Governmental Accounting Basics GFOAZ Quarterly Training May 17, 2012

What’s a Government? A group of people who have the power to make and enforce laws for a country, area, territory, or specific purpose. Can be elected or appointed Different levels of enforcement power

Accounting Standards Types of Governmental Entities Cities, Towns, Townships, Counties School Districts Universities States Fire Districts Retirement Systems Cooperatives Councils, Commissions Boards, Agencies, Authorities Public Utilities

Accounting Standards Accounting standards result in consistent, timely and useful information for the users of financial reports. Generally accepted accounting principles (GAAP) are the conventions, rules, and procedures that serve as the norm for the fair presentation of financial statements.

Accounting Standards State Level – Arizona Revised Statute (A.R.S.) section – “Audits of Cities and Towns” – Requires each city or town to produce financial statements that are in conformity with generally accepted accounting principles (GAAP). National Level – Governmental Accounting Standards Board (GASB) – Independent organization that establishes standards of accounting and financial reporting. Recognized as the official source on generally accepted accounting principles (GAAP) for state and local governments.

Accounting Standards Accounting for Business and Industry Focus on profitability Legal business entity varies Information to shareholders and investors Unprofitable lines of business may be eliminated Efficiency increases profits Payments to officers based on profitability Budgets are a management tool Profits are distributed to shareholders Subsidiaries and consolidations International Accounting Standards (IFRS) Management decisions driven by profitability

Accounting Standards Accounting for Governments Focus is on sources and uses of money Funding is restricted for certain purpose or activity Highly regulated Information prepared for the public Partial or complete subsidy of activities Budgets are a legal requirement Efficiency improves services or reduces taxes No distribution of profits or payments to officers Component governments Inter-fund transfers Management of funding are political!

Unique Characteristics of Governmental Accounting 1. Use of Fund Accounting 2. Measurement Focus and Basis of Accounting (or MFBA) Full Accrual AND Modified Accrual

What’s a Fund? Fund: A self contained accounting entity with its own self-balancing set of accounts. Similar to business accounting entity  Business entity captures all reported attributes for the entire business  Fund captures all reported attributes of a specific portion of the government’s activities

Fund Accounting Fund accounting helps governments demonstrate compliance with restrictions on the use of public resources. Fund accounting is the most distinctive feature of governmental accounting.

Fund Types GOVERNMENTAL FUNDS 1. General Fund 2. Special Revenue Fund 3. Capital Project Fund 4. Debt Service Fund 5. Permanent Fund PROPRIETARY FUNDS 1. Enterprise Funds 2. Internal Service Funds FIDUCIARY FUNDS 1. Agency Funds 2. Pension Funds 3. Investment Trust Funds 4. Private Purpose Trust Funds

Measurement Focus & Basis of Accounting (MFBA) Measurement Focus tells you WHAT to recognize Basis of Accounting tells you WHEN to recognize it

Current Financial Resources Measurement Focus and Modified Accrual Basis of Accounting WHAT: Current financial resource measurement focus only considers SHORT-TERM or CURRENT inflows, outflows and balances of expendable financial resources. Two Types of MFBA’s in Governmental Accounting #1

Modified Basis Cont. WHEN: Modified accrual basis of accounting in which: - Revenues are recognized in the accounting period in which they become available and measurable. - Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable. Two Types of MFBA’s in Governmental Accounting #1

Two Types of MFBA’s in Governmental Accounting #2 Economic Resources Measurement Focus and Accrual Basis of Accounting WHAT: Economic resource measurement focus considers ALL inflows, outflows and balances affecting or reflecting on an entity’s net assets.

Full Accrual Basis Cont. WHEN: Accrual basis of accounting recognizes the financial effect of transactions, events, and interfund activities when they occur, regardless of the timing of related cash flows. Two Types of MFBA’s in Governmental Accounting #2

Fund Types GOVERNMENTAL FUNDS (Current Resources/Modified Accrual) 1. General Fund 2. Special Revenue Fund 3. Capital Project Fund 4. Debt Service Fund 5. Permanent Fund PROPRIETARY FUNDS (Economic Resources/Full Accrual) 1. Enterprise Funds 2. Internal Service Funds FIDUCIARY FUNDS (Economic Resources/Full Accrual) 1. Agency Funds 2. Pension Funds 3. Investment Trust Funds 4. Private Purpose Trust Funds

Fund Types Governmental Funds – Used to account for activities which are primarily supported by taxes and intergovernmental revenues.

