1. Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 12 Governmental Entities: Introduction and General Fund Accounting

2. 12-2 Learning Objective 1 Understand and explain the basic differences between governmental and private sector accounting. Understand and explain the basic differences between governmental and private sector accounting.

3. 12-3 Overview  Governmental entities have operating objectives different from those of commercial entities.  As a result, governmental accounting is different from accounting for commercial enterprises.

4. 12-4 Overview  Nature of governmental entities 1. Collect resources and make expenditures to fulfil societal needs 2. Absence of profit motive except for some activities 3. Have legal authorization for their existence, conduct revenue-raising through the power of taxation, and have mandated expenditures they must make to provide their services 4. Control mechanism – Use of comprehensive budgetary accounting

5. 12-5 Overview  Nature of governmental entities 5. Accountability for the flow of financial resources is a chief objective 6. Typically are required to establish separate funds to carry out various missions; each fund is an independent accounting and fiscal entity 7. Many fund entities do not record fixed assets or long-term debt in their funds 8. An important objective of governmental financial reporting is accountability

6. 12-6 History of Governmental Accounting  History Before 1934, directed by the Municipal Finance Officers Association (MFOA) In 1934, the first statement on local governmental accounting published In 1968, Governmental Accounting, Auditing, and Financial Reporting (GAAFR) was published The GAAFR is periodically updated to include the most recent governmental reporting standards

7. 12-7 History of Governmental Accounting  History 1974 –The American Institute of Certified Public Accountants (AICPA) published an industry audit guide, in which it stated that “except as modified in this guide, they [GAAFR] constitute generally accepted accounting principles” March 1979 – The National Council on Governmental Accounting (NCGA) issued its Statement No. 1, “Governmental Accounting and Financial Reporting Principles” (NCGA 1)

8. 12-8 History of Governmental Accounting  History 1984 – Governmental Accounting Standards Board (GASB) established GASB Statement No. 1 The GASB stated that all NCGA statements and interpretations issued and in effect on that date were accepted as generally accepted accounting principles for governmental accounting GASB Statement No. 34 Established government-wide financial statements to be prepared on the accrual basis of accounting and an array of fund-based financial statements

9. 12-9 History of Governmental Accounting  History The GASB continues to issue new standards to meet the information needs of users of the financial reports of governmental units. Accounting for governmental entities is given the general name of fund accounting.

10. 12-10 The Governmental Accounting Standards Board (GASB)  GASB Created in 1984 A sister organization to the FASB Establishes GAAP for state and local units No authority to establish GAAP for the federal government Seven members—simple majority vote needed (4 votes)

11. 12-11 GAAFR: “The Blue Book”  “Governmental Accounting, Auditing, and Financial Reporting”  Published by the Government Finance Officers Association (GFOA).  Neither prescribes nor authoritatively interprets GAAP for governmental units.  Provides detailed guidance (many examples) for applying governmental GAAP.  Widely used by governmental units.

12. 12-12 Practice Quiz Question #1 Which of the following statements is correct? a.The GASB is responsible to set standards for governmental units and not-for-profit entities. b.The FASB was created in 1972 and sets standards for governmental units. c.The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d.The GASB is responsible for setting standards for state and local governments but not the federal government. Which of the following statements is correct? a.The GASB is responsible to set standards for governmental units and not-for-profit entities. b.The FASB was created in 1972 and sets standards for governmental units. c.The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d.The GASB is responsible for setting standards for state and local governments but not the federal government.

13. 12-13 Practice Quiz Question #1 Which of the following statements is correct? a.The GASB is responsible to set standards for governmental units and not-for-profit entities. b.The FASB was created in 1972 and sets standards for governmental units. c.The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d.The GASB is responsible for setting standards for state and local governments but not the federal government. Which of the following statements is correct? a.The GASB is responsible to set standards for governmental units and not-for-profit entities. b.The FASB was created in 1972 and sets standards for governmental units. c.The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d.The GASB is responsible for setting standards for state and local governments but not the federal government.

14. 12-14 Learning Objective 2 Understand and explain major concepts of governmental accounting.

15. 12-15 Major Concepts of Governmental Accounting  Elements of a Statement of Financial Condition 1. Assets are resources with present service capacity that the entity presently controls. 2. Liabilities are present obligations to sacrifice resources that the entity has little or no discretion to avoid. 3. A deferred outflow of resources is a consumption of net assets that is applicable to a future reporting period. 4. A deferred inflow of resources is an acquisition of net assets that is applicable to a future reporting period. 5. Net position is the residual of all other elements presented in a statement of financial condition.

