1. Chapter 18
Governmental Entities: Special Funds and Government-wide Financial Statements
Note: We provide a summary of the slides and suggestions on how they might be used in the instructor’s manual for each chapter.
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2. Learning Objective 18-1
Understand and explain the differences in financial reporting requirements of the different fund types and understand the basics of the special revenue fund.

3. Big Picture
A government should establish those funds required by law and the specific operating and management needs of the government entity.
Figure 18-2 summarizes the different types of funds. 3

4. Overview of Accounting and Financial Reporting for Governments4

5. Governmental Funds Worksheets
Each of the five governmental funds will report two fund-based financial statements:
The Balance Sheet
The Statement of Revenues, Expenditures, and Changes in Fund Balance 5

6. Worksheet for the Balance Sheet for the Governmental Funds6

7. Worksheet for the Statement of Revenues, Expenditures, and Changes in Fund Balances for the Governmental Funds 7

8. The General Fund
General rule: all activities should be accounted for in the general fund unless specifically required by law or the different measurement focus used for proprietary and fiduciary funds.
We discussed the general fund in Chapter 17.

9. Special Revenue Funds
Used to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specific purposes.
With the exception of inflows for Capital projects and Expendable trusts.
Includes resources and expenditures for operations, such as public libraries, when a separate tax is levied for their support.
Necessary revenue often comes from special tax levies or federal or state governmental grants.
Special revenue fund accounting is identical to general fund accounting.
Thus, we don’t discuss the principles in detail here.

10. Practice Quiz Question #1
Which of the following statements is true about fund accounting?
a. An enterprise fund is an example of fiduciary fund.
b. Most transactions of a state or municipal government are accounted for in the general fund.
c. A capital projects fund is an example of proprietary fund.
d. Most transactions of a state or municipal government are accounted for in the internal service fund.

11. Learning Objective 18-2
Make calculations and record journal entries for capital projects funds.

12. Capital Projects Funds
Account for financial resources used for the acquisition or construction of major capital facilities.
Examples: libraries, civic centers, fire stations, courthouses, bridges, major streets, and city municipal buildings.
A separate fund is created when a project
is approved and ceases at its completion.
Use the modified accrual basis of accounting.
Do not record fixed assets, depreciation, or long-term debt.
Typically do not have annual operating budgets.

13. Capital Projects Funds
Capital budget
Prepared as a basis for selling bonds to finance a project.
The control mechanism for the length of the project.
May or may not be formally recorded in the accounts.
The fund records capital outlays as expenditures. 13

14. Illustration of Transactions
On January 1, 20X2, Sol City establishes a capital projects fund to account for a capital addition to the municipal courthouse. The expected cost of the addition is $120,000. A $100,000, 10 percent general obligation bond issue is sold at 102 for total proceeds of $102,000. The bond is a five-year serial bond with equal amounts of $20,000 to be paid each year, beginning on December 31, 20X2, until the debt is extinguished.
The capital projects fund is not entitled to the $2,000 premium on the sale of bonds. The premium is transferred out to the debt service fund immediately upon receipt. If bonds are sold at a discount, either the amount expended for the improvement must be decreased or the general fund must make up the difference to the face value of the bonds.

15. Illustration of Transactions
On January 1, 20X2, Sol City establishes a capital projects fund to account for a capital addition to the municipal courthouse. The expected cost of the addition is $120,000. A $100,000, 10 percent general obligation bond issue is sold at 102 for total proceeds of $102,000. The bond is a five-year serial bond with equal amounts of $20,000 to be paid each year, beginning on December 31, 20X2, until the debt is extinguished.

16. Illustration of Transactions
The city also receives a federal grant for $10,000 as financial support for part of the capital addition, and the capital projects fund receives an interfund transfer in of $20,000 from the city’s general fund.

17. Practice Quiz Question #2
Which of the following statements is true about capital projects funds?
Capital projects funds record depreciation.
Capital projects funds are permanent because long-term assets remain in the fund until disposal.
Capital projects funds are required by law to have operating budgets.
When a capital project is completed, the fund is closed and the asset is transferred to the GCA-GLTL general ledger.

18. Make calculations and record journal entries for debt service funds.
Learning Objective 18-3
Make calculations and record journal entries for debt service funds.

19. Debt Service Funds
Account for the accumulation and use of resources for the payment of general long-term debt principal and interest.
The accounting and financial reporting is the same as for the general fund.
Use the modified accrual basis of accounting.

