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State and Local Government Accounting Principles

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1 State and Local Government Accounting Principles
Chapter 2

2 © 2013 Pearson Education, Inc. All rights reserved.
Learning Objectives Discuss major aspects of government financial reporting model Define fund and examine broad categories Identify MFBA used in financial statements Analyze effects of transactions Discuss budgetary accounting and reporting Understand fund categories and types of funds found in each category Understand basic financial reporting requirements © 2013 Pearson Education, Inc. All rights reserved.

3 GASBS 34: Basis for Financial Reporting
Issuance in 1999 marked a major change in governmental financial reporting Created dual perspective reporting: Fund financial statements—detailed presentations Government-wide financial statements—condensed consolidated overview © 2013 Pearson Education, Inc. All rights reserved.

4 Basic Financial Statements: Overview
© 2013 Pearson Education, Inc. All rights reserved.

5 Minimum Requirements for External Financial Reporting: The GASB’s View
© 2013 Pearson Education, Inc. All rights reserved.

6 Fundamentals of SLG Accounting and Financial Reporting
GAAP and legal compliance Fund accounting Fund categories Types of funds Comparative financial statement formats Annual financial reporting © 2013 Pearson Education, Inc. All rights reserved.

7 GAAP and Legal Compliance
GAAP Reporting Ensures that the financial reports of all SLGs contain the same types of financial statements and disclosures for the same types of funds and activities Requires “full” disclosure © 2013 Pearson Education, Inc. All rights reserved.

8 GAAP and Legal Compliance (continued)
Ranges from simple to complex requirements May be simple if budgeting on a GAAP basis More complex if cash or encumbrance budgeting is required Identifying the budgetary basis is key © 2013 Pearson Education, Inc. All rights reserved.

9 GAAP and Legal Compliance (continued)
Reconciling GAAP and legal requirements Maintain budgetary accounting control during the year Clearly distinguish between budgetary basis from GAAP basis Prepare statements and schedules using both bases and reconcile differences © 2013 Pearson Education, Inc. All rights reserved.

10 © 2013 Pearson Education, Inc. All rights reserved.
GAAP Requirements Trying to assure comparability among and between governments Full disclosure may result in much more information than “adequate” disclosure required by FASB © 2013 Pearson Education, Inc. All rights reserved.

11 © 2013 Pearson Education, Inc. All rights reserved.
Fund Accounting Most distinctive feature of governmental accounting Use of fund accounting allows for Proper accounting controls Demonstrating compliance Must understand fund structure, fund model, and interrelationships between funds © 2013 Pearson Education, Inc. All rights reserved.

12 © 2013 Pearson Education, Inc. All rights reserved.
Definition of a Fund Independent accounting entity with a self-balancing set of accounts Similar to a business accounting entity Business entity captures all reported attributes for the entire business and all its transactions Fund captures all reported attributes of a portion of the government’s activities and resources accounted for in that fund © 2013 Pearson Education, Inc. All rights reserved.

13 Fund Categories Proprietary Funds Governmental Funds Fiduciary Funds
Plus the Nonfund Accounts © 2013 Pearson Education, Inc. All rights reserved.

14 © 2013 Pearson Education, Inc. All rights reserved.
Proprietary Funds Similar to accounting for businesses Accounting measures net position, changes in net position, and cash flows © 2013 Pearson Education, Inc. All rights reserved.

15 Proprietary Funds: Accounting Equation
Current Assets + Noncurrent Assets Deferred Outflows Current Liabilities Long-Term Liabilities Deferred Inflows Net Position – = © 2013 Pearson Education, Inc. All rights reserved.

16 Proprietary Funds: MFBA
Measurement Focus (MF) Economic resources Financial statement recognition of all assets and all liabilities Basis of Accounting (BA) Accrual Recognize revenues when earned and expenses when incurred © 2013 Pearson Education, Inc. All rights reserved.

17 © 2013 Pearson Education, Inc. All rights reserved.
Governmental Funds Used to account for sources, uses, and balances of general government financial resources Funds represent segregations of general government net financial assets © 2013 Pearson Education, Inc. All rights reserved.

18 Governmental Funds: Accounting Equation
Financial Assets + Deferred Outflows Fund Balance Related Liabilities Deferred Inflows = – Assets + Deferred Outflows Fund Balance Liabilities Deferred Inflows = Reporting Format © 2013 Pearson Education, Inc. All rights reserved.

19 Governmental Funds: Accounting Equation Terms
Financial Assets—refers primarily to cash, investments, and receivables Related Liabilities—related to the current year and normally paid for available current financial resources Fund Balance Net financial assets of fund Difference in financial assets and related liabilities © 2013 Pearson Education, Inc. All rights reserved.

20 Governmental Funds: MFBA
Measurement focus—current financial resources Basis of accounting—modified accrual © 2013 Pearson Education, Inc. All rights reserved.

21 Governmental Funds: Recognition Criteria—Revenues
Earned during or levied for the period Objectively measurable Collected in period or soon enough thereafter (usually 60 days) to pay liabilities incurred for expenditures of the period (available) © 2013 Pearson Education, Inc. All rights reserved.

22 Governmental Funds: Recognition Criteria—Expenditures
When operating or capital outlay—liabilities to be paid currently from governmental funds are incurred When debt service (principal and interest) —payments on long-term liabilities are due © 2013 Pearson Education, Inc. All rights reserved.

23 Expenditure/Expense Comparison
Expenditures (net financial assets expended) Expenses (cost of goods or services used) Operating Salaries, supplies, utilities, etc. Capital Outlay Acquisition Depreciation Debt Service Principal and Interest Interest © 2013 Pearson Education, Inc. All rights reserved.

24 Deferred Outflows and Deferred Inflows
Introduced in GASB Concepts Statement No. 4 Included in standards on derivatives and service concessionaire arrangements Financial statements expanded to include classifications in GASBS 63 Broader application made in GASBS 65 © 2013 Pearson Education, Inc. All rights reserved.

25 Deferred Outflows and Deferred Inflows: Defined
Deferred Outflow—consumption of net assets by the government that is applicable to a future reporting period Deferred Inflow—acquisition of net assets by the government that is applicable to a future reporting period © 2013 Pearson Education, Inc. All rights reserved.

26 Common Examples of Deferred Inflows in Governmental Funds
Taxes collected in advance of the period for which they are levied Taxes levied in the current period to finance next period Revenues deferred due to availability criterion Other specific examples will be discussed when certain conditions arise in text © 2013 Pearson Education, Inc. All rights reserved.

27 © 2013 Pearson Education, Inc. All rights reserved.
Nonfund Accounts General Capital Assets—not financial resources available for expenditure, but must maintain accountability General Long-Term Liabilities—unmatured principal that does not require current appropriation or expenditure of fund financial resources © 2013 Pearson Education, Inc. All rights reserved.

28 Nonfund Accounts: General Capital Assets
Capital assets used in general government activities Not assets of any fund but of the governmental unit as a whole Inclusion in governmental fund financial statements would increase fund balance and could mislead users © 2013 Pearson Education, Inc. All rights reserved.

29 Nonfund Accounts: General Long-Term Liabilities
Secured by the general credit and revenue-raising powers of the government Not liabilities of any fund but of general government as a whole If included as governmental fund liability would be misleading and dysfunctional to current period management control © 2013 Pearson Education, Inc. All rights reserved.

30 Nonfund Accounts: Accounting Equation
General Capital Assets (GCA) Net Position (NP) Unmatured General Long-Term Liabilities (GLTL) = – © 2013 Pearson Education, Inc. All rights reserved.

31 © 2013 Pearson Education, Inc. All rights reserved.
Fiduciary Funds Accounts for assets held by government in trustee or agency capacity for others Not used to report assets held for government’s own use © 2013 Pearson Education, Inc. All rights reserved.

32 Fiduciary Funds: Accounting Equation
Assets + Deferred Outflows Liabilities Deferred Inflows Net Position – = © 2013 Pearson Education, Inc. All rights reserved.

33 © 2013 Pearson Education, Inc. All rights reserved.
Fiduciary Funds—MFBA Measurement focus—economic resources Basis of accounting—accrual © 2013 Pearson Education, Inc. All rights reserved.

34 Categories and Types of Funds
GOVERNMENTAL FUNDS General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds PROPRIETARY FUNDS Enterprise Funds Internal Service Funds FIDUCIARY FUNDS Pension Trust Funds Investment Trust Funds Agency Funds Private Purpose Trust Funds © 2013 Pearson Education, Inc. All rights reserved.

35 Types of Proprietary Funds
Enterprise Funds—customers are usually the general public (as well as businesses and other entities besides the government’s own departments or agencies (Chapter 10) Internal Service Funds—customers are predominantly other departments or agencies of the government (Chapter 11) © 2013 Pearson Education, Inc. All rights reserved.

36 Types of Governmental Funds
General Fund—used to account and report all financial resources not accounted for and reported in another fund (Chapters 3–6) Special Revenue Funds—used to account for the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes (Chapters 3–6) © 2013 Pearson Education, Inc. All rights reserved.

37 Types of Governmental Funds (continued)
Capital Projects Funds—used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including acquisition or construction of capital facilities or other capital assets (Chapter 7) © 2013 Pearson Education, Inc. All rights reserved.

38 Types of Governmental Funds (continued)
Debt Service Funds—used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest (Chapter 8) © 2013 Pearson Education, Inc. All rights reserved.

39 Types of Governmental Funds
Permanent Funds—used to account for and resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs—that is, for the benefit of the government or its citizenry © 2013 Pearson Education, Inc. All rights reserved.

40 Types of Fiduciary Funds
Pension (and other employee benefit) Trust Funds—established to account for resources that are required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, other post-employment benefit plans, and other employee benefit plans © 2013 Pearson Education, Inc. All rights reserved.

41 Types of Fiduciary Funds (continued)
Investment Trust Funds—used to account for the external portion of investment pools held by the sponsoring government Private-Purpose Trust Funds—used to account for all other trust arrangements under which principal and/or income benefit individuals or groups outside the government © 2013 Pearson Education, Inc. All rights reserved.

42 Types of Fiduciary Funds
Agency Funds—established to account for resources held in a purely custodial capacity for others All Fiduciary Funds are discussed in Chapter 12 © 2013 Pearson Education, Inc. All rights reserved.

43 Interfund Transactions
Interfund loans Interfund services provided and used Interfund reimbursements Interfund transfers Of particular interest here are loans and transfers © 2013 Pearson Education, Inc. All rights reserved.

44 © 2013 Pearson Education, Inc. All rights reserved.
Loans Amounts provided by one fund to another with a requirement for repayment Affects only balance sheet accounts Transfers Flows of assets from one fund to another with no requirement for repayment Affects balance sheet and operating statement accounts © 2013 Pearson Education, Inc. All rights reserved.

45 Comparative Operating Statements
Proprietary Funds Accrual-based Must distinguish between operating and non-operating revenues and expenses Separate reporting for capital contributions, special and extraordinary items, and transfers Change in Net Position Governmental Funds Modified accrual-based Report revenues by source and expenditures by character Other Financing Sources and Uses for other resource flows, including transfers Special and extraordinary items reported separately Change in Fund Balance © 2013 Pearson Education, Inc. All rights reserved.

46 Comparative Balance Sheets
Proprietary Funds Current and Noncurrent Assets Deferred Outflows Current and Noncurrent Liabilities Deferred Inflows Net Position Governmental Funds Financial Assets Deferred Outflows Related Liabilities Deferred Inflows Fund Balance © 2013 Pearson Education, Inc. All rights reserved.

47 Annual Financial Reporting
Comprehensive Annual Financial Report (CAFR) Should be prepared for all governmental entities Sections include: Introductory—little GAAP for this section Financial—most GASB standards apply to this section Statistical—see recently issued GASBS 44 © 2013 Pearson Education, Inc. All rights reserved.

48 Annual Financial Reporting
© 2013 Pearson Education, Inc. All rights reserved.

49 Annual Financial Reporting
Minimum reporting requirements Management’s Discussion and Analysis Basic Financial Statements Government-wide financial statements Fund financial statements Notes to the financial statements Required supplementary information other than MD&A © 2013 Pearson Education, Inc. All rights reserved.

50 Annual Financial Reporting
Financial Reporting Entity consists of Primary government (PG) Organizations for which the PG is financially accountable Other organizations whose omission would cause financial statements to be misleading © 2013 Pearson Education, Inc. All rights reserved.

51 Annual Financial Reporting
Management’s Discussion and Analysis Brief discussion of financial statements Condensed government-wide financial information Analysis of position and results of operations Analysis of individual funds Budget analysis Significant capital assets and LTL events Modified approach Description of currently known facts © 2013 Pearson Education, Inc. All rights reserved.

52 Annual Financial Reporting
Government-wide financial statements should include separate columns for Governmental Activities, Business-Type Activities, Total column for PG, and discretely presented component units © 2013 Pearson Education, Inc. All rights reserved.

53 Annual Financial Reporting
Fund Financial Statements include major funds individually and nonmajor funds in the aggregate © 2013 Pearson Education, Inc. All rights reserved.

54 Annual Financial Reporting
Financial Reporting Entity Nucleus is the PG Other activities include: Discretely presented component units Blended component units Joint ventures Jointly governed organizations Related organizations © 2013 Pearson Education, Inc. All rights reserved.

55 Annual Financial Reporting
Government-wide Financial Statements Statement of Net Position Statement of Activities © 2013 Pearson Education, Inc. All rights reserved.

56 Annual Financial Reporting
Governmental Fund Statements (Schedules) Balance Sheet Statement or Revenues, Expenditures, and Changes in Fund Balance Statement or Revenues, Expenditures, and Changes in Fund Balance—Budget-to-Actual (may be either BFS or RSI) © 2013 Pearson Education, Inc. All rights reserved.

57 Annual Financial Reporting
Proprietary Fund Statements Statement of Net Position / Balance Sheet Statement of Revenues, Expenses, and Changes in Net Position Statement of Cash Flows © 2013 Pearson Education, Inc. All rights reserved.

58 Annual Financial Reporting
Fiduciary Fund Financial Statements Statement of Fiduciary Fund Net Position Statement of Changes in Fiduciary Fund Net Position © 2013 Pearson Education, Inc. All rights reserved.

59 Preparation Process: Step 1
Start with the transaction data—the basic building blocks for everything in the Comprehensive Annual Financial Report (CAFR) Transaction Data © 2013 Pearson Education, Inc. All rights reserved.

60 Preparation Process: Step 2
Individual Fund Statements From the transaction data, prepare the individual fund financial statements and schedules. Also, some of the transaction data will be used later in the CAFR preparation process. Transaction Data Schedules 1 © 2013 Pearson Education, Inc. All rights reserved.

61 Preparation Process: Step 3
Determine the major funds (this process will be discussed later). Also, information from the individual fund statements and schedules will be used later in the process. Individual Fund Statements Major Fund Determination Transaction Data 2 Schedules 3 1 © 2013 Pearson Education, Inc. All rights reserved.

62 Preparation Process: Step 4
Nonmajor Fund Combining Statements Individual Fund Statements Major Fund Determination Transaction Data Major Fund Statements 2 Once the major funds have been determined, the nonmajor fund combining statements can be prepared. The total column from these statements becomes a single column in the major fund statements along with a separate column for each major fund. Schedules 3 1 © 2013 Pearson Education, Inc. All rights reserved.

63 Preparation Process: Step 5
Nonmajor Fund Combining Statements Individual Fund Statements Major Fund Determination Transaction Data Major Fund Statements Conversion Process 2 CU Statements Govt.-wide Statements Schedules 3 1 The major funds statements undergo a conversion process and are combined with the component units financial statements to complete the government-wide statements. © 2013 Pearson Education, Inc. All rights reserved.

64 Preparation Process: Step 6
Nonmajor Fund Combining Statements 3 Individual Fund Statements Major Fund Determination 2 Notes Transaction Data Major Fund Statements Conversion Process 2 CU Statements Govt.-wide Statements Schedules 3 1 Information from all the financial statements and the schedules are used to prepare the notes to the financial statements. This process completes the Basic Financial Statements (BFS). © 2013 Pearson Education, Inc. All rights reserved.

65 Preparation Process: Step 7
1 Other RSI Nonmajor Fund Combining Statements 3 Individual Fund Statements Major Fund Determination 2 Notes Transaction Data Major Fund Statements Conversion Process MD&A 2 CU Statements Govt.-wide Statements Schedules 3 1 Budget Personnel Information from the transaction data, individual fund statements, and schedules are used to complete the Other RSI. Then information from all sources combine to provide data for the MD&A. Dept. Heads Program Managers © 2013 Pearson Education, Inc. All rights reserved.

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