16. 12-16 Major Concepts of Governmental Accounting  Elements of a the resource flows statements 1. An outflow of resources is a consumption of net assets that is applicable to the current reporting period 2. An inflow of resources is an acquisition of net assets that is applicable to the current reporting period

17. 12-17 Major Concepts of Governmental Accounting  Expendability of resources versus capital maintenance objectives Commercial EnterprisesGovernment Entities Measurement focus The flow of all economic resources Changes in current financial resources available to provide services to the public in accordance with the budget Method of accounting Accrual methodModified accrual method Balance sheet Contains both current and noncurrent assets and liabilities, and the change in retained earnings reflects the company’s ability to maintain its capital investment Reports only current assets, current liabilities, and a fund balance

18. 12-18 Practice Quiz Question #2 Which of the following statements is true? a.Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. b.Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. c.The balance sheets of governmental units contain long-term assets and liabilities. d.The balance sheets of commercial entities contain a fund balance. Which of the following statements is true? a.Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. b.Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. c.The balance sheets of governmental units contain long-term assets and liabilities. d.The balance sheets of commercial entities contain a fund balance.

19. 12-19 Practice Quiz Question #2 Which of the following statements is true? a.Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. b.Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. c.The balance sheets of governmental units contain long-term assets and liabilities. d.The balance sheets of commercial entities contain a fund balance. Which of the following statements is true? a.Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. b.Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. c.The balance sheets of governmental units contain long-term assets and liabilities. d.The balance sheets of commercial entities contain a fund balance.

20. 12-20 Learning Objective 3 Understand and explain the differences between the various governmental fund types. Understand and explain the differences between the various governmental fund types.

21. 12-21 The Nature & Diversity of Governmental Activities  The operations of governmental entities are classified into three categories: Governmental—these activities do not resemble commercial activities. Proprietary—these activities resemble commercial activities. Can measure profitability or capital maintenance. Fiduciary—holding and managing assets owned by others (e.g., pension assets).

22. 12-22  Fund Accounting Accounting for certain activities separately from all other operations. Fund definition: A fiscal and accounting entity with a self-balancing set of accounts (like a branch or a division of a commercial entity). The General Fund: The main and largest fund—records most routine transactions. The difference between a fund’s assets and liabilities is called: Use of Fund Accounting Government and Fiduciary-type Funds Proprietary Funds Fund BalanceNet Assets

23. 12-23  Three Types of Funds Governmental Funds Used to provide basic governmental services to the public Each entity creates only one general fund, but it may create more than one of each of the other types of funds Proprietary Funds The objective is to recover the unit’s costs through user charges Fiduciary Funds Major Concepts of Governmental Accounting

24. 12-24 Major Concepts : Types of Funds  Governmental Funds General Fund: Accounts for all activities not required to be accounted for in another fund. Special Revenue Fund: A clone of the General Fund. Capital Projects Funds Debt Service Funds Permanent Funds

25. 12-25 Major Concepts : Types of Funds  Proprietary Funds Enterprise Funds: Provides services primarily to nongovernmental users Examples: City-owned utilities or recreational facilities Internal Service Funds: Provides services solely to governmental departments.

26. 12-26  Fiduciary Funds Trust Funds Pension (and similar) Trust Funds Investment Trust Funds Private-Purpose Trust Funds (these activities do not benefit the government unit) Agency Funds Major Concepts : Types of Funds

27. 12-27 Major Concepts of Governmental Accounting Governmental Fund Types General fund Accounts for all financial resources except for those accounted for in another fund. Includes transactions for general governmental services provided by the executive, legislative, and judicial operations of the governmental entity. Special revenue fund Accounts for the proceeds of specific revenue sources that are restricted for specified purposes. Capital projects fund Accounts for financial resources for the acquisition or construction of major capital facilities that benefit many citizens, such as parks and municipal buildings. Debt service fund Accounts for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Permanent fund Accounts for resources that are restricted such that only earnings, but not principal, may be used in support of governmental programs that benefit the government or its citizenry.