20. Debt Service Funds
Function is to accumulate resources to pay debt principal and interest as they become due.
Only the portion of long-term debt that has matured and is currently payable is recorded.
“When-due” recognition of interest:
Not accrued
Recognized as a liability only when it comes due

21. Debt Service Funds
A government may have several types of general long-term debt obligations.
Serial bonds: most common form; repaid in installments over the life of the debt.
Term bonds: less frequent; entire principal is due at the maturity date.
Special assessment bonds: secured by tax liens on the property located within the special assessment tax district.
May finance capital projects or acquire other assets to operate the governmental unit.
Special assessment feature simply states the source of financing and means of repayment. 21

22. Debt Service Funds
A government may have several types of general long-term debt obligations.
Notes and warrants: debt typically issued for one or two years.
Capital leases: governmental entities must record capital leases in accordance with GAAP; become the governmental unit’s long-term liabilities. 22

23. The GCA-GLTL General Ledger
GCA-GLTL = general capital assets and general long-term liabilities.
Used to record all long-term items because the governmental financial statements have a current focus.

24. Adoption of Debt Service Fund Budget
Sol City adopts its annual operating budget for the debt service fund when it creates the fund to service the serial bonds sold for the courthouse addition. The city budgets appropriations of $30,000 to pay $20,000 of maturing principal and $10,000 of interest for the year. Sol City budgets all expected interfund transactions and records the anticipated interfund transfer in of the $2,000 premium on the serial bonds sold with the following journal entry:

25. Debt Service Fund Revenue and Other Financing Sources
The following journal entries record the receipt of the bond premium (recall that the capital projects fund records this transfer as an interfund transfer out) and the levy and collection of taxes:

26. Debt Service Fund Revenue and Other Financing Sources
The following journal entries record the receipt of the bond premium (recall that the capital projects fund records this transfer as an interfund transfer out) and the levy and collection of taxes:

27. Debt Service Fund Expenditures
The primary expenditures of the debt service fund are for the first annual payment of principal and interest on the series bond payable. The following journal entries record the expenditures:

28. Closing Entries in the Debt Service Fund
The following journal entries record the closing of the nominal accounts:

29. Closing Entries in the Debt Service Fund
The following journal entries record the closing of the nominal accounts:

30. Closing Entries in the Debt Service Fund
If the debt service fund services term bonds, a different budgetary account system is used. The following budgetary entry would be made for term bonds for the periods prior to maturity date:

31. Debt Service Fund Investments
Debt service funds may make temporary investments of excess cash to maximize the return from its resources.
These investments are reported as an asset.
Most temporary investments are made in low-risk U.S. Treasury securities or in CDs from large banks.
Interest income is accrued as earned.
Valued in accordance with GASB 31: fair value for most investments made by a governmental entity.

32. Practice Quiz Question #3
Which of the following statements is true?
Long-term debt resides permanently in the debt service fund.
The GCA-GLTL General Ledger services interest payments on long-term debt.
Special assessments are levied against the general population.
A debt service fund only makes interest and principal payments.
Debt service funds accrue liabilities as incurred.

33. Make calculations and record journal entries for permanent funds.
Learning Objective 18-4
Make calculations and record journal entries for permanent funds.

34. Permanent Funds
Established by government entities when a donor restriction stipulates that
the fund principal must be preserved, and
the income from these permanent funds be used to benefit the government’s programs or its general citizenry.

35. Permanent Funds Classified in the governmental funds category.
The income resources in permanent funds are to be used toward the government’s programs and services.
Use the modified accrual basis of accounting.
Financial statements for permanent funds are the same as for all other governmental funds.

36. Illustration of Transactions
On January 1, 20X2, Sol City receives a $100,000 bequest from a long-term city resident. The will stipulates that the $100,000 be invested and the income be used to provide for maintenance and improvement of the city park. The following is the journal entry to record the acceptance of the permanent fund resources:

37. Illustration of Permanent Fund Transactions
Sol City uses the fund’s resources to acquire $100,000 face value, high-grade, 8 percent governmental securities at 90 to yield an effective interest rate of 10 percent. The following is the journal entry to record this investment:

38. Illustration of Permanent Fund Transactions
Sol City uses the fund’s resources to acquire $100,000 face value, high-grade, 8 percent governmental securities at 90 to yield an effective interest rate of 10 percent. The following is the journal entry to record this investment:
Note: the fund uses the modified accrual method for interest income. This means that the revenue recognition may be for only the interest amount that is both measurable and available to finance expenditures made during the current fiscal period.

