1. Chapter Sixteen Accounting for State and Local Governments, Part I McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Importance of Governmental Accounting Absence of profit removes an important internal control Allocation of limited resources to unlimited needs creates public debate Focus on methods used to generate financial sources and the uses made of those funds Need to keep public informed (Stewardship) Massive  Federal government  50 State governments  Thousands of local governmental units 16-2

3. Governmental Accounting Focuses on financial reporting for non-profit governmental agencies. Many concepts are similar to financial accounting, but terminology and procedures differ. Governmental Accounting Standards Board (GASB) generates primary standards. Now requires two sets of financial statements Focuses on financial reporting for non-profit governmental agencies. Many concepts are similar to financial accounting, but terminology and procedures differ. Governmental Accounting Standards Board (GASB) generates primary standards. Now requires two sets of financial statements 16-3

4. Governmental Accounting User Needs In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: Citizenry Citizenry Legislative and oversight bodies Legislative and oversight bodies Investors and creditors Investors and creditors In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: In Concepts Statement #1, GASB identified 3 basic groups of users of governmental accounting information: Citizenry Citizenry Legislative and oversight bodies Legislative and oversight bodies Investors and creditors Investors and creditors 16-4

5. Government-wide Financial Statements GASB Statement No. 34 Requires the production of two sets of statements: Fund-Based Financial Statements Report all revenues and costs of providing services each year and all resources available to the governmental unit. Show restrictions on the use of resources and measures, in the short run, revenues and expenditures from certain activities. 16-5

6. Important Difference in Focus Fund-based financial statements  Focus on specific activities (and the resources allocated and used by them)  Primary measurement focus is on flow and amount of current financial resources  Recognition timing is typically based on the modified accrual approach  Assess fiscal accountability Government-wide financial statements  Report on activities as a whole  Assess operational accountability  Focus on all economic resources  Utilize accrual accounting  Comparable to business-type accounting 16-6

7. Reporting Diverse Governmental Activities - Fund Accounting Governmental units have many different types of activities. Governmental units have many different types of activities. No common motivation links these activities. No common motivation links these activities. Therefore, each activity operates quasi-independent, self-balancing sets of accounts called “funds.” Therefore, each activity operates quasi-independent, self-balancing sets of accounts called “funds.” Governmental units have many different types of activities. Governmental units have many different types of activities. No common motivation links these activities. No common motivation links these activities. Therefore, each activity operates quasi-independent, self-balancing sets of accounts called “funds.” Therefore, each activity operates quasi-independent, self-balancing sets of accounts called “funds.” Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions Examples include: Public Safety Sanitation Health & Welfare Education Parks & Recreation Judicial System Water and Sewer Employee Pensions 16-7

8. Fund-Based Financial Statements Seek to Answer Three Questions How did the government generate its current financial resources? Where did those financial resources go? What amount of financial resources is presently held? 16-8

9. Governmental Funds Accounting for activities related to serving the public. Proprietary Funds Accounting for business-type activities. Fiduciary Funds Accounting for financial resources held for others in a trustee capacity. Fund Accounting Classification All funds fall into one of three broad classifications. 16-9

10. Fund Accounting Classification Governmental Funds 16-10

11. Governmental Funds - General Fund Used to account for all financial resources except those accounted for in other funds. Used to account for all financial resources except those accounted for in other funds. In 2006, 49% of Baltimore’s governmental funds (over $1 Billion) were accounted for in the General Fund. In 2006, 49% of Baltimore’s governmental funds (over $1 Billion) were accounted for in the General Fund. Used to account for all financial resources except those accounted for in other funds. Used to account for all financial resources except those accounted for in other funds. In 2006, 49% of Baltimore’s governmental funds (over $1 Billion) were accounted for in the General Fund. In 2006, 49% of Baltimore’s governmental funds (over $1 Billion) were accounted for in the General Fund. 16-11

12. Governmental Funds – Special Revenue Fund Expenditures are legally restricted. Expenditures are legally restricted. Resources must be spent for specific purposes. Resources must be spent for specific purposes. St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.” St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.” Expenditures are legally restricted. Expenditures are legally restricted. Resources must be spent for specific purposes. Resources must be spent for specific purposes. St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.” St. Paul, Minnesota, requires that receipts from charitable gambling must be used to support youth athletics or “otherwise as legally determined.” 16-12

13. Governmental Funds - Capital Projects Fund Accounts for costs incurred to acquire or build major governmental facilities. Accounts for costs incurred to acquire or build major governmental facilities. The actual asset is not recorded in this account, but the money to finance its purchase or construction is. The actual asset is not recorded in this account, but the money to finance its purchase or construction is. Accounts for costs incurred to acquire or build major governmental facilities. Accounts for costs incurred to acquire or build major governmental facilities. The actual asset is not recorded in this account, but the money to finance its purchase or construction is. The actual asset is not recorded in this account, but the money to finance its purchase or construction is. 16-13

14. Governmental Funds - Debt Service Funds Record financial resources accumulated to pay long- term liabilities and interest as they come due. Does not account for the actual debt In 2005, Birmingham, Alabama, reported paying out $19 million in principal payments and $17 million in interest payments from its debt service funds. 16-14

15. Governmental Funds - Permanent Funds (Endowments) Account for assets donated to the government by external donors with stipulation that the principal cannot be spent. Account for assets donated to the government by external donors with stipulation that the principal cannot be spent. In 2005, Dallas reported nearly $9 million in funds maintain four different parks. In 2005, Dallas reported nearly $9 million in funds maintain four different parks. 16-15

16. Fund Accounting Classification - Proprietary Funds 16-16

17. Proprietary Funds - Enterprise Funds May be used to account for any government activity that is financed, at least in part, by user charges. May be used to account for any government activity that is financed, at least in part, by user charges. An activity MUST be accounted for here if, any one of the conditions below are met... An activity MUST be accounted for here if, any one of the conditions below are met... May be used to account for any government activity that is financed, at least in part, by user charges. May be used to account for any government activity that is financed, at least in part, by user charges. An activity MUST be accounted for here if, any one of the conditions below are met... An activity MUST be accounted for here if, any one of the conditions below are met... Net revenues generated by the activity provide the sole security for the activity’s debts. The law requires costs to be recovered from user fees. Fees are set high enough to recover costs. 16-17

18. Proprietary Funds - Internal Service Funds Account for any operation that provides services to OTHER governmental departments. Account for any operation that provides services to OTHER governmental departments. Inter-departmental fees are charged on a cost-reimbursement basis. Inter-departmental fees are charged on a cost-reimbursement basis. Tennessee Tech University charges its departments for the use of University vehicles. Tennessee Tech University charges its departments for the use of University vehicles. Account for any operation that provides services to OTHER governmental departments. Account for any operation that provides services to OTHER governmental departments. Inter-departmental fees are charged on a cost-reimbursement basis. Inter-departmental fees are charged on a cost-reimbursement basis. Tennessee Tech University charges its departments for the use of University vehicles. Tennessee Tech University charges its departments for the use of University vehicles. 16-18

19. Internal Service Funds - Example In its 2006 financial statements, the City of Lincoln, Nebraska had the following internal service funds: Information services fund Engineering revolving fund Insurance revolving fund Fleet services fund Police garage fund Communication services fund Copy services fund 16-19

20. Fiduciary Funds Account for assets that are held in a Trustee Capacity for External Users 4 types: Investment Trust – outside portion of investment pools Private-Purpose Trust – principal and interest are both for the benefit of parties outside the government Pension Trust – employee retirement Agency Funds – any resources held by the government as an agent for others (some taxes and tolls frequently fall into this category) 16-20

21. Coverage of Fund Accounting Procedures 16-21

22. Let’s look at an overview of the Government- Wide Statements. 16-22

23. Government-Wide Financial Statements Two separate statements are required: Statement of Net Assets & Statement of Activities Two separate statements are required: Statement of Net Assets & Statement of Activities The economic resources measurement focus requires reporting of ALL assets and liabilities. 16-23

24. Statement of Net Assets Note that we keep the Governmental Activities separate from the Business- Type Activities. Exh. 16-1 16-24

25. Statement of Net Assets Also note that this statement does not give information about Fiduciary Funds This is consistent with the economic resources management focus which only includes assets and liabilities that are available to use for governmental purposes. Exh. 16-1 16-25

26. Statement of Activities The net for a given function is determined horizontally, while the totals for expenses and revenues are determined vertically. Exh. 16-2 16-26

27. Statement of Activities The general revenues are shown separately at the bottom of the statement. Exh. 16-2 16-27

28. Importance of Budgets The budget serves several important purposes:  Expresses public policy by showing allocative preferences  Expresses financial intent  Provides control by establishing authorized spending limits  Comparison of actual results to the budget provides a means of evaluating performance 16-28

