1. Granof-5e1 FUND ACCOUNTING Chapter Two Chapter 2

2. Granof-5e2 Thought to Ponder: Chapter 2 Chapter 2 “That government is best which governs the least, because its people discipline themselves“That government is best which governs the least, because its people discipline themselves” Henry David Thoreau

3. Granof-5e3 Learning Objectives After studying Chapter 2, you should understand:  The nature of funds  The hierarchy classification of fund balances  The three basic fund types of a state or local government: -Governmental funds, -Proprietary funds, and -Fiduciary funds  The main components of a CAFR  The primary F/S issued by governments  The difference between the “current” and the “old” accounting models. Chapter 2

4. Granof-5e4 Business One company  “Fund” used as an informal term (multiple meanings) May refer to working capital (current net assets) May refer to cash or investments available May have other definitions  The company is a single fiscal and accounting entity  A = L + E (“E” usually called “Owners’ Equity”) Chapter 2

5. Granof-5e5 Governmental  Multiple “entities” --“Fund” used as a formal term (single meaning) “A fiscal and an accounting entity with a self- balancing set of accounts.”  Each fund is like its own “entity” --In other words, a fund is an entity with its own set of books (i.e., chart of accounts, general journal, general ledger, trial balances, and financial statements)  Fund accounting uses the equation: Assets = Liabilities + Fund balance (often referred to as net assets) Chapter 2

6. Granof-5e6 GASB Statement No. 54 In February 2009, the GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, to improve the usefulness, and understandability of governmental fund balance information. –The statement is effective for years beginning after June 15, 2010. (i.e. June 30, 2011 year ends) Chapter 2

7. Granof-5e7 Brief Summary Fund balances of governmental type funds are now to be reported based on a hierarchy in five different classifications: –Nonspendable –Restricted –Committed –Assigned –Unassigned The reporting of Reserve for Encumbrances is eliminated According to GASB Statement No. 54, only the Fund balance reported on the balance sheet of Governmental type funds is affected. It does not affect the reporting of net assets by proprietary or fiduciary funds. It also does not affect the reporting of net assets of governmental activities in the government-wide financial statements. Chapter 2

8. Granof-5e8 GASB 54 -- Exhibit 1 Chapter 2

9. Granof-5e9 GASB 54—Exhibit 2 Chapter 2

10. GASB 54 -- Cont’d Fund Balance should be identified between Nonspendable resources and Spendable resources Nonspendable resources include amounts that are not in spendable form or are required to be maintained intact. –Inventories and prepaids (also includes assets held for sale and long-term receivables) –The principal (corpus) of a Permanent Fund Ex. In Table 2-5, pg. 48, the FB Reserved for Inventories in the GF will now be presented as FB-Nonspendable. Spendable resources is the remaining balance and is to be reported in a hierarchy of classification (4 categories) based on the extent to which the government is bound by restrictions/constraints on those funds -- Restricted (most constraint) --Committed --Assigned --Unassigned (no constraint) Granof-5e10Chapter 2

11. Granof-5e11 Spendable Resources Restricted (most constraint) includes amounts constrained to specific purposes by their providers, through constitutional provisions, or by enabling legislation. Externally imposed constraints by --creditors, bondholders, --grant providers, contributors, or --imposed by law through constitution or enabling legislation. Enabling legislation (imposed by law) authorizes the government to assess, levy, charge, or mandate payments of resources and includes a legally enforceable requirement that the resources be used only for the specific purpose. Thus the level of constraint on restricted fund balance is equivalent to the level of constraint on Net Assets-Restricted in proprietary funds and the government-wide statement of net assets. Ex. In, Table 2-5, pg. 48, the balances for State Statute, Convention Center debt service and Tourism debt service will be presented as FB Restricted Chapter 2

12. Granof-5e12 Spendable Resources (Cont’d) Committed fund balance—here the constraints are imposed by a formal action of the government’s highest level of decision-making authority (for ex. City council committing funds for construction contracts, rainy day fund etc). -- These funds cannot be used for any other purpose unless the government removes or changes the specified use by taking the same formal action that originally imposed the constraint. --Committed funds include contractual obligations for which existing resources in the fund have been specifically committed for use. --The funds may also include “rainy day” or “stabilization funds.” Note: In contrast to fund balance that is restricted by enabling legislation, amounts in the committed fund balance can be redeployed for other purposes with appropriate due process. Ex. In, Table 2-5, pg. 48, assuming FB reserved for Encumbrances is a contractual commitment, it will be presented as FB Committed. Chapter 2

13. Granof-5e13 Spendable Resources (Cont’d) Assigned fund balance –Government’s intent to use the funds for a specific purpose. Here INTENT is the key. --Intent can be expressed by the governing body itself or another body that has the delegated authority. --In the General Fund, assignment conveys that the intended use is narrower than the general purposes of the government itself. --Fund Balance in other governmental funds (except General Fund) that is not restricted or committed is considered as Assigned FB in those funds. In other words it is the residual balance of these funds. Note: the authority for making an assignment does not have to be made by the government’s highest level of decision-making authority. Thus, constraints imposed on assigned amounts can be more easily removed or modified than those that are classified as committed. Ex. In, Table 2-5, pg. 48, the Unreserved balances in Debt Service, Capital Projects and Special revenue funds will be presented as FB Assigned Chapter 2

14. Granof-5e14 Spendable Resources (Cont’d) Unassigned fund balance –this is the residual classification of the General Fund --includes amounts that are available for any purpose --only the GF can report this positive Unassigned FB -- for other governmental funds, this category is used to report only a negative fund balance (i.e. when expenditures have exceeded the revenues). Ex. In, Table 2-5, pg. 48, the Unreserved FB in the General Fund will be presented as FB Unassigned. Chapter 2

15. Granof-5e15Chapter 2

16. Granof-5e16 A CROSSWALK (Cont’d) 1 Items like inventory and prepaids would be reported as nonspendable. 2 Depends on the terms of the legal or contractual requirement. If the earnings of a permanent fund can be used only for the purpose the donor stipulates, then the earnings would be restricted. If the donor does not place limitations on how the earnings can be used, the government certainly could take action to commit them. In the absence of a restriction or commitment, the earnings in the permanent fund are presumed to be assigned to the purpose of the fund. 3 This is probably less likely to occur, but technically possible. One’s first reaction might be to think a negative unassigned in a permanent fund indicates that the government violated the legal or contractual requirement to maintain the corpus. But it more likely means that the government spent more for the purpose of the fund than was available in expendable earnings, and therefore must have spent unassigned general fund resources as well. 4 However, negative unassigned fund balance in the general fund cannot be caused by assignment (see par. 15). Chapter 2

17. Granof-5e17 Not-for-profit NFP may use fund accounting internally to ensure control of funds, but they do not report these funds externally. Classifies Net Assets into 3 groups: --Unrestricted --Temporarily restricted – used for specific purpose --Permanently restricted -explained further on later slides FASB regulates NFP reporting for nongovernmental organizations and only requires 6 totals –Total assets –Total liabilities –Total net assets –Total unrestricted net assets –Total temporarily restricted net assets –Total permanently restricted net assets. Chapter 2

18. Granof-5e18 Basis of Accounting  Full Accrual: Revenues recognized when earned; expenses recognized when incurred  Cash: Revenues recognized when available; expenses/expenditures recognized when paid  Modified Accrual: revenues are recognized when measurable and available ; expenditures when incurred Chapter 2

19. Granof-5e19 Measurement Focus  What is measured?  Where is the focus of an entity?  Economic resources measurement focus -Report on the determination of net income, financial position, and cash flows (i.e. capital maintenance) -To measure operational accountability  Current financial resources measurement focus - Report on the inflows and outflows of current financial resources (i.e. cash or other items expected to be converted into cash during the current period) -To measure fiscal accountability; meet the legal and budget needs of government Chapter 2