39. Illustration of Permanent Fund Expenditures
The permanent trust expends $5,000 during the period for maintenance of the city park and recognizes the following entry:

40. Practice Quiz Question #4
Which of the following is NOT true about permanent funds?
a. The principal of permanent funds is usually required to be preserved.
b. The income from permanent funds is usually allowed to be spent for the benefit of the governmental entity and its citizens.
c. Permanent funds are accounted for in the general fund.
The accounting for permanent funds is similar to the accounting in the general fund.
Permanent funds usually have donor restrictions.

41. reporting as major funds.
Learning Objective 18-5
Understand and explain how governmental funds are reported and rules for separate
reporting as major funds.

42. Governmental Funds Financial Statements
GASB 34: two required financial statements for government funds.
The governmental funds balance sheet.
The governmental statement of revenues, expenditures, and changes in fund balance.
Prepared for each individual governmental fund.
The foundation for the financial statements prepared for the governmental entity. 42

43. Governmental Funds Financial Statements
Only major government funds are reported individually.
The general fund is always a major fund.
If a governmental fund is not determined to be a major fund, it is aggregated and reported in a single column as other governmental funds.

44. Governmental Funds Financial Statements
To determine which of the other governmental or specific enterprise funds are major, both of the following criteria must be met:
10% criterion: total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10% of the corresponding total for all funds of that category or type.
5% criterion: total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 5% of the corresponding total for all governmental plus enterprise funds combined.

45. Practice Quiz Question #5
Which of the following is NOT true about governmental reporting?
a. The special revenues fund is always a major fund.
b. Non-major funds are aggregated and reported in a single column.
c. The general fund is always a major fund.
d. Major funds are defined as those that constitute at least 10% of their fund category or 5% of all funds.

46. Make calculations and record journal entries for enterprise funds.
Learning Objective 18-6
Make calculations and record journal entries for enterprise funds.

47. Enterprise Funds
Account for activities that provide services primarily to the public.
Examples: a city may operate electric, gas, and water utilities.
Accounting like business accounting.
Measurement focus on all economic resources and the accrual basis of accounting.
Report fixed assets, which are depreciated, and long-term debt, if issued.
Focus on income determination and capital maintenance.

48. Enterprise Funds
The enterprise fund is one of the two proprietary fund types.
The financial statements for proprietary funds are very similar to those for commercial entities:
The statement of net assets (balance sheet).
The statement of revenues, expenses, and changes in fund net assets (income statement).
The statement of cash flows.

49. Practice Quiz Question #6
Which of the following statements is true about enterprise funds?
a. The activities accounted for in enterprise funds primarily benefit other government units.
b. The accounting for enterprise funds is similar to the accounting for businesses.
Enterprise never report long-term assets or depreciation.
A maintenance service center for public busses other city vehicles is an example of an activity accounted for in an enterprise fund.

50. Understand and explain the financial reporting of proprietary funds.
Learning Objective 18-7
Understand and explain the financial reporting of proprietary funds.

51. Financial Statements for the Proprietary Funds
Three financial statements are required for the proprietary funds:
The statement of net position.
The statement of revenues, expenses, and changes in fund net position.
The statement of cash flows. 51

52. Financial Statements for the Proprietary Funds
Statement of Net Position
Similar to the balance sheet for commercial entities.
Proprietary funds report their own fixed assets, investments, and long-term liabilities.
GASB 34 specifies that the net position section is separated into three components:
Invested in capital assets, net of related debt.
Restricted because of restrictions beyond the government’s control.
Unrestricted. 52

53. The Financial Statements of Proprietary Funds
Statement of Revenues, Expenses, and Changes in Fund Net Position
Similar to the income statement for commercial entities.
Operating and nonoperating revenues and expenses are separated to provide more information value regarding the operations of the proprietary funds. 53

54. The Financial Statements of Proprietary Funds
Statement of Cash Flows
Differs somewhat from the three-section format of the statement for commercial entities.
Because of the large number of capital asset acquisition and financing transactions, GASB 9 specifies four sections:
Cash flows from operating activities.
Cash flows from noncapital financing activities.
Cash flows from capital and related financing activities.
Cash flows from investing activities. 54

