© 2009 Pearson Education, Inc. publishing as Prentice Hall18-1 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, 10 th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-2 Governmental: Objectives 1.Learn about the historical development of accounting principles for state and local governmental units. 2.Understand the need for fund accounting and its basic premises. 3.Perform transaction analysis using proprietary and governmental accounting models. 4.Recognize various fund categories, as well as their measurement focus and basis of accounting.

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-3 Objectives (cont.) 5.Review basic governmental accounting principles. 6.Learn about the contents of a governmental entity's comprehensive annual financial report.

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-4 1: History An Introduction to Accounting for State and Local Governmental Units

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-5 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 Hall18-6 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 Hall18-7 Hierarchy of GAAP GAAP for local and state governmental accounting: 1.GASB Statements and Interpretations 2.GASB Technical Bulletins 3.Consensus positions of GASB's Emerging Issues Task Force 4.Implementation Guides 5.Other accounting literature

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-8 2: Fund Accounting An Introduction to Accounting for State and Local Governmental Units

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-9 Accounting for Governments Focus on continuing ability to fund and provide goods and services –Not profit Types of activities 1.Business type activities Provide services or goods to users for fees 2.General governmental activities Provide services or goods to citizens without regard for ability to pay

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-10 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 Hall18-11 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 Hall18-12 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 Hall18-13 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 Hall18-14 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 : Transaction Analysis An Introduction to Accounting for State and Local Governmental Units

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-16 Transactions 1.Borrowed $75 by issuing a 3-year note. 2.Purchased equipment costing $30 for cash. 3.Sold a fully depreciated truck costing $80, with a residual value of $10 for $8 cash. 4.Computed current depreciation as $15. 5.Borrowed $30 on a six month note.

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-17 Using Proprietary Fund Model Model: CA + NCA – CL – NCL = Net Assets CANCACLNCL Net Assets 1 Borrowed long term75 2 Bought equipment(30)30 3 Sold truck8(10) (2) 4 Depreciation (15) 5 Borrowed short term30

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-18 Using Governmental Fund Model 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 Model: CA – CL = Fund balance CACL Fund balance 1 Borrowed long term75 2 Bought equipment(30) 3 Sold truck8 8 4 Depreciation 5 Borrowed short term30

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

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-20 Proprietary Fund Types 1.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 2.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 Hall18-21 Governmental Fund Types 1.Special revenue funds –General governmental financial resources restricted for specific purposes 2.Permanent funds –Resources are restricted but earnings benefit government or citizens 3.Capital projects funds –Resources used to construct or acquire major governmental fixed assets

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-22 Governmental Funds (cont.) 4.Debt service funds –Resources to be used to pay principle, interest and charges on long term debt 5.General fund –Working capital available for general governmental use Governmental offices, police, fire, library

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-23 Fiduciary Fund Types Basic proprietary model: CA + NCA – CL – NCL = Net Assets 1.Pension trust funds 2.Investment trust funds 3.Private purpose trust funds An abbreviated model: CA = CL 4.Agency funds

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-24 Apply Model to Specific Funds 1.Issued general obligation bonds, par value of $3,000, at 101 to finance construction of a government office building. 2.Transferred the premium on the bonds to the fund used to account for payment of principal and interest on the bonds. 3.Incurred and paid construction costs of $125 on the building. 4.Levied and collected sales taxes restricted to use for economic development, $60. 5.Paid general governmental employees’ salaries, $450. Another $50 of salaries accrued but has not been paid. 6.Borrowed $7,500 on a six-month note to finance general operating costs of the government.

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-25 Model: CA – CL = Fund balance Specific Fund:CACL Fund balance 1Capital projects fund3,030 2a Capital projects fund(30) 2b Debt service fund30 3 Capital projects fund(125) 4 Special revenue fund60 5 General fund(450)50(500) 6 General fund1,500 Transactions in Governmental Type Funds

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-26 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 : Governmental Accounting Principles An Introduction to Accounting for State and Local Governmental Units

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-28 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 Hall18-29 Expenditures and Expenses 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 Hall18-30 Interfund Activity Interfund loans Interfund transfers –Operating or residual equity 1.Nonreciprocal –Government funds Other financing sources and uses –Proprietary funds Nonoperating revenues or expenses 2.Reciprocal Seller has revenues Purchaser has expense or expenditure

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-31 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 Hall18-32 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 : Comprehensive Annual Financial Report (CAFR) An Introduction to Accounting for State and Local Governmental Units

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-34 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 Hall18-35 CAFR – Introductory Section Table of contents Letter of transmittal Principal officers Organizational chart

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-36 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 Hall18-37 Statement of Net Assets

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-38

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-39 Statement of Activities

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-40

© 2009 Pearson Education, Inc. publishing as Prentice Hall18-41 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 Hall18-42 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 Hall18-43 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.