20. Granof-5e20 Measurement Focus and Basis of Accounting Chapter 2

21. Granof-5e21 Types of Local Governments Counties 3,033 Municipalities 19,492 Townships 16,519 School districts 13,051 Special districts 37,381 Total 89,476 Source: U.S. Bureau of the Census, Government Organizations, 2007 Census of Government, July 2007. http://www.census.gov/govs/www/cog2007.html Chapter 2

22. Granof-5e22 Activities of Government  Governmental Activities  Core governmental services like police and fire protection, streets, highways, etc. – Chapters 3-6. These activities are accounted under governmental funds.  Proprietary Activities  Public utilities, toll roads (Sam Houston Tollway) and toll bridges, airports (ex. Houston’s new Toyota Center, Hobby, IAH) – Chapter 9. These activities are accounted under proprietary funds.  Fiduciary Activities  Sometimes known as Trust & Agency Funds. Accounts for resources for which the government is acting in a trustee capacity (ex. Houston Foundation, MacGregor Parks Endowment) – Chapter 10. These activities are accounted under fiduciary funds. Chapter 2

23. Granof-5e23 Types of Funds “ Funds divide a government into units to control resources or attain objectives, not functional department or operations.”  Governmental Funds (5) General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds  Proprietary Funds (2) Internal Service Funds Enterprise Funds  Fiduciary Funds (2) Agency Funds Trust Funds Pension (and other employee benefit) Investment Trust Funds Private purpose Trust Funds Chapter 2

24. Granof-5e24 Definition of Fund Types  Governmental Funds A generic classification used by GASB to refer to all funds other than proprietary or fiduciary No guarantee that the funds will be reimbursed for services rendered  Proprietary Funds Government generally makes initial contribution but thereafter the fund is expected to “pay its own way” through fees for services rendered. Also referred to as business-like or commercial-type funds.  Fiduciary Funds Any fund held by a government in a fiduciary capacity. Simply, the gov’t. holds someone else’s money in trust and acts as a custodian. Since it is not the government’s money, it is not expendable for the government’s own programs. Chapter 2

25. Granof-5e25 Overview  Basis of Accounting: --Modified Accrual  Measurement Focus: --Current Financial Resources Other names: “financial flow” focus or spending focus Only current assets and liabilities are generally included on their balance sheet (i.e. Capital assets and long-term liabilities are not included) Reports expenditures (not expenses) of appropriations  Fund Balance (net current assets) measures “available spendable resources” Fund Balance = Current Assets – Current Liabilities Increased by revenues and other financing sources Decreased by expenditures and other financing uses Governmental fund operating statements present these increases and decreases in net current assets. Chapter 2

26. Granof-5e26 Required Financial Statements  Balance Sheet  Statement of Revenues, Expenditures, and Changes in Fund Balances  Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level. Chapter 2

27. Granof-5e27 (1) - General Fund (GF)  The operating fund of the government-embraces most major governmental functions  Accounts for all resources that are not required to be accounted for in other funds; in essence, it accounts for all unassigned resources.  Only one per government and is the most significant single fund General Activities of city government (ex. Fire, police) Chapter 2

28. Granof-5e28 (2) - Special Revenue Funds (SRF)  Accounts for financial resources that are restricted or committed (does not include assigned) to expenditure for specific purposes other than debt service or capital projects.  Accounting and budgeting usually identical to GF Ex. City of Houston maintains over 17 SRF - Examples include  Public Safety Special Fund (9-1-1 Emergency Network)  Public Works Special Fund  Health and Housing Special Fund  Parks and Recreation Special Fund  Other Special Revenue Fund (Cable Television) Chapter 2

29. Granof-5e29 (3) - Capital Projects Funds (CPF)  Accounts for financial resources that are restricted, committed, or assigned to expenditure for capital outlays.  Ex. Astrodome, Toyota Center, GRB Chapter 2