55. The Financial Statements of Proprietary Funds
Descriptions of the Four Sections of the Statement of Cash Flows for Proprietary Funds:
Cash flows from operating activities: all transactions from providing services and delivering goods.
Cash flows from noncapital financing activities: all activities such as borrowing or repaying money for purposes other than to acquire, construct, or improve capital assets.
Cash flows from capital and related financing activities: all activities related to the acquisition, disposition, construction, or improvement of capital assets.
Cash flows from investing activities: all investing activities, interest and dividend revenue, and acquisition and disposition of debt or equity instruments. 55

56. Practice Quiz Question #7
Which of the following statements is true about the financial reporting of proprietary funds?
a. The financial statements are identical to those of the general fund.
b. Proprietary funds do not need to meet the 10% or 5% tests to be major funds.
c. Enterprise funds are always major funds.
Internal service funds are not required to provide a statement of cash flows.
Proprietary funds provide financial statements very similar to those of commercial businesses.

57. Learning Objective 18-8
Make calculations and record journal entries for internal service funds.

58. Internal Service Funds
Account for the financing of goods or services provided by one department or agency to other departments or agencies on a cost-reimbursement basis.
These services are not available to the general public, making it different from the enterprise fund.
Examples: motor vehicle pools, central computer facilities, and printing shops.
Accounting and financial reporting is the same as for commercial entities.
Measurement focus on all economic resources and the accrual basis of accounting.
Report fixed assets, which are depreciated, and long-term debt, if issued.

59. Practice Quiz Question #8
Which of the following an example of an activity that would be accounted for in an internal service fund?
a. A public swimming pool.
b. A municipal golf course with a club house used for weddings and other public gatherings.
c. A maintenance department that provides services to various government offices.
A state beach or park.
A city recreation center with weight rooms, a workout facility, and a pool available to citizens of the community.

60. Make calculations and record journal entries for trust funds.
Learning Objective 18-9
Make calculations and record journal entries for trust funds.

61. The Fiduciary Funds Two categories (four types of funds) Trust funds
Pension (and other employee benefit) trust funds
Investment trust funds
Private-purpose trust funds
Agency funds

62. Trust Funds
Account for resources held by a governmental unit in a trustee capacity.
The unit acts as a fiduciary for monies or properties held on behalf of individuals, employees, or other governmental agencies.

63. Trust Funds Trust funds use the accrual basis of accounting
Financial statements required:
The statement of fiduciary net position.
Includes all trusts and agency funds.
The statement of changes in fiduciary net position.
Includes only the trust funds because agency funds do not have a net asset balance. 63

64. Trust Funds
Private-purpose trust funds account for trust agreements for which the principal and/or income benefit is limited to:
Specific individuals
Private organizations
Other governments
The benefit is limited to private, rather than general public, purposes.

65. Practice Quiz Question #9
Which of the following is NOT true trust funds?
a. Trust funds use the accrual basis of accounting.
b. Trust funds can account for money that belongs to employees.
Trust funds are not required to provide financial statements.
Pension funds are an example of a trust fund.

66. Make calculations and record journal entries for agency funds.
Learning Objective 18-10
Make calculations and record journal entries for agency funds.

67. A = L The following items do not exist for agency funds: Agency Funds
A fiduciary fund type that accounts for resources held by a governmental unit as a custodial agent for individuals, private organizations, other funds, or other governmental units.
Since the assets belong to someone else, assets always equal liabilities.
The following items do not exist for agency funds:
A fund balance/equity
Statement of changes in fiduciary net position
A = L

68. Agency Funds Agency funds use the accrual basis of accounting.
The financial statement for agency funds is the statement of fiduciary net position. 68

69. Practice Quiz Question #10
Which of the following is a good example of an activity that would be accounted for in an agency fund?
a. A public parking lot available to all citizens that charges a fixed daily or monthly rate.
b. A county tax assessment agency that collects property taxes for all cities in the county.
c. A county owned ski resort that is available to both county residents and non- residents.
d. A public water utility providing services to all residents of the county.