29. Now, let’s look at an overview of the Fund- Based Statements. 16-29

30. Fund-Based Financial Statements Two separate statements are required: Balance Sheet & Statement of Revenues, Expenditures, and Changes in Fund Balance Two separate statements are required: Balance Sheet & Statement of Revenues, Expenditures, and Changes in Fund Balance Fund-Based statements include information on fiduciary funds. 16-30

31. Fund-Based Financial Statements These statements will differ from the Government- Wide financial statements for three reasons. 3  The Internal Service Funds are included in separate statements for Proprietary Funds.  The current financial resources measurement basis is used.  The modified accrual accounting approach is used.  The Internal Service Funds are included in separate statements for Proprietary Funds.  The current financial resources measurement basis is used.  The modified accrual accounting approach is used. 16-31

32. Fund Accounting - Balance Sheet Example Exh. 16-3 16-32

33. Fund Accounting - Balance Sheet Example Note that the statement has a separate column for the General Fund and for each fund identified as a “major” fund. Exh. 16-3 Two criteria determine whether a fund is classified as “major”: 1. 1.Total assets, liabilities, revenues, or expenditures are at least 10% of the corresponding total for all funds of the same category. 2. 2.Total assets, liabilities, revenues, or expenditures are at least 5% of the corresponding for all other funds combined. Two criteria determine whether a fund is classified as “major”: 1. 1.Total assets, liabilities, revenues, or expenditures are at least 10% of the corresponding total for all funds of the same category. 2. 2.Total assets, liabilities, revenues, or expenditures are at least 5% of the corresponding for all other funds combined. 16-33

34. Statement of Revenues, Expenditures, & Changes in Fund Balances - ExampleContinue Exh. 16-4 16-34

35. Statement of Revenues, Expenditures, & Changes in Fund Balances - Example Exh. 16-4 16-35

36. Let’s look at the accounting procedures for the Governmental Accounts for both the Fund-Based and Government-Wide Statements. 16-36

37. Recording Budgetary Entries Purposes of the budget, per the GASB: 1. Expresses public policy. 2. Serves as an expression of financial intent. 3. Provides control by establishing spending limits. 4. Offers a means of evaluating performance. Purposes of the budget, per the GASB: 1. Expresses public policy. 2. Serves as an expression of financial intent. 3. Provides control by establishing spending limits. 4. Offers a means of evaluating performance. Budget information for the General Fund and for each of the major Special Funds must be presented. 16-37

38. Prepare the journal entry to record the Special Revenue Fund budget. For example, assume a town enacts a motel excise tax to promote tourism and conventions. For 2008, the tax is expected to generate $490,000 in Special Revenues. Based on this projection, the city council authorizes expenditures of $400,000 which include $200,000 designated for salaries, $30,000 for utilities, $80,000 for advertising, and $90,000 for supplies. Recording Budgetary Entries 16-38

39. Budget Encumbrance Actual Encumbrances In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities. A recorded commitment or contract is called an “encumbrance.” 16-39

40. Encumbrances For Fund-Based Financial Statements:  An entry is required to record the encumbrance.  An entry is required when the bill is received. For Government-Wide Financial Statements:  No entry is required to record the encumbrance.  An entry is required when the bill is received. 16-40

41. Record the order in Drye Township’s books. Encumbrances – Example Fund-Based Statements Nagy Township has budgeted office supplies for $180,000 for 2008. On May 15, Nagy Township places an order for $16,000 office supplies with Kicsi Office Supplies. Remember, this entry is only recorded for Fund-Based Financial Statements. 16-41

42. Record the receipt of the supplies in Drye Township’s books for the Fund- Based Statements. On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16, and the city was given the sale price). Encumbrances – Example Fund-Based Statements This is the account title typically used in governmental accounting in place of Accounts Payable. 16-42

43. Record the receipt of the supplies in Drye Township’s books for the Government-Wide Statements. Encumbrances – Example Government-Wide Statements Note that with the Government-Wide Financial Statements, no entry is necessary for the encumbrances used with the Fund-Based Statements. On May 17, the supplies are received with a bill for $15,680 (some of the items went on sale on May 16, and the city was given the sale price). 16-43