28. 12-28 Major Concepts of Governmental Accounting Proprietary Fund Types Enterprise fund Accounts for operations of governmental units that charge for services provided to the general public. Internal service fund Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit. Services are offered only to governmental agencies. Fiduciary Fund Types and Similar Component Units Pension (and other employee benefit) trust fund Accounts for resources required to be held in trust for the members and beneficiaries of pension plans, other post-employment benefit plans, or other EBPs. Investment trust fund Accounts for the external portion of investment pools reported by the sponsoring government. Private-purpose trust fund Accounts for all other trust arrangements under which the fund’s resources are to be used to benefit specific individuals, private organizations, or other governments. Agency fund Accounts for assets held by a governmental unit in an agency capacity for employees or for other governmental units.

29. 12-29 Practice Quiz Question #3 The three major categories of governmental funds are: a.Governmental, commercial, and proprietary. b.Governmental, trust, and fiduciary. c.Enterprise, proprietary, and fiduciary. d.Governmental, proprietary, and fiduciary. e.Governmental Service, proprietary, and commercial The three major categories of governmental funds are: a.Governmental, commercial, and proprietary. b.Governmental, trust, and fiduciary. c.Enterprise, proprietary, and fiduciary. d.Governmental, proprietary, and fiduciary. e.Governmental Service, proprietary, and commercial

30. 12-30 Practice Quiz Question #3 The three major categories of governmental funds are: a.Governmental, commercial, and proprietary. b.Governmental, trust, and fiduciary. c.Enterprise, proprietary, and fiduciary. d.Governmental, proprietary, and fiduciary. e.Governmental Service, proprietary, and commercial The three major categories of governmental funds are: a.Governmental, commercial, and proprietary. b.Governmental, trust, and fiduciary. c.Enterprise, proprietary, and fiduciary. d.Governmental, proprietary, and fiduciary. e.Governmental Service, proprietary, and commercial

31. 12-31 Learning Objective 4 Understand and explain basic concepts for financial reporting in governmental accounting. Understand and explain basic concepts for financial reporting in governmental accounting.

32. 12-32 Financial Reporting of Governmental Entities  Governmental funds – financial statements Balance sheet Statement of revenues, expenditures and changes in fund balance  The five governmental funds use the current financial resources measurement focus

33. 12-33  Specific General Ledger Accounts Used defined by GASB 54: Fund Accounting Government and Fiduciary-type Funds Proprietary Funds Fund BalanceNet Assets Non-spendableRestricted Spendable: Restricted Limited Assigned Unassigned Unrestricted

34. 12-34 Financial Reporting of Governmental Entities Balance Sheet for Governmental Funds Assets (financial resources available for current use; presented in order of liquidity) $X,XXX Total Assets $X,XXX Liabilities and Fund Balances: Liabilities (due and expected to be paid from current financial resources; presented in order of due date) $ XXX Fund Balances Nonspendable $ XX Spendable: Restricted XX Limited XX Assigned XX Unassigned XX Total Liabilities and Fund Balances $X,XXX

35. 12-35 Financial Reporting of Governmental Entities  Statement of revenues, expenditures, and changes in fund balance Often called the operating statement of the governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues (recognized when both measurable and available; presented by source of revenue) $XX,XXX Expenditures (approved decreases in net financial resources; presented by function and character) X,XXX Excess of Revenues over Expenditures $ XXX Other Financing Sources or Uses (other increases or decreases in net financial resources available, such as bond issue proceeds and interfund transfers) XX Special Items and Extraordinary Items (X) Net Change in Fund Balance$ XX Fund Balance—Beginning XXX Fund Balance—Ending (reconciles to total fund balance on balance sheet)$ XXX

36. 12-36 Practice Quiz Question #4 Which of the following is true? a.The operating statements of governmental entities focus on revenues and expenses. b.The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c.The operating statements of governmental entities focus on revenues and liabilities. d. The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. e. All governmental fund balances are spendable. Which of the following is true? a.The operating statements of governmental entities focus on revenues and expenses. b.The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c.The operating statements of governmental entities focus on revenues and liabilities. d. The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. e. All governmental fund balances are spendable.

37. 12-37 Practice Quiz Question #4 Which of the following is true? a.The operating statements of governmental entities focus on revenues and expenses. b.The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c.The operating statements of governmental entities focus on revenues and liabilities. d. The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. e. All governmental fund balances are spendable. Which of the following is true? a.The operating statements of governmental entities focus on revenues and expenses. b.The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c.The operating statements of governmental entities focus on revenues and liabilities. d. The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. e. All governmental fund balances are spendable.

38. 12-38 Learning Objective 5 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting.