1. Chapter Seventeen Accounting for State and Local Governments, Part II McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Accounting for Leases The lease transfers ownership at the end of the lease term. The lease has a bargain purchase option. The lease term 75% of the assets estimated useful life. The minimum lease payments > 90% of the PV of the asset. The lease transfers ownership at the end of the lease term. The lease has a bargain purchase option. The lease term 75% of the assets estimated useful life. The minimum lease payments > 90% of the PV of the asset. For accounting purposes, leases must be identified as either Capital or Operating. GASB has adopted the same four criteria applied by FASB to identify a capital lease. For accounting purposes, leases must be identified as either Capital or Operating. GASB has adopted the same four criteria applied by FASB to identify a capital lease. 17-2

3. Accounting for Operating Leases Government-Wide Financial Statements: Do not record an encumbrance. Record an expense when the lease payment is made. Government-Wide Financial Statements: Do not record an encumbrance. Record an expense when the lease payment is made. 17-3 Fund-Based Financial Statements: Record the encumbrance. Record an expenditure when the lease payment is made. Fund-Based Financial Statements: Record the encumbrance. Record an expenditure when the lease payment is made.

4. Accounting for Capital Leases Government-Wide Financial Statements Record both the asset and the lease obligation. Government-Wide Financial Statements Record both the asset and the lease obligation. On 1/1/10, Good City signs a 10-year capital lease for a $50,000 dump truck with an implied interest rate of 8%. 17-4

5. Accounting for Capital Leases Government-Wide Financial Statements Record interest expense & reduce the obligation. Government-Wide Financial Statements Record interest expense & reduce the obligation. At 12/31/10, Good City made a $7,452 payment that included interest of $4,000. 17-5

6. Solid Waste Landfill The operation of a solid waste landfill creates long-term liabilities. The EPA imposes requirements that will require large outlays of resources to close a landfill in the future and to deal with such postclosure activities as groundwater monitoring. 17-6

7. Fund-Based Financial Statements Make no entry to record a liability. Record cash payments made to fund the future obligation as expenditures. Fund-Based Financial Statements Make no entry to record a liability. Record cash payments made to fund the future obligation as expenditures. Government-Wide Financial Statements Record a portion of the expected closing costs, pro-rated as a % of capacity used, each year as an expense and a liability. Government-Wide Financial Statements Record a portion of the expected closing costs, pro-rated as a % of capacity used, each year as an expense and a liability. Solid Waste Landfill 17-7

8. Fund-Based Financial Statements Record only the portion of the liability that is expected to be paid from current resources. Fund-Based Financial Statements Record only the portion of the liability that is expected to be paid from current resources. Government-Wide Financial Statements Accrue the expense and liability related to unused/accrued vacation and sick leave. Government-Wide Financial Statements Accrue the expense and liability related to unused/accrued vacation and sick leave. Compensated Absences Employees accrue vacation and sick leave at a predetermined rate. Unused/accrued vacation and sick leave are payable upon termination or retirement, creating a liability. 17-8

9. Works of Art and Historical Treasures GASB No. 34 says governments should capitalize works of art, historical treasures, and similar assets at their historical cost or fair value at date of donation. Fund-Based Financial Statements Record an expenditure and the cash payment (if purchased). No entry is made if the item is donated. Fund-Based Financial Statements Record an expenditure and the cash payment (if purchased). No entry is made if the item is donated. Government-Wide Financial Statements Record the asset and the payment (if purchased) or revenue (if donated). Government-Wide Financial Statements Record the asset and the payment (if purchased) or revenue (if donated). 17-9

10. Works of Art and Historical Treasures GASB 34 made capitalization optional if the following three criteria are met: 17-10 1. 1. Item is held for public exhibition, education, or research in furtherance of public service, rather than financial gain 2. 2. Item is protected, kept unencumbered, cared for, and preserved 3. 3. Item is subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections

11. Infrastructure Assets Government-Wide Financial Statements: Record all newly acquired assets. Show approximate cost for all major assets previously acquired that Were acquired after June 30, 1980, or that Had major renovations, restorations, or improvements since that date. Fund-Based Financial Statements: Record the acquisition as an expenditure. Government-Wide Financial Statements: Record all newly acquired assets. Show approximate cost for all major assets previously acquired that Were acquired after June 30, 1980, or that Had major renovations, restorations, or improvements since that date. Fund-Based Financial Statements: Record the acquisition as an expenditure. 17-11

12. Infrastructure Depreciation 17-12 Depreciation For government-wide financial statements, depreciation is recorded for all assets except land, art works, and historical treasures that are inexhaustible. Depreciation For government-wide financial statements, depreciation is recorded for all assets except land, art works, and historical treasures that are inexhaustible.

13. Infrastructure Depreciation 17-13 Maintenance costs are immediately expensed in lieu of depreciation Information must be accumulated about particular infrastructure items A minimum acceptable condition level must be met and documented An asset management system must monitor the network or subsystem The cost and record-keeping have so far limited adoption of the modified approach GASB 34 provides an alternative, known as the modified approach, which eliminates the need for depreciating qualifying infrastructure.

14. GASB Statement 34 - General Purpose Statements Three distinct sections: 1.Managements Discussion and Analysis (MD&A) 2.Financial Statements Government-wide Financial Statements Fund-based Financial Statements Notes to the Financial Statements 3.Required Supplementary Information Three distinct sections: 1.Managements Discussion and Analysis (MD&A) 2.Financial Statements Government-wide Financial Statements Fund-based Financial Statements Notes to the Financial Statements 3.Required Supplementary Information 17-14

15. Public Colleges and Universities Public colleges and universities must follow the same guidelines as state and local governments. (GASB retains primary reporting authority) Their statements will differ from those of private colleges and universities, who are following FASB accounting standards. Public colleges and universities must follow the same guidelines as state and local governments. (GASB retains primary reporting authority) Their statements will differ from those of private colleges and universities, who are following FASB accounting standards. 17-15