1. Chapter Eleven Accounting for State and Local Governments, Part I McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Importance of Governmental Accounting  Absence of profit motive removes an important internal control  Allocation of limited resources to unlimited needs creates public debate  Focus on sources and uses of funds  Need to inform public (stewardship)  Massive  Federal government  50 State governments  Thousands of local governmental units Why is it different than “for profit” businesses? LO 1 11-2

3. Governmental Accounting Governmental Accounting Standards Board (GASB) generates primary standards.  Focuses on financial reporting for non- profit governmental agencies.  Many concepts are similar to financial accounting, but terminology and procedures differ.  Requires two sets of financial statements 11-3

4. Governmental Accounting User Needs  In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information:  Citizenry  Legislative and oversight bodies  Investors and creditors 11-4

5. GASB Statement No. 34 Requires the production of two sets of financial statements: Government-wide Financial Statements Report all revenues and costs with a long term focus. Of interest to creditors, to assess the likelihood of being paid. Fund Financial Statements Show restrictions on the use of resources, and report current revenues and expenditures from certain activities. LO 2 11-5

6. Important Difference in Focus Fund financial statements:  Report on individual government activities.  Primary measurement focus is current financial resources especially cash and receivables.  Assess fiscal accountability in raising and utilizing money.  The timing of recognition, in most cases, is based on modified-accrual accounting. 11-6

7. Important Difference in Focus Government-wide financial statements:  Report on financial affairs as a whole.  Assess operational accountability, the government’s ability to meet its objectives.  Focus on all economic resources.  Utilize accrual accounting.  Comparable to ‘business’ accounting.  Help users evaluate government’s financial decisions and its long-term stability. 11-7

8. Fund Financial Statements Seek to Answer Three Questions How did the government generate its current financial resources? Where did those financial resources go? What amount of financial resources is presently held? 11-8

9. Reporting Diverse Governmental Activities - Fund Accounting Governmental units have many different types of activities. No common motivation links these activities. Each activity operates a quasi- independent, self- balancing set of accounts called “funds.” Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions LO 3 11-9

10. Governmental Funds Accounting for activities related to serving the public. Proprietary Funds Accounting for business-type activities. Accounting for financial resources held for others as trustee. Fund Accounting Classification All funds fall into one of three broad classifications. LO 4 11-10 Fiduciary Funds

11. Governmental Funds - General Fund  Used to account for all financial resources except those accounted for in other funds.  In 2010, 58% of Baltimore’s governmental funds (over $1.25 Billion) were accounted for in the General Fund. 11-11

12. Governmental Funds - Special Revenue Fund  Expenditures are legally restricted for a specific purpose other than debt payments or capital projects.  St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.” 11-12

13. Governmental Funds - Capital Projects Fund  Accounts for capital resources to be used for capital outlays such as bridges, schools, and other major governmental facilities.  The actual asset is not recorded in this account, but the money to finance its purchase or construction is. 11-13

14. Governmental Funds - Debt Service Funds  Record financial resources accumulated to pay long-term liabilities and interest when due.  Does not account for the actual debt.  In 2010, Birmingham, Alabama, reported paying out $19.9 million in principal payments and $14.8 million in interest payments from its debt service funds. 11-14

15. Governmental Funds - Permanent Funds (Endowments)  Account for assets donated to the government by external donors with stipulation that the principal cannot be spent.  In 2009, Dallas, Texas reported nearly $8 million in funds to maintain four different parks. 11-15

16. Proprietary Funds - Enterprise Funds  May be used to account for any government activity that is financed, at least in part, by user charges.  An activity MUST be accounted for here if, any one of the conditions below are met... – Costs are recovered from user fees – Fees are set high enough to recover costs – Net revenues generated by the activity provide the sole security for the activity’s debts 11-16

17. Proprietary Funds - Internal Service Funds  Account for any operation that provides services to OTHER governmental departments.  Inter-departmental fees are charged on a cost-reimbursement basis.  Accounted for similar to for-profit operations in the private sector.  In 2010, Lincoln, Nebraska reported seven operations that were accounted for as internal service funds including copy services fund, police garage fund, and fleet services fund. 11-17

18. Fiduciary Funds  Investment Trust  Investments held on behalf of others  Private-Purpose Trust  Principal and interest are both for the benefit of parties outside the government  Pension Trust  Employee retirement  Agency Funds  Any resources held by the government as an agent for others (some taxes and tolls fall into this category) Account for assets that are held in a Trustee Capacity for External Users 11-18

19. Government-Wide Financial Statements Two statements are required: 1)Statement of Net Assets 2)Statement of Activities Reporting is separated into governmental activities (government funds and most internal service funds) and business-type activities (enterprise funds and remaining internal service funds). LO 5 11-19

20. Statement of Net Assets Note: The Statement of Net Assets reports Governmental Activities separate from the Business- Type Activities. 11-20

21. Statement of Net Assets Also note this statement does not give information about Fiduciary Funds. This is consistent with the “economic resources management focus” -- only include assets and liabilities that are available to use for governmental purposes. 11-21

22. Statement of Activities On the Statement of Activities, the net for a given function is determined horizontally, while the totals for expenses and revenues are determined vertically. 11-22

23. Statement of Activities The general revenues are shown separately at the bottom of the statement. Statement continued... 11-23

24. Fund Financial Statements Fund-Based statements will include information on fiduciary funds. Two statements are required: 1)Balance Sheet 2)Statement of Revenues, Expenditures, and Changes in Fund Balance 11-24

25. Fund Financial Statements  The Internal Service Funds are included in separate statements for Proprietary Funds.  The current financial resources measurement basis is used.  The modified accrual accounting approach is used. These statements will differ from the Government-Wide financial statements for three reasons. 11-25

26. Fund Accounting – Balance Sheet Example Separate column for each “major” fund (where a fund total > 10% of all funds in the same category, or > 5% of all funds). 11-26

27. Statement of Revenues, Expenditures, & Changes in Fund Balances - Example Also reports each “major” fund (where a fund total > 10% of all funds in the same category, or > 5% of all funds) in separate columns. 11-27

28. Statement of Revenues, Expenditures, & Changes in Fund Balances - Example Statement continued... 11-28

29. Procedures – Importance of Budgets  The budget serves several purposes: – Expresses public policy – Expresses financial intent – Provides spending limits – Compares actual results to the budget as a means of evaluating performance – Indicates proposed deficits  The budget is recorded in the books as a DEBIT to estimated revenues, and a CREDIT to each “appropriation” approved. LO 6 11-29

30. Prepare the journal entry to record the Special Revenue Fund budget. A town enacts a motel excise tax to promote tourism and conventions. For 2013, the tax is expected to generate $490,000 in Special Revenues. The city council authorizes expenditures of $420,000 including $200,000 for salaries, $30,000 for utilities, $110,000 for supplies, and $80,000 for advertising. Procedures – Recording Budgetary Entries Example 11-30

31. BudgetEncumbranceActual Procedures – Encumbrances  In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities.  A recorded commitment or contract is called an “encumbrance.” 11-31

32. Procedures – Encumbrances For Fund-Based Financial Statements:  An entry is required to record the encumbrance.  An entry is required when the bill is received. For Government-Wide Financial Statements:  No entry is required to record the encumbrance.  An entry is required when the bill is received. 11-32

33. Record the order in Drye Township’s books. Procedures – Encumbrances – Example Assume a city’s police department ordered $18,000 worth of equipment. This amount has been committed even though no formal liability exists until the equipment is received. Remember, this entry is only recorded for Fund-Based Financial Statements. 11-33

34. The equipment arrives with an invoice for $18,160. Sales tax, price adjustments, and other costs may cause the actual invoice to differ from the estimated amount. Procedures – Encumbrances – Example The account title typically used in place of Accounts Payable. General Fund – Police Department 11-34

35. Procedures – Fixed Assets The expenditure for fixed assets is recorded in the General Fund for fund-based statements.  But, depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. However, GASB requires a record of ALL capital assets in the Statement of Net Assets in government-wide statements.  And, depreciation expense is recorded. LO 7 11-35

36. Procedures – Recognition of Revenues Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions For Government-Wide Statements, record the revenues when “eligibility requirements have been met”. For Fund Statements, record the revenues when they become “available for recognition”. LO 8 11-36

37. Procedures – Issuance of Bonds The town of Ruark issues $9 million in bonds for the construction of new school building. The following journal entry is prepared to reflect the sale of the bonds. LO 9 11-37

38. Procedures – Payment of Long-Term Liabilities Government-Wide Financial Statements Record principal and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. The town makes a $500,000 bond payment and pays 3 months of interest amounting to $10,000. 11-38

39. Special Assessments  Governments may provide improvements or services that benefit particular properties.  They may assess the costs, in total or in part, to the property owners.  Examples – Paving – Curbing – Sidewalks – Sewers and drains – Water lines  Usually financed by debt issuance and liens on the benefited property (to ensure reimbursement). 11-39

40. Special Assessments - Accounting  Government-wide financial statements – Debt and subsequent construction handled as for-profit enterprises do – Asset recorded at cost – Taxes assessed and collected – Tax receipts used to settle debt  Fund-based financial statements – Infrastructure not recorded – Debt not recorded – Reported in Capital Projects Fund and Debt Service Fund (tagged as special assessment in both) 11-40

41. Interfund Transactions  Commonly used, particularly monetary transfers from the General Fund  Normally reported as “other financing source” and “other financing use” within the fund-based financial records  Many of these are not reported in the government-wide financial statements because they create no net impact (intra-activity transactions)  Interactivity transactions occur between governmental and enterprise funds and are reported on government-wide financial statements LO 10 11-41

42. Summary  Traditionally, accounting for governmental units was handled by means of fund accounting because of the absence of profit as a control  GASB 34 radically altered this tradition and now requires that government-wide financial statements be produced in addition to the fund- based financial statements previously required  The primary focus of governmental accounting remains the sources and uses of financial resources, as well as the balances and their allocation 11-42