1. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #1 CHAPTER 10 Governmental Accounting: The General Fund and the Account Groups (including Other Governmental Funds, Proprietary Funds and Fiduciary Funds) Fundamentals of Advanced Accounting 1st Edition Fischer, Taylor, and Cheng

2. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #2 Accounting Standards Separate standard setting boards for government and business enterprises Financial Accounting Standards Board (FASB) – Business enterprises Government Accounting Standards Board (GASB) – Government –Objectives of Financial Reporting Concept # 1 Accountability Interperiod equity

3. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #3 Measurement Focus and Basis of Accounting Measurement focus – what resources are measured Basis of Accounting – traditional measurement & financial resources –When transactions should be recognized for financial reporting purposes Prepare two separate (related sets of financial statements –Fund financial statements –Government wide statements

4. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #4 Structure of Funds Variety of funds to record events Small government might have 1 general fund Larger government units use special funds –Establish minimum number of funds for legal requirements Each fund is an accounting entity Each fund has self balancing set of accounts

5. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #5 Fund Types and Account Groups 3 fund types –Governmental funds –Proprietary funds –Fiduciary funds 2 account groups –General capital assets account group - GCAAG –General long term debt account group - GLTCAG

6. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #6 Governmental Funds Accounts for activities that provide citizens with services Financed by taxes and inter-governmental grants Working capital focus Only include current assets and current liabilities

7. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #7 5 Governmental Funds General Fund –Resources have no specific restrictions Special Revenue Fund –Resources legally restricted to specific purpose Capital Projects Fund –Resources used for construction/acquisition of capital facilities Debt Service Fund –Resources used for payment of general long-term debt and interest Permanent Fund –Resources legally restricted in that only earnings (not principal) can be used for operations

8. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #8 Accounting for Transactions of Government Funds Modified accrual method Revenue recorded when –Measurable –Available to finance expenditures in current fiscal period Expenditures recognized where liabilities are –Measurable –incurred

9. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #9 Revenues Increase in resource from internal parties that are not repaid Non-exchange transactions –Government is paid but gives nothing directly in return Exchange transactions –Government provides goods/services for fees Modified accrual basis –Some revenues recognized on accrual basis –Some recognized on cash basis Generally amount not know before collection

10. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #10 Timing of Revenues Recognized Property taxesWhen levied Taxes on IncomeWhen sales tax return filed Licenses & permitsWhen received Charges for svcs.When billed Investment incomeAccrued as earned Grants & other inter- governmental revenues –Restricted grantsExpenditure driven –Unrestricted grantsUpon award –EntitlementsUpon award FinesWhen received DonationsWhen received

11. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #11 Other Financing Sources Other inflows of financial resources –Issue general long term debt (LTD) –Record present value of capital lease obligation –Sale of capital assets –Receipt of transfers from other government funds Other financing sources –This classification avoids duplication of recognizing revenue

12. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #12 Expenditures Decrease in resources from transactions with external parties –Expenditure…NOT expenses Recognized –in period measurable and incurred –If related liability is paid from current year resources –Recorded simultaneously with cash payments Results from –Operating activities –Acquiring capital assets –Payment of debt: principal & interest Journal entry DR Expenditure CR Cash

13. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #13 Expenditures – Employee Related Liabilities State and federal withholdings recorded at same time as expenditure for salaries –DR Expenditures –CR Cash –CRLiability for State & Federal Withholding Vacations & holidays tracked in account groups - GLTDAG –DR Amount to be provided in future periods –CRLiability for compensated absences

14. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #14 Expenditures – Employee Related Liabilities Continued Pension expenditures –Actuarial calculations required –Portion paid from current resources DR Expenditures CR Current pension liability –Portion paid from future resources – GLTDAG DR Amount to be provided in future periods CRUnfunded pension liability Post-retirement benefits –Similar accounting to pension

15. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #15 Expenditures - Prepayments Cash paid or liabilities recorded for purchase of goods/services before used –Examples: prepaid rent, supplies inventory Recorded as financial resources (assets) –DR Prepaid Item –CRCash Expenditure recorded when resources are consumed –DR Expenditure –DRPrepaid Item

16. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #16 Expenditures – Other Financing Uses Inter-fund operating transfers to other government units Prevents duplication of reporting expenditures

17. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #17 Expenditures – Operating Debt Government may issue short/long term debt to finance operating activities Short term –Not for capital assets acquisition –Accounts payable and tax anticipation notes Long term –Bonds –Long term vendor financing

18. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #18 Expenditure – Tax Anticipation Notes Cash borrowed using tax to be collected as security Short term financing Recorded in general fund –DR Cash –CRTax anticipation note payable

19. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #19 Expenditures – Principle & Interest on Long Term Capital Debt General long term capital debt – financing for capital asset acquisitions Accounted for in capital project funds Face amount of debt accounted for in GLTDAG Principle and interest expenditures accounted for in debt service funds

20. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #20 Expenditures – Special and Extraordinary Items Extraordinary – infrequent occurrence & unusual in nature –Example: natural disaster Special items – come from transactions within control of management –Infrequent and unusual –Example: sale of government asset as a result of civil riot Must be reported separately –Inform citizens of unusual practices

21. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #21 Use of Budgetary Accounting Budgets are submitted to legislative body for authorization –Authorized expenditures are called appropriations Executive leader approves budget or returns to legislature Final approved budget is recorded in general ledger –Summarized in control accounts –Subsidiary ledger in detail

22. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #22 Use of Budgetary Accounting - continued Budgetary totals for the following are recorded in the general ledger –Appropriations –Estimated revenues –Other financing sources –Other financing uses

23. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #23 Accounting for the General Fund – Trial Balance Trial balance includes Assets (including allowances on receivables) Liabilities Fund balance = Assets less liabilities –Reserved Obligations or legal restrictions for resources Committed & unavailable resources –Unreserved Not legally restricted Designated: Intends to be used Undesignated: Free for unrestricted use

24. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #24 Recording the Budget - Example City Council & Mayor approve city’s budget Estimated revenues$1,350,000 Appropriations1,300,000 Estimated transfer to debt service fund30,000 Journal entry: Estimated revenues1,350,000 Appropriations1,300,000 Estimated other financing uses30,000 Budgetary fund balance – unrestricted20,000

25. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #25 Recording Revenues & Transfers - Example Detailed example in textbook Includes 16 transactions

26. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #26 Recording Encumbrances and Actual Expenditures Government uses encumbrance system Encumbrance is an expected expenditure –Contra account to fund balance Recorded when purchase order is approved –DR Encumbrances –CR Fund balance – reserve for encumbrances Recorded when invoice is received –DR Fund balance – reserve for encumbrances –CR Encumbrances –DR Expenditure –CRVoucher payable Encumbrances closed to fund balance at year-end

27. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #27 Prior Period Encumbrances Prior year encumbrances –Closing entry is reversed –After reversal, accounted for in normal manner in the next year

28. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #28 Encumbrances – Year 1 Commit to future expenditure Encumbrancexx Fund Balance – Reserve for Encumbrancesxx When invoice is received Fund Balance – Reserve for Encumbrancesxx Encumbrancexx Expenditures xx Vouchers Payablexx At year end Fund Balancexx Encumbrancexx Expendituresxx Leave Reserve for Encumbrances open as an equity account on the balance sheet.

29. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #29 Encumbrances – Year 2 At beginning of the year reinstate encumbrances Encumbrancesxx Fund Balancexx When invoice is received Fund Balance – Reserve for Encumbrancesxx Encumbrancesxx Expendituresxx Vouchers payablexx At year end Fund Balancexx Encumbrancexx Expendituresxx

30. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #30 Other transactions Correction of prior year errors made directly to Unreserved, Undesignated Fund Balance Reimbursement of expenditures credited to expenditures Investments – adjustment required at report date to fair value –Use account “Net Increase/Decrease in Fair Value of Investment”

31. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #31 Year-end Closing Entries Reverse budgetary entries Close the budget Appropriationsxx Budgetary Fund Balancexx Estimated Revenuesxx Close revenue and expenditure amounts into “Fund Balance – Unreserved, Undesignated” Close the actual accounts Revenuesxx Expendituresxx Encumbrancesxx Fund Balancexx

32. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #32 Account Groups Government used account groups to keep control of –Capital assets – General Fixed Asset Account Group GFAAG –Long term debt – General Long Term Debt Account Group GLTDAG Account groups are not reported on financial statements Account groups information disclosed in notes to financial statements

33. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #33 GFAAG Accounts for general capital assets not related to specific fiduciary/proprietary fund Tracks fixed assets and assigns responsibility for –Custody –Proper use Categories –Land –Buildings –Other improvements –Machinery & equipment –Construction in progress –Major infrastructure assets

34. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #34 Accounting for CFAAG Purchased asset is recorded at cost Donated asset recorded at FMV at time of receipt Expenditure for capital asset is recorded in the fund making the purchase An entry is also recorded in GFAAG –DR Specific asset account –CROriginal funding source of capital

35. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #35 Accounting for CFAAG - Example City purchases building for $200,000 Gen FunExpenditure200,000 Voucher payable200,000 GFAAGBuilding200,000 Investment in General Fixed Assets – General Fund Revenues200,000

36. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #36 Capital Assets – Subsequent Expenditures Maintenance expenditures accounted for separately Does not increase book value of capital asset

37. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #37 Capital Assets – Depreciation No depreciation recorded in the general fund –This would mix the two difference concepts of expense and expenditure Depreciation is reported in government-wide statements Accumulated depreciation is recorded in GFAAG –DR Investment in GFA – General Fund Revenue –CRAccumulated depreciation

38. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #38 Capital Assets - Disposal Original cost minus accumulated depreciation is removed from the GFAAG –DR Investment in GFA – General fund revenue –CRSpecific asset If sold – proceeds recorded in general fund –DR Cash –DROther financing sources If traded –Additional expenditure is recorded in general fund –New asset is recorded in GFAA

39. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #39 General Long Term Debt Group Accounts for general long term debt –Not related to specific fiduciary/proprietary funds Record of all general LT obligations of the governmental unit “General” means principle and interest paid by levied taxes This group does not account for interest –Principle only

40. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #40 GLTD Examples General government bond issue General government special assessment debt General government long-term notes General government claims and judgments General government compensated absences General government capital lease liabilities General government unfunded pension contributions General government unfunded landfill closure and postclosure care

41. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #41 GLTDAG Accounting Equation 3 phases: When incurred Amount to be provided = long-term obligation While debt is outstanding Amount available +Amount to be provided =Long-term obligation When debt matures Reverse accounts from the account group

42. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #42 Record General LTD DRAmount to be provided for payment of specific liability CRLiability account Example: Government issues $1,000,000 of term bonds Amount to be provided for payment of term bonds1,000,000 Term bonds payable1,000,000 (discount/premium is ignored) Amount available in Debt Service Funds- Term bonds80,000 Amount to be provided for payment of term bonds80,000 (debt service fund receives annual appropriation for eventual retirement) Term bonds payable1,000,000 Amount available in debt service fund – term bonds1,000,000 (bonds are paid at maturity)

43. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #43 Purchase of Capital Asset (Leased Machine) with LTD - Example GFExpenditures50,000 Other financing sources50,000 (record present value of capital lease in general fund) GFAAGLeased machine50,000 Investment in GFA – General Funds50,000 (record present value of capital lease in GFAAG) GLTDAGAmount to be provided50,000 Lease Obligations50,000

44. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #44 Other Governmental Funds Special revenue fund –Revenue collected for special purpose Permanent fund –Trust set up for specific public use –Principle is not expended Capital projects fund –Major capital asset acquired Debt service fund –Accounts for debt recorded in GLTDAG

45. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #45 Special Revenue Fund Revenue from specific sources is restricted by law or donor and used for –Specific operating purpose –Acquisition of minor fixed asset Governmental unit may have one, many or none Uses modified accrual basis of accounting

46. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #46 Examples Of Special Revenue Funds Nonexchange transactions Fed & state grant proceeds restricted fro community development expenditures Gasoline tax revenue for highway maintenance Fed/State funds for education Resources for food stamp programs Expendable public trust fund

47. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #47 Permanent Fund Accounts for public purpose fund Earnings of trusts are for specific purpose Principle cannot be used Often referred to as endowment Example: earnings of resource received will be use for maintenance of government parks

48. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #48 Capital Projects Fund (CPF) The acquisition of major general fixed assets through: –Purchase –Construction –Capital lease Same basic accounting and reporting model as general fund or special revenue funds

49. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #49 CPF: Funding Sources Interfund operating transfers (credit OFS) Long-term borrowing (credit OFS) –General obligation term or serial bonds Intergovernmental grants (credit revenue) Special assessments (credit revenue) –Levied against property owners or other beneficiaries

50. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #50 Resources From Bond Issue Record face amount of bond issue –Premium/discount recorded separately Bond issue costs recorded as expenditures Bond issued at premium –Premium and payment received for interest is transferred to DSF Bond issue at discount –Project authorization is reduced by bond discount unless additional resources are transferred in Proceeds temporarily invested until needed –Interest recorded as revenue and transferred to DSF

51. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #51 CPF – Annual Budgets Expenditures continue through project completion by authority of annual budgets Closing entries recorded at year-end even if project is incomplete –Credit to expenditures is recorded as construction in progress in GFAAG

52. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #52 CPF: Year End Project Complete Close revenues and expenditures to Fund Balance and transfer any residual fund equity to source(s) Project Incomplete Close revenues & OFS, expenditures, and OFU to the Fund Balance Close open encumbrances against Fund Balance; leave Fund Balance – Reserve for Encumbrance Reestablish at beginning of next year: Encumbrance xx Fund Balancexx

53. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #53 Capital Project Cost – Actual Vs. Estimate Actual cost may be different that estimated cost Actual > estimate –Usually covered by transfer from general fund Actual < estimate –May be returned to general fund –May be transferred to DSF

54. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #54 Capital Project Completion Customary to withhold part of payment until final inspection and approval –Liability recorded in “contracts payable – retained percentage”

55. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #55 Debt Service Fund - DSF Accounts for financial resources accumulated to cover principle and interest payments on general government obligations –Term bonds –Serial bonds –Notes that mature in more than one year –Periodic payments on capital leases Uses modified accrual basis

56. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #56 DSF: Expenditure Recognition Modified accrual –Report principal and interest expenditures when legally payable (i.e., do not accrue unmatured principal or interest) Accrual permitted, but not required, if: –Resources for debt service accumulated in fund by year end and payment due early next year –Accrual option is used; must accrue entire debt service payment due early next year

57. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #57 DSF – Serial Bonds As Resource Most popular form of financing Redeemed in series of installments No large cash amounts in sinking funds Annual budget provides for interest and principle reductions

58. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #58 DSF - Resources Credit to revenues –Portion of property tax levied –Net amount of taxes estimated to be collected Credit to other financing sources –Transfers from other funds

59. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #59 DSF: Refunding Defined Issuance of new debt to finance payment of interest and principal of existing debt –Current refunding – Use refunding proceeds to retire debt immediately –Advance refunding – Place proceeds in escrow and use to pay interest and principal in future (in-substance defeasance)

60. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #60 DFS: Reporting Refunding and Defeasances DSF entry: Cashxx OFS – Proceeds of Refunding Bondsxx Refunding issue is reported in GLTDAG Defeased (retired) debt is removed from GLTDAG

61. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #61 Special Assessments Capital improvements/services for benefit of specific group of property owners Paid partially/totally by property owners Service type and capital improvements

62. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #62 Special Assessment – Service Type Covers operational activities No increases to fixed assets Usually single charge added to property tax bill Accounted for in fund type that best reflects nature of transaction

63. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #63 Special Assessment – Capital Improvements Additions/improvements to fixed assets Accounted for in –Enterprise fund OR –GFAAG

64. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #64 Proprietary Funds Accounts for business type activity Focus in capital maintenance Measures whether revenues are sufficient to cover expenses of fiscal period Types –Enterprise – goods or services provided to the general public –Internal service – goods or services provided inter- or intra-governmental unit

65. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #65 Proprietary Funds: Accounting Principles Similar to for-profit enterprises Apply GAAP except where it has been specifically overridden by a GASB pronouncement GASB #20 (Sept ‘93): –Must apply all pertinent GAAP (ARBs, APBs, SFASs, etc.) through SFAS 102 unless conflict –May apply GAAP from SFAS 103 to present Apply ALL, unless conflict or Apply NONE, unless adopted by GASB...continued...

66. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #66 Proprietary Funds: Financial Statements Balance sheet –Fund balance = Net assets Statement of revenues, expenses, and changes in net assets Statement of cash flows Plus: –Combining statements –Segment information

67. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #67 Enterprise Fund Operating efficiency may be monitored by the fund’s net income or loss

68. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #68 Enterprise Fund: Funding Sources Issue of LTD Interfund transfer in Loans/advances from government unit Revenues –Internal (other gov’t. funds) –External (customers, other gov’ts. Non-operating revenues

69. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #69 Enterprise Funds: Nonoperating Revenues Capital contributions Operating transfers Loans Others –Grants –Tap fees –Impact fees –Internal and external subsidies –Debt forgiveness from general government

70. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #70 Enterprise Funds Use is optional as long as fee is charged to external users Use is mandatory (including capital assets) if: –Activity is financed only with revenues from specific activity –Laws/regulations require activity cost of providing services to be financed by fees rather than general tax –Pricing policy of activity establishes fees to cover its own costs

71. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #71 Enterprise Fund – Restricted Cash Cash and cash equivalents available only for designated purposes –Customer deposits subject to refund –Proceeds of LTD for construction –Cash set aside for bond interest/principle reductions Common when fund is used to account for a utility

72. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #72 Enterprise Fund – Cash Flow Statement GASB Statement No. 9 requires Statement of Cash Flows to show movement of restricted and unrestricted cash in four categories –Cash flow from operating activities –Cash flow from non-capital financing activities –Cash flow from capital and related financing activities –Cash flow from investing activities

73. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #73 Government Units Operate More Than One Enterprise Fund Combined statements required Different, identifiable activities presented separately –Different – product, program or service generated by different activities –Identifiable – specific revenue stream and related expenses Example – natural gas, water and electricity service accounted for as one utility enterprise fund

74. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #74 Internal Service Fund Services to other departments/governments Self sustaining Cost-reimbursement basis

75. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #75 Internal Service Fund – Continued No restricted assets Must recover costs (including depreciation) or be subsidized Maintain record of capital assets Use accrual basis of accounting Budgetary accounts not used

76. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #76 Internal Service Fund – Net Income Sufficient to allow for –Replacement of capital assets –Payment of risk-related losses Should not be too large –Allow balance to stay in other funds –Billing rates impact expenditures of other funds

77. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #77 Trust And Agency Funds Used to account for assets received and held by government acting as trustee or custodian for individuals, organizations, businesses, or other governments Difference – Duration of the fiduciary responsibility –Agency fund: short-term fiduciary responsibility –Trust funds: long-term fiduciary responsibility

78. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #78 Types Of Trust Funds Private purpose trust Investment trust Pension trust

79. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #79 Private Purpose Trust Fund Holds –performance deposits of licenses –Scholarship funds to external individuals –Endowments to benefit needy employees –IRS Section 457 deferred compensation plan –Funds used to account for escheat property Accounted for just as proprietary fund

80. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #80 Investment Trust Funds Used to account for –assets, –liabilities, –net assets and –changes in net assets of external participants in an investment pool managed by government for other governments and not-for-profit organizations

81. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #81 Pension Trust Funds Accounts for public employees’ retirement system funds Actuaries estimate required funding Use full accrual basis of accounting

82. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #82 Agency Funds Used when cash collected or withheld from gov’t employees must be forwarded to a proper destination –Example: deductions from gov’t employee salaries for social security

83. Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 10, Slide #83 Government Accounting – Interactions Among Funds Each fund is a separate accounting entity –Records only limited phase of event Complete recording involves more than one fund Transactions among funds are frequent