Chapter Twelve

Accounting for State and Local Governments,

Part II

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective 12-1

Account for lease contracts where the state or local government finds itself as either lessor or lessee.

12-2

Accounting for Leases

The lease transfers ownership at the end of the lease term.

The lease has a bargain purchase option.

The lease term ≥75% of the asset’s estimated useful life.

The minimum lease payments > 90% of the PV of the asset.

For accounting purposes, leases must be identified as either Capital or Operating.GASB has adopted

the same four criteria applied by FASB to

identify a capital lease.

12-3

Learning Objective 12-2

Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill.

12-4

Solid Waste Landfill

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

12-5

Government-Wide Financial Statements

Solid Waste Landfill

Record a portion of the expected closing costs, pro-rated as a percentage of capacity used, each year as an expense and a liability.

12-6

Fund Financial StatementsMake no entry to record a liability. Record cash payments made to fund the future obligation as “expenditures”.

Solid Waste Landfill

12-7

Learning Objective 12-3

McGraw-Hill/Irwin Copyright © 2015 by The McGraw-Hill Companies, Inc. All rights reserved.

Explain the reporting of a net pension liability resulting from a defined benefit pension plan provided to employees by a state or local government.

12-8

Defined Benefit Pension Plans

Retirees are usually entitled to future benefits based on a contractually set formula.

Future pension obligations of both companies and state governments collectively amount to trillions of dollars.

Obligations can be measured individually in billions of dollars.

12-9

Learning Objective 12-4

Record the donation and acquisition of works of art and historical treasures.

12-10

Works of Art and Historical Treasures

Although optional reporting is allowed, governments “should capitalize works of art, historical treasures, and similar assets at their historical cost or fair value at date of donation.”

FundFinancial Statements

Record an expenditure and the cash payment (if purchased). No entry is

made if the item is donated.

Government-Wide Financial StatementsRecord the asset and

the payment (if purchased) or revenue

(if donated).

12-11

Works of Art and Historical Treasures

1. Item is held for public exhibition, education, or research in furtherance of public service, rather than financial gain,

2. Item is protected, kept unencumbered, cared for, and preserved, and

3. Item is subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

GASB makes capitalization optional if the following three criteria are met:

12-12

Learning Objective 12-5

Explain the reporting and possible depreciation of infrastructure assets.

12-13

Infrastructure Assets and Depreciation

Infrastructure is defined as long-lived capital assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most capital assets.

Government-Wide Financial Statements:

Infrastructure costs are recorded as assets in the government-wide statements.

Fund Financial Statements:

Record the acquisition as an expenditure.

12-14

Infrastructure Depreciation

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

GASB provides an alternative, the modified approach, which eliminates the need for depreciating qualifying infrastructure (assets that have virtually an unlimited life).

If specified guidelines are met, a government can choose to expense all maintenance costs each year in lieu of recording depreciation.

Additions and improvements must be capitalized, but the cost of maintaining the infrastructure in proper working condition is expensed.

12-15

Infrastructure Depreciation

The modified approach requires the government to accumulate information about all infrastructure assets within either a network or a subsystem of a network.

For eligible assets, the government must establish a minimum acceptable condition level and then document that this minimum level is being met.

The government must have an asset management system in place to monitor the eligible assets to assess the ongoing condition to ensure that the eligible assets are operating at the predetermined level.

12-16

Learning Objective 12-6

Understand the composition of a state or local government’s comprehensive annual financial report (CAFR).

12-17

Comprehensive Annual Financial Report (CAFR)

Three distinct sections:1. Management’s Discussion and Analysis (MD&A)2. Financial Statements– Government-wide Financial Statements– Fund Financial Statements– Notes to the Financial Statements

3. Required Supplementary Information

The government-wide and the fund financial statements are most often presented to the public as part of a comprehensive annual financial report (CAFR). The CAFR also includes an extensive amount of other information about the reporting government.

12-18

Learning Objective 12-7

Explain the makeup of a primary government and its relationship to component units and related organizations as well as the combination of governments.

12-19

Primary Government and Component Units

Reporting units start with a primary government unit (town, city, county or state).

Primary government must include all funds, activities, organizations, agencies, offices and departments that are not legally separate from it. May be difficult to determine whether certain activities should be included

Any unit legally separate from the primary government, but where financial accountability still exists, must be included.

Legally separate activities closely connected to the primary government must be included if omission from the financial statements would be misleading.

12-20

Special Purpose Governments

Special purpose governments carry out only a single function or a limited number of functions for the public. Common examples include:

- public school districts - colleges and universities- water utilities - hospitals - transit authorities - library services.

12-21

Mergers, Acquisitions, and Transfers of Operations

Combinations and realignment transactions are common. GASB views a combination as a merger if two legally separate entities are brought together to form a new entity and no significant consideration is exchanged.

A merger also exists if one of the entities ceases to exist while the other continues.

In a merger, net carrying values for all assets, deferred outflows of resources, liabilities and deferred inflows of resources are combined.

12-22

Learning Objective 12-8

Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

12-23

General Purpose Financial Statements

General purpose statements are made up of government-wide statements that present financial information for both governmental and business-type activities and fund financial statements created for governmental, proprietary, and fiduciary funds.

Government-wide statements measure economic resources and use accrual accounting.

Governmental funds use the current financial resources measurement focus and modified accrual accounting. The proprietary and fiduciary funds use accrual accounting to report all economic resources.

12-24

Government-Wide Statements - Statement of Net Position

Designed to report the economic resources controlled by the government.

Include all assets, capital assets, and liabilities (current and long-term).

Capital assets other than land, inexhaustible works of art, and construction in progress are reported net of accumulated depreciation.

In the Net Position section, several amounts are restricted. Restrictions are reported if usage of the resources has been specified.

12-25

Government-Wide Statements - Statement of Activities

The statement of activities presents information about various functions of state or local government.

Expenses are shown by function. Interest on general long-term debt is normally an

indirect expense, frequently shown as a separate function.

Related program revenues should be shown for each function.

Show the net revenue figure for each function. General revenues are shown at the bottom of the

statement.

12-26

Balance Sheet—Governmental Funds—Fund Financial Statements

Reports only current financial resources and uses modified accrual accounting.

Does not include proprietary funds, component units, or fiduciary funds.

Separate columns for the General Fund and each major fund.

In the Fund Balance section, identify both the “restricted” and “committed” amounts.

12-27

Statement of Revenues, Expenditures, & Other Changes in Fund Balances

Net revenues are not identified for specific functions.

Report ‘expenditures,’ not expenses. Other financing sources and uses are shown to

reflect long-term debt, sale of property, and transfers between funds.

Reconcile the ending fund balance and the ending change in net assets.

12-28

Statement of Net Position Shows individual information about major enterprise

funds and all internal service funds. A single column for the summation of all other enterprise

funds. Provides a combined total for all of the enterprise funds.

Statement of Revenues, Expenses, & Other Changes in Fund Net Assets

Shows information about the same funds. Revenues, expenses, nonoperating items, and transfers

reported here.

Fund Financial Statements - Proprietary Funds

12-29

A proprietary fund operates similarly to a for-profit business, and information about cash flows is considered just as vital. However, the physical structure is not entirely the same.

Statement of Cash Flows

Four sections…

1) Cash flows from operating activities. 2) Cash flows from noncapital financing activities.3) Cash flows from capital and related financing activities.

4) Cash flows from investing activities.

Note that the Direct Method is required for presentation.

Fund Financial Statements - Proprietary Funds

12-30

Learning Objective 12-9

Understand the presentation of financial statements for a public college or university.

12-31

Public Colleges and Universities

Public and private schools educate students, charge tuition and other fees, conduct scholarly research, maintain libraries and sports teams, operate cafeterias, and museums, etc.

Differences in measurement basis and form of financial statements for private and public colleges or universities:

Private colleges and universities follow FASB Accounting Standards Codification.

Public colleges and universities follow the same guidelines as state and local governments.

12-32

Public Colleges and Universities

A large amount of funding for public schools comes from governments, lessening reliance on tuition and fees.

With public funding, public schools often raise and accumulate a smaller amount of endowment funds than private colleges and universities.

Public universities may operate similarly to businesses but they are special purpose governments and accountable to the citizenry.

Most public schools only need to prepare a single set of statements equivalent to those of an enterprise fund.

12-33