCr. This will be eliminated against “transfers out”

8-17 Government-wide Statements: 1. Statement of Net Position 2. Statement of Activity No cash flow statement

8-18 Government-wide Statements: Statement of Net Position Separate columns are presented for Government and Business type activities (statements are ‘consolidated’ within columns) Would have another column for component units if the government has any (discretely presented). Government Activities column includes government type funds and (most) Internal service funds. Fiduciary Assets and Liabilities are not included

8-19 Government-wide Statements: Statement of Activities Net cost approach: Start with functional expenses less allocable program revenues shows net cost. From the net cost add general revenues, special items and transfers to show the overall change in net position for Governmental and Business type activities. Change plus beginning net position = ending balance (this should agree with Statement of Net Position)

8-20 Reconciliation of Governmental Fund Balances to Government-Wide Net Position Starts with Government fund balances Summarizes all the changes made to get entity- wide governmental activities net position Note typical reconciliation items include:  Addition of long-term assets (+)  Inclusion of ISF assets & liabilities (usually +)  Handling of deferred revenue as revenue instead of as liability (+)  Addition of long-term liabilities (-)

8-21 Activity Statement Reconciliation Reconciles changes in fund balances to changes in net position for the governmental activities (Shows difference in accrual vs. modified accrual) Examples: Excess of depreciation over capital outlay expenditures Gain/loss on sale of assets vs. “proceeds” Deferred revenue items treated as revenues under accrual Difference in bond proceeds and retirements Net Internal Service Fund profit from government funds Bond premium amortization

8-22 Capital Assets: Record Keeping While no specific method of keeping track of long-term assets is required by GASB, obviously some type of records should be kept on the cost, location, and life of all fixed assets in order to support amounts reported in the government-wide statements. Historically this was done in the General Fixed Asset Account Group An account group is merely a listing of balances of capital assets

8-23 Capital Assets: Collections Plant, infrastructure and equipment Record as asset and depreciate Land Record as asset, do not depreciate Collections (reported as expense if not capitalized) Must be held for public exhibit, education or research Protected Proceeds of any sale must be put back into other collections

8-24 Capital Assets: Infrastructure Examples include roads, bridges, drainage systems, sewer systems, dams, lighting … Capitalization was optional before GASB 34 Once capitalized, governments may depreciation or use “modified approach” which does not require depreciation if assets adequately maintained

8-25 Modified Approach to Infrastructure Accounting To quality for the modified approach, a government must: Maintain an inventory of infrastructure Do condition assessments every 3 years Estimate annual cost to maintain at target level And, Document that target maintenance level is being met Under the modified approach, the cost of maintaining charged to expense rather than taking depreciation. The cost to extend the life of existing assets is charged to expense, rather than capitalized under either option

8-26 Long-Term Debt Common Types: Most general obligation bonds Long-term lease obligation amounts Compensated absence amounts Claims and judgments Landfill closure liabilities

8-27 Long-term Debt: Record Keeping Similar to capital assets, some record must be maintained of the balances and changes to long-term liabilities. Historically this was done in the General Long- term Debt Account Group An account group is merely a listing of balances of long-term liabilities

8-28 Long-Term Debt: Additional Reporting Schedule of Changes in Long-Term Debt Shows difference in new debt vs. amount paid off. Schedule of Debt Service Requirements to Maturity Helps users see any future ballooning of debt service that may require tax increases. Computation of Legal Debt Margin Shows additional debt that can be legally issued. Schedule of Direct and Overlapping Debt Helps citizens see their total debt obligation.