44. Fund-Based Statements Fixed Assets While the expenditure for a fixed asset is usually recorded in the General Fund... While the expenditure for a fixed asset is usually recorded in the General Fund... Depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. Depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. While the expenditure for a fixed asset is usually recorded in the General Fund... While the expenditure for a fixed asset is usually recorded in the General Fund... Depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. Depreciation is not recorded in the governmental fund, since net income is not a concept relevant to governmental units. 16-44

45. Government-Wide Statements Fixed Assets. GASB Statement No. 34 requires a record of ALL capital assets in the Statement of Net Assets in the government-wide statements. Depreciation expense is recorded. Governments have 4 years to capitalize previously acquired assets.. GASB Statement No. 34 requires a record of ALL capital assets in the Statement of Net Assets in the government-wide statements. Depreciation expense is recorded. Governments have 4 years to capitalize previously acquired assets. 16-45

46. Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions Recognition of Revenues - Nonexchange Transactions For Government- Wide Statements, record the revenues at the “time of eligibility”. For Fund-Based Statements, record the revenues when they become “available for recognition”. 16-46

47. Prepare the journal entry to record the bonds for government-wide statements. Issuance of Bonds Government-Wide Financial Statements Increase both Cash and the Debt. Government-Wide Financial Statements Increase both Cash and the Debt. Fund-Based Financial Statements Increase Cash and Other Financing Sources. Fund-Based Financial Statements Increase Cash and Other Financing Sources. Nagy Township issues $50,000 in bonds for new sidewalks. No revenues recognized!! 16-47

48. Prepare the journal entry to record the bonds for fund-based statements. Issuance of Bonds Government-Wide Financial Statements Increase the Cash and the Debt. Government-Wide Financial Statements Increase the Cash and the Debt. Fund-Based Financial Statements Increase Cash and Other Financing Sources. Fund-Based Financial Statements Increase Cash and Other Financing Sources. Nagy Township issues $50,000 in bonds for new sidewalks. No revenues recognized!! 16-48

49. Prepare the journal entry to record the loan payment for government-wide statements. Payment of Long-Term Liabilities Government-Wide Financial Statements Record principle and interest as with GAAP. Government-Wide Financial Statements Record principle and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. Nagy Township makes a $10,000 payment on a loan that includes $1,000 in interest. 16-49

50. Prepare the journal entry to record the loan payment for fund-based statements. Payment of Long-Term Liabilities Government-Wide Financial Statements Record principle and interest as with GAAP. Government-Wide Financial Statements Record principle and interest as with GAAP. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. Fund-Based Financial Statements Record expenditures in the Debt Service Fund. Nagy Township makes a $10,000 payment on a loan that includes $1,000 in interest. 16-50

51. Special Assessments Governments may provide improvements or services that benefit particular properties In these cases, they may assess the costs, either in total or in part, to the property owners Examples  Paving  Curbing  Sidewalks  Sewers and drains  Water lines Usually financed by debt issuance and liens on the benefited property (to ensure reimbursement) 16-51

52. Special Assessments - Accounting Government-wide financial statements  Debt and subsequent construction handled as for- profit enterprises do  Asset recorded at cost  Taxes assessed and collected  Tax receipts used to settle debt Fund-based financial statements  Infrastructure not recorded  Debt not recorded  Reported in Capital Projects Fund and Debt Service Fund (tagged as special assessment in both) 16-52

53. Interfund Transactions Commonly used, particularly involving monetary transfers from the General Fund Normally reported as “other financing source” and “other financing use” within the fund-based financial records Many of these are not reported in the government-wide financial statements because they create no net impact (intra- activity transactions) Interactivity transactions occur between governmental and enterprise funds and are reported on government-wide financial statements 16-53

54. Summary Traditionally, accounting for governmental units was handled by means of fund accounting because of the absence of profit as a control GASB 34 radically altered this tradition and now requires that government-wide financial statements be produced in addition to the fund-based financial statements previously required The primary focus of governmental accounting remains the sources and uses of financial resources, as well as the amounts remaining and their allocation 16-54

55. Possible Criticisms GASB 34 has proven quite controversial. Some critics contend that it has driven up the cost of governmental accounting by requiring the production of two sets of financial statements based on radically different methods of accounting. Others have argued that it represents an inappropriate application of for-profit accounting methods to the not-for-profit sector and that it attempts to force a “single accounting methodology.” WHAT DO YOU THINK???? 16-55