70. Learning Objective 18-11
Understand and explain the preparation of governmentwide financial statements.

71. The Government Reporting Model
GASB 34 specifies the reporting model for governmental entities.
All general-purpose units such as states, counties, and municipalities must provide all financial statements that GASB 34 requires. 71

72. The Government Reporting Model
Four major issues that arise in the governmental reporting model:
What organizations compose the reporting entity?
The primary government.
A component unit for which the primary government is financially accountable.
Any organization that has a significant relationship with the primary government. 72

73. The Government Reporting Model
Four major issues that arise in the governmental reporting model:
What constitutes financial accountability?
Financial accountability is evidenced when the primary government appoints a majority of the organization’s governing board.
Financial accountability may also exist if the organization has a separately elected or appointed board but depends on the primary government for the financial resources required to operate. 73

74. The Government Reporting Model
Four major issues that arise in the governmental reporting model:
What other organizations should be included in the reporting entity?
GASB 14 specifies a third category of organizations to be evaluated to determine if they are part of the reporting entity with the primary government.
These are legally separate, tax-exempt entities for which the primary government is not financially accountable.
Three characteristics must be met for a legally separate, tax-exempt organization to be reported as a component unit of the primary government. 74

75. The Government Reporting Model
Four major issues that arise in the governmental reporting model:
How should the financial results of the component units be reported?
A choice between two methods:
Discrete presentation in a separate column of the primary government’s financial statements.
Blended presentation by combining the organization’s results into the primary government’s financial results. 75

76. Government Financial Reports
The Comprehensive Annual Financial Report (CAFR)
Government-wide financial statements (2)
The statement of net position
The statement of activities
Fund-based statements (7)

77. The Comprehensive Annual Financial Report77

78. Government-wide Financial Statements
Two government-wide financial statements:
The statement of net position
Includes all GCA and GLTL
The statement of activities
Includes depreciation expense
Prepared on the economic resources measurement focus.
Accrual basis of accounting.
Fiduciary activities are excluded from the government-wide statements because their resources are not available to support government programs.

79. Government-wide Financial Statements
Important features of the statement of net position:
Reports all types of governmental entity’s assets, including infrastructure.
Reports all debt—including GLTL.
Reports net assets in three categories:
Invested in capital assets, net of related debt
Restricted
Unrestricted
In general, interfund balances (loans, advances, and due to and due from accounts) are eliminated.

80. Governmentwide Statement of Net Position80

81. Governmentwide Statement of Activities81

82. Practice Quiz Question #11
Which of the following is true about the CAFR?
a. Government-wide financial statements are similar to the balance sheet and income statement disclosed by businesses.
b. Government-wide financial statements are based on the modified accrual basis of accounting.
c. Since governments provide the two government-wide financial statements, they are not required to provide fund statements.
d. Governmental reporting requires a government-wide statement of cash flows.

83. Learning Objective 18-12
Understand and explain the additional disclosures that accompany governmentwide
financial statements.

84. The Government Reporting Model
Reconciliation schedules
GASB 34 requires two to reconcile the net change in the total amounts reported on the governmental funds statements with the amounts reported on the government-wide statements.
Reconciliation schedule for statement of net position.
Reconciliation schedule for statement of activities.
Budgetary comparison schedule
GASB 34 requires that this be presented as required supplementary information for the general fund and for each special revenue fund that has a legally adopted annual budget. 84

85. The Government Reporting Model
Management’s Discussion and Analysis
GASB 34 specifies that MD&A should be included in the required supplementary information (RSI) of the government-wide financial statements to provide an analytical overview of the government’s financial and operating activities.
Notes to the government-wide financial statements
GASB 34 specifies a number of required note disclosures. 85

86. The Government Reporting Model
Interim reporting
Governmental entities generally are not required to publish interim reports, although many prepare monthly or quarterly reports.
Valuable internal management control instrument.
Auditing governmental entities
Most entities are audited annually.
Different from the audit of a commercial entity.
The Single Audit Act of 1984 is a federal law specifying audit requirements for all state and local governments receiving federal financial assistance. 86

87. Additional Considerations
Special-purpose governmental entities
Special-purpose governments are legally separate entities.
Examples: cemetery districts, levee districts, park districts, tollway authorities, and school districts.
GASB 34 establishes specific reporting requirements for each of the following types of special-purpose governments:
Engaged in more than one governmental program or in both governmental and business-type activities.
Engaged in a single governmental program (such as cemetery districts or drainage districts).
Engaged in only business-type activities.
Engaged in only fiduciary-type activities. 87

88. Practice Quiz Question #12
Which of the following is true about required supplemental disclosures of governmental entities?
a. Governments are autonomous and need not provide any specific disclosures.
b. The CAFR must include management discussion and analysis.
c. No one reads governmental financial reports, so it doesn’t really matter what is disclosed.
d. Governments must provide quarterly interim reports as part of the CAFR.

89. Conclusion
The End