30. Granof-5e30 (4) - Debt Service Funds (DSF) Accounts for financial resources that are restricted, committed, or assigned for the payment of interest and principal on long- term debt. Ex. City of Houston reports as of 6/30/2009  Total fund balance in DSF $161,414,000.  Total outstanding debt $14.55 Billion ($13.8 B in 2008). I.O.U. Chapter 2

31. Granof-5e31 (5) - Permanent Funds Accounts for resources provided that are legally restricted so that only earnings, not principal, may be used to support the government’s programs. Chapter 2

32. Granof-5e32 (1) - Internal Service Funds (ISF)  Accounts for activities in which goods are services are provided to (1) other departments of the same government (2) other governments for a charge on a cost reimbursement basis  Examples include central stores, central computing, motor pools, and printing.  ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government. --ex. City of Houston’s employees Health Benefits and Long -Term disability. These funds are covered in depth in Chapter 9. Chapter 2

33. Granof-5e33 (2) - Enterprise Funds (EF)  Accounts for activities in which goods or services are provided to the general public for a charge  Reported as business-type activities in the government-wide financial statements  Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores  Ex. City of Houston’s EF Airport System Convention & Entertainment facilities Combined Utility system Nonmajor Enterprise funds (Houston Area Water Corporation, Parking Management) Chapter 2

34. Granof-5e34 Overview  Basis of Accounting: Full Accrual Operated like a “normal for-profit” business --ex. City of Houston operates its Airports under a Proprietary fund  Measurement Focus: Economic Resources All assets and liabilities (both current and noncurrent) are included in the balance sheet Accounts for expenses (not expenditures) --Depreciation expense is reported  Fund Equity (Total Net Assets) Net Assets = Assets – Liabilities Increased by revenues and other financing sources Decreased by expenses and other financing sources Segregated into contributed capital and retained earnings components Chapter 2

35. Granof-5e35 Required Financial Statements Similar to those of for-profit entities  Statement of Net Assets  Statement of Revenues, Expenses, and Changes in Net Assets (i.e. operating statement)  Statement of Cash Flows Chapter 2

36. Granof-5e36 Fiduciary Funds - Agency Funds  Accounts for financial resources in which the government is acting in an “agency” capacity Agent - Government holds assets on behalf of another government  Accounting is simple: assets = liabilities. No revenue and expense to accrue No fund equity account  Examples are tax agency funds, certain special assessment funds, and pass-through agency funds Chapter 2

37. Granof-5e37 Overview  Both Trust funds and Agency funds account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations, other governments, and/or other funds. Therefore, the government cannot include these funds in the government-wide statements.  Basis of Accounting: Full Accrual  Measurement Focus: Economic Resources Chapter 2

38. Granof-5e38 Required Financial Statements  Statement of Fiduciary net assets  Statement of Changes in Fiduciary net assets Only Trust Funds may have a change in net assets Chapter 2

39. Granof-5e39 Trust Funds  Each trust is classified for accounting measurement purposes as either a governmental fund or a proprietary fund (ex. Houston Firefighters Relief and Retirement and Police Officers’ Funds).  Funds can be either expendable or nonexpendable.  Three types of trust funds (i) Pension (and other employee benefits) Trust Funds (one or more) (ii) Investment Trust Funds (iii) Private Purpose Trust Funds Chapter 2

40. Granof-5e40 Trust Funds (i) Pension (and other employee benefits) Trust Fund  Accounts for financial resources in which the government (or other designated trustee) is acting in a trustee capacity for the employees of the government to provide retirement benefits.  Uses business-type accounting practices. Chapter 2

41. Granof-5e41 Trust Funds (ii) Investment Trust Funds  Accounts for external investment pools in which the assets are held for other (external) governments, along with funds of the sponsoring government  Reports the assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants Chapter 2

42. Granof-5e42 Trust Funds (iii) Private-purpose Trust Funds  Encompasses all trust funds other than pension and investment trust funds  Accounts for financial resources in which the government is acting in a trustee capacity for the benefit of individuals, other organizations, or other governments (e.g., an endowment in which the principal amount must be kept intact)  Accounting is virtually identical to that for an enterprise fund. Chapter 2

