©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for State and Local Governmental Units – Proprietary and Fiduciary Funds Chapter 20

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 1 Review the appropriate accounting and financial reporting for proprietary funds.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Proprietary Funds The objective of proprietary funds is to maintain capital or produce income, or both. Full accrual accounting procedures apply.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Proprietary Funds Current Assets + Noncurrent Assets – Current Liabilities – Noncurrent Liabilities = Net Assets

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Statements Statement of revenues, expenses, and changes in net assets Statement of net assets Statement of cash flows

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Types of Funds Enterprise Internal service Internal service

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Internal Service Funds Internal service funds (ISF) are proprietary funds that a government uses to account for governmental activities that provide goods and services to other departments or agencies of the governmental unit, or to other governmental units.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sources of Financing Nonreciprocal contributions Loans

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Internal Service Fund The village of Tara creates a central motor pool fund with a cash contribution of $200,000 from the general fund and a contribution of motor vehicles with a book value of $120,000.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Internal Service Fund Cash200,000 Motor Vehicles120,000 Nonreciprocal Transfer from GF200,000 Contributed Capital from Municipality120,000 To record establishment of the fund

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Internal Service Fund The village constructs a building for $100,000, purchases equipment for $50,000, and acquires supplies for $20,000. What is the entry?

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Internal Service Fund Building100,000 Equipment 50,000 Supplies on Hand 20,000 Cash170,000 To record purchase of building, equipment, and supplies

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Internal Service Fund When ISF bills user funds, individual funds will record entries at the selling price. Collection of the user charges triggers entries in the funds involved. Adjusting and closing entries are similar to those in commercial enterprises.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Reporting Internal Service Funds Included with proprietary funds Never considered a major fund Aggregated into a single column

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Reporting Internal Service Funds Reported with government activities

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Enterprise Funds Enterprise funds (EF) are proprietary funds that a government uses to account for activities that are financed and operated similarly to those of private business enterprises.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Enterprise Funds (1) are financed with debt secured solely by net revenue from fees and charges to external users,…

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Enterprise Funds (2) operate under laws requiring costs be recovered with fees and charges, or (3) have prices established by management to cover the costs of providing services.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Enterprise Fund Example of entries related to customer deposits. Restricted Cash10,000 Customer Deposits10,000 To record customer deposits collected

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 2 Introduce the differences between a proprietary fund statement of cash flows and its commercial business counterpart.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Statement of Cash Flows GASB 34 makes the direct method mandatory for statement presentation.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Statement of Cash Flows Operating activitiesNoncapital financing activitiesCapital financing activitiesInvesting activities

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Flows from Operating Activities Receipts from sales of goods or services, and interfund reimbursements. Payments to suppliers and employees. Payments to other governments as grants for operating activities. Payments for taxes and in lieu of taxes.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Inflows from Noncapital Financing Activities Proceeds from bonds not clearly issued specifically to finance capital assets Receipts from grants and subsidies not restricted for capital purposes or operating activities Receipts from taxes collected for the government enterprise

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Outflows from Noncapital Financing Activities Repayments other than those related to acquiring or constructing capital assets Payments for grants and subsidies (except those for specific operating activities of the grantor government) Cash paid to other funds except for interfund services used

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Flows from Capital and Related Financing Activities Inflows: Capital grants Sale or disposal of fixed assets Outflows: Acquisition, construction, or improvement of capital assets Repayments and interest related to capital assets

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Cash Flows from Investing Activities Inflows: Collections of loans Sales of investment securities Receipt of interest and dividends Outflows: Making loans Payments to acquire investment securities Other than cash equivalents

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 3 Prepare journal entries and fund financial statements for fiduciary funds.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fiduciary Funds Governmental units use these funds to account for assets held in a trustee or agency capacity. Resources cannot be used for the benefit of the government’s own programs.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fiduciary Funds Agency Trust

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fiduciary Funds Trust Funds Private- purpose InvestmentPension

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Fiduciary Funds Agency funds are used to account for resources that governments hold in a custodial or agency capacity.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Agency Fund Assume that Morris County collects $200,000 taxes for its own purpose as well as for other cities. Total property taxes levied: Morris County$100,000 Other Cities 100,000 Total$200,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Agency Fund Taxes Receivable for Local Governmental Units200,000 Liability to Morris County100,000 Liability to Other Cities100,000 To record tax levy $180,000 is collected, and $160,000 remitted.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Agency Fund Cash180,000 Taxes Receivable for Local Governmental Units180,000 To record collection of taxes receivable Liability to Other Cities 900 Due to GF of Morris County 900 To charge cities a 1% fee for taxes collected for them

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for an Agency Fund Due to GF of Morris County 800 Liability to Morris County80,000 Liability to Other Cities79,200 Cash160,000 To record remittance of taxes collected net of 1% fee

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Trust Funds Investment trust funds are used to account for multi-government external investment pools sponsored by the governmental entity. Private-purpose trust funds are used to account for resources that are held for the benefit of parties outside the governmental entity.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Trust Funds Pension trust funds are used when a government acts as a trustee. Defined Benefit Defined Contribution

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Financial Statements for the Trust Fund Trust Fund Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net Assets

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 4 Learn about GASB guidance for pension fund accounting.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Pension Trust Fund Pension trust fund accounting and financial requirements are set forth primarily in GASB Statement No. 25. “Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans”

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GASB Statement No. 25 This statement outlines the information that should be reported about each pension plan. Statement of plan net assets Statement of changes in plan net assets

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GASB Statement No. 25 Two schedules must be presented as RSI. 1. A schedule of funding progress 2. A schedule of employer contributions Information is included for 6 years.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GASB Statement No. 25 GASB Statement No. 25 also provides disclosure requirements for defined contribution pension. Plan description Summary of accounting policies Fair value of net assets Identification of investment concentrations

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GASB Statement No. 27 This statement establishes standards for… – pension cost recognition – disclosures

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GASB Statement No. 27 Pension obligation is the cumulative difference between annual pension cost and the employer’s contribution to the plan, including the pension liability, or assets in transition, if any.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn GASB Statements No. 25 and Reporting framework Parameters Disclosure Plan net assets Changes in net assets Recognition of pension costs Disclosures

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Learning Objective 5 Become familiar with the differences among governmental, proprietary, and fiduciary funds.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Preparing the Government-Wide Financial Statements The government-wide statements include a column for business-type activities. This column includes enterprise fund amounts only. Conversion is not necessary.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Preparing the Government-Wide Financial Statements Governments must either eliminate internal balances or report them as interfund balances in the asset section of the statement of net assets. Government-wide statements report internal service funds with governmental activities.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Required Proprietary Fund Note Disclosures If an enterprise fund issues debt that is backed by its revenue generating activity, the government must present certain detailed segment information in the notes to the financial statements.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 20