Governmental Funds General Fund- day to day operations; can only have ONE General Fund Special Revenue Funds- accounts for proceeds of specific revenue sources that should be used for specific purposes (i.e.: HURF, federal grants) Capital Project Funds- accounts for financial resources used for acquisition or construction of major assets

Governmental Funds Cont. Debt Service Fund- to account for accumulation of resources that will be used to pay general long-term debt Permanent Fund- used to report resources that are legally restricted to the extent that only earnings, not principal, can be spent. Program must benefit the government or its citizenry, not a specific group or organization. (i.e.: perpetual care endowment of a municipal cemetery)

Governmental Fund Financial Statements Current Resources; Modified Accrual Balance Sheet Statement of Revenues, Expenditures and Changes in Fund Balance **See City of Phoenix handout/example

How can you tell MFBA by looking at a financial statement? Modified Accrual Expenditures (Capital Outlay and Debt Service Principal Payments) Assets-Liabilities=Fund Balance Only Current Assets and Current Liabilities Shown Myopic (narrow) View No Long-term Assets means no Depreciation Expense

Governmental Funds - Journal Entry Example Assume that a government borrows $20,000 to acquire equipment with a useful life of 10 years (no salvage value). Debt repayment of $5,000 principal at end of each next 4 years, and interest of 5% per year. What are the appropriate journal entries at the end of year 1??

Governmental Funds - Journal Entry Example – cont’d

Questions….. The Police Chief calls and tells you the Police Dept. has been awarded a new federal operating grant and they need a new fund. What type of fund would you set up? Correct answer – a Special Revenue Fund

Questions….. You are reviewing a preliminary draft of the General Fund statements prepared by a co-worker. The statement of Revenues, Expenditures and Changes in Fund Balance has a line item titled “Depreciation Expense”. Is this correct? Correct answer – NO. Governmental funds expense the entire cost of a capital item in “Capital Outlay”.

Questions….. The City of Kirbyville is selling G.O. Bonds to build a new park. They will need to set up 2 new funds. What are the 2 new fund types? Correct answer – Capital Project Fund (to account for the construction of the park) and a Debt Service Fund (to account for the debt service payments).

Fund Types Proprietary Funds – Used to account for activities that are financed and operated in manner similar to private business. The intent is that the total costs are recovered primarily through user charges. Fiduciary Funds – Report assets held in a trustee or agency capacity for others (including employees and retirees), and which cannot be used to support the government’s own programs. Not included in the Government-Wide statements, as they are not assets of the government.

Proprietary Funds Enterprise Funds- may be used to report any activity for which a fee is charged to EXTERNAL users for goods and services. Must be used if: 1. Debt is secured solely by a pledge of net revenues 2. Laws or regulations require fees to cover full cost of providing the service 3. Pricing policies require full cost recovery (i.e.: utilities, airports, convention center, or stadiums)

Proprietary Funds Cont. Internal Service Fund- accounts for the financing of goods and services provided by one department or agency to other INTERNAL departments or agencies of a governmental unit. Fees are charged with the intent to BREAK EVEN. (i.e.: motor pool or printing services)

Fiduciary Funds Pension Fund- to account for resources that are required to be held in trust for the members and beneficiaries of pension and/or benefit plans. Private Purpose Trust Funds- to account for all other trust arrangements under which principal and income benefit individuals

Fiduciary Funds Cont. Investment Trust Funds- to account for the external portion of investment pools reported by a sponsoring government. Agency Funds- used to report resources held by the reporting government in a purely custodial capacity. Assets = Liabilities

Proprietary Funds Financial Statements Economic Resources; Full Accrual Statement of Net Assets or Balance Sheet Statement of Revenues, EXPENSES, and Changes in Fund Net Assets Statement of Cash Flows **see City of Peoria handout/example

Fiduciary Funds Financial Statements Economic Resources; Full Accrual Statement of Fiduciary Net Assets Statement of Changes in Fiduciary Net Assets

How can you tell MFBA by looking at a financial statement? Full Accrual Expenses Assets-Liabilities=Net Assets Current AND Long- Term Assets and Liabilities Shown Long-term View Depreciation Expense Included in Operating

Proprietary Funds - Journal Entry Example Assume that a government borrows $20,000 to acquire equipment with a useful life of 10 years (no salvage value). Debt repayment of $5,000 principal at end of each next 4 years, and interest of 5% per year. What are the appropriate journal entries at the end of year 1??

Proprietary Funds - Journal Entry Example – cont’d

Questions….. The Community Services Department Director calls and tells you they need a new enterprise fund for program they are starting to provide after school care for a fee. What questions would you ask to determine what type of fund is needed? Correct answer – Intent of program? Full recovery of cost? Other funding sources? Any assets (facilities) or debt?

Questions….. The City of Tres Rios Water Department is set up as an enterprise fund. They purchase a new vehicle for their operations and they charge the expense to an account called “Operating Equipment”. Is this okay? Correct answer – Equipment needs to be capitalized and depreciation should be recorded.

Questions….. You are reviewing a preliminary draft of the Enterprise Fund Financial statements. The statement of Statement of Revenues, Expenses and Changes in Net Assets has a line item titled “Depreciation and Amortization”. Is this correct? Correct answer – Yes. Enterprise Funds show depreciation expense.

Thank you!!  Vicki Rios, Deputy Finance Director City of Phoenix  Michelle Kirby, Deputy Finance Director City of Phoenix