43. Granof-5e43 GASB Statement No. 34 Government-wide Statements 1)Statement of Net Assets 2)Statement of Activities  Address questions that have not been easily answered by fund accounting  “What do government services really cost, e.g., public safety or recreation?”  “How much debt for current services are we shifting to the next generation?”  “ How much of the cost of government is borne by citizens in the form of general revenues?” Chapter 2

44. Granof-5e44 Reporting Model-Statement 34 Fund Presentation  Major funds  Non-major funds presented in a single column by category  Concept does not apply to fiduciary funds and internal service funds Chapter 2

45. Granof-5e45 Comprehensive Annual Financial Report - CAFR Review from Ch. 1 The CAFR is the recommended annual report of a governmental unit. It has 3 sections.  Introduction section  Financial section  Statistical section The minimum requirements for general purpose external reporting include:  MD&A  Basic financial statements  RSI other than MD&A Chapter 2

46. Granof-5e46 Comprehensive Annual Financial Report - CAFR  Every government should prepare interim statements as needed for sound management  The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Houston for CAFR for the fiscal year ended June 30, 2009. Note: Please also refer to Chapter 1 slides on CAFR. Chapter 2

47. Granof-5e47 CAFR Reviewing again, a CAFR has  Introduction section:  Letter of transmittal – presents overview of financial and economical conditions. General information about how the government is organized.  Financial Section:  MD&A – brief overview of financial performance of the government.  Basic financial statements and Notes  Required Supplementary Information  Combining and individual fund financial statements.  Statistical section:  Contains current and historical data. Supplemental information to the basic financial statements Chapter 2

48. Granof-5e48 Component Units (CU) Entities that are economically intertwined with the government albeit legally separate Criteria to determine whether a primary government (PG) is financially accountable for another government. (1) PG appoints a voting majority of unit’s governing body (2) A majority of unit’s governing body is composed of PG’s officials (3) The PG is able to “impose its will” upon the unit (4) Unit can cause the PG financial benefits or burdens If it meets these criterion, then unit is a CU of PG. Two Presentations of CU (1) Blended – CU consolidated with PG in government-wide statements Presented this way if CU “provides services exclusively or almost exclusively for the city” (City of Houston CAFR) (2) Discrete – CU shown in a separate column in government-wide statements This topic is discussed in depth as part of Ch. 11. Chapter 2

49. Granof-5e49 City of Houston Blended Component Unit Examples Chapter 2

50. Granof-5e50 City of Houston Discrete Component Unit Examples Chapter 2

51. Granof-5e51 Not-for-Profits revisited Financial Reporting: NFPs classify and report both current and non current assets & liabilities based on three different donor mandated restriction categories (i.e. 12 different categories (2x2x3 = 12)). (1) unrestricted (2) temporarily restricted (3) permanently restricted Chapter 2

52. Granof-5e52 Classification of Assets and Liab. (12 categories) “Current unrestricted” Analogous to general fund “Current temporarily restricted” Analogous to special revenue funds “Current permanently restricted” **Doesn’t exist because it would mean you have available resources you can never use “Noncurrent unrestricted” Property, Plant, and Equipment used for operations Accounts Receivables which, once collected, may be used Long-term Liabilities “Noncurrent temporarily restricted” Assets analogous to capital projects fund Accounts Receivable which, once collected, are restricted for a specific use or time period Liabilities analogous to debt service fund and fiduciary funds “Noncurrent permanently restricted” Assets analogous to permanent fund All Liabilities are either unrestricted or temporarily restricted never permanently restricted Chapter 2

53. Granof-5e53 Summary  Fund financial statements for governmental funds utilize the modified accrual basis of accounting and a current financial resources measurement focus.  GASB Std. # 34 requires both government-wide financial statements and fund financial statements.  Government-wide financial statements and fund financial statements for proprietary and fiduciary funds follow the full accrual basis of accounting and the economic resources measurement focus (similar to commercial accounting). Chapter 2