GOVERNMENTAL AND NONPROFIT ACCOUNTING THEORY AND PRACTICE

State and Local Government Accounting Principles

Chapter 2

Learning Objectives

Discuss major aspects of government financial reporting model

Define fund and examine broad categories Identify MFBA found in financial statements Analyze effects of transactions Discuss budgetary accounting & reporting Understand revenue, expenditure, expense and

interfund activity classifications Understand basic financial reporting

requirements

GASBS 34: Basis forFinancial Reporting

Issuance in 1999 marked a major change in governmental financial reporting

Created dual perspective reporting: Government-wide financial statements,

using accrual accounting Fund financial statements, using other

bases of accounting

Basic Financial Statements: Overview

Notes to the Financial Statements

FundFinancial Statements

FiduciaryFunds

ProprietaryFunds

GovernmentalFunds

7 - 8 Financial Statements

Links[Worksheets]

Reconciliations(Explanations)

Government-wideFinancial Statements

TotalPrimary Government

Business-TypeActivities

GovernmentalActivities

2 Financial Statements

Minimum Requirements for External Financial Reporting:The GASB’s View

Management's discussion and

analysis

Required supplementary information(other than MD&A)

Government-wide financial statements

Notes to the financial statements

Fund financial statements

Classifications of Principles

1. GAAP & legal compliance

2. Fund accounting

3. Measurement focus and basis of accounting (MFBA)

4. Capital Assets & Long-term Liabilities

5. Classification & terminology

6. Annual financial reports

Principle 1:Accounting & Reporting Capabilities

Present fairly and with full disclosure funds and activities in conformity with GAAP

Determine and demonstrate compliance with finance-related legal and contractual provisions

GAAP Requirements

Trying to assure comparability among and between governments

Full disclosure may result in much more information than “adequate” disclosure required by FASB

Compliance: With What?

With GAAP – in most basic form With budget requirements – may be

complicated if budgetary basis is different then GAAP basis

With requirements of grants received from other governments (special reports or non-GAAP basis reports)

Principle 10:Budgeting, Budgetary Control and Budgetary Reporting Annual budget should be adopted by

every governmental unit Accounting system should allow for

budgetary control Budgetary reporting should provide for

comparisons for budget and actual information

Adopting an Annual Budget

Not GAAP – GASB does not have authority to make this a requirement

Typically placed on cities and counties by State and on State by constitutional requirements

Accounting system allowing for budgetary control

GASB cannot require certain accounting system designs

Still, GASB can encourage governments to use system that will allow for budgetary and financial control over revenues and expenditures or expenses

Budgetary Reporting

This is a GAAP requirement GASB requires reporting for General

Fund and major Special Revenue Funds as part of minimum reporting requirements

Governments may elect to provide additional reports outside minimum requirements (other information)

Information to be provided in budgetary reporting

Original budget Final budget for the reporting period Actual inflows and outflows on budgetary

basis – if different from GAAP basis, the differences must be explained on face of statement/schedule or elsewhere in report

Principle 2:Fund Accounting Systems

Accounting system should be organized on a fund basis

Fund defined by the GASB

Accounting system

As in budgeting, GASB cannot define capabilities of accounting system

Still, if governments are to report on a fund basis, accounting system better have capabilities for accounting and reporting in this manner

What is a Fund?

Abraham Lincoln once said that America is a government “…of the people, by the people, and for the people…”

Ordinary people have traditionally run local governments – they designed a system they understand

Most people have a checkbook

Checkbook

Cash Receipts

Cash Disbursements

Balance

A “Fund” is an adaptation of the checkbook concept

Fund

Cash Receipts

Cash Disbursements

Balance

Other financial resources and related liabilities added to checkbook concept to get a governmental fund:

Cash and Other

Financial Resources

Fund

Balance

Related

Liabilities=–

Categories and Types of Funds

GOVERNMENTAL FUNDS General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds

PROPRIETARY FUNDS Enterprise Funds Internal Service Funds

FIDUCIARY FUNDS Pension Trust Funds Investment Trust Funds Agency Funds Private Purpose Trust

Funds

Governmental Funds

Most basic type of fund – use basic fund format defined earlier

Used to account for general government activities

Accounting equation does not allow for capital assets and long-term liabilities – necessitates use of nonfund accounts: General Capital Assets General Long-Term Liabilities

Nonfund accounts

General Capital Assets – property, plant, & equipment used in general operation of government

General Long-term Liabilities – debt used to finance capital assets and other long-term liabilities not recognized in the governmental funds

Proprietary Funds

Used to account for business-like activities of the government: Golf courses Maintenance operations Airports Utilities

May use more “traditional” accounting equation:

Current Assets

+

Capital Assets

Current +

Long-term

Liabilities

Net Assets– =

Fiduciary Funds

Accounts for assets held by government in trustee or agency capacity for others

Not used to report assets held for government’s own use

Principle 3:Types of Funds

Provides definition for each fund type Permanent Fund is exception to rule

concerning Governmental Funds – more on that later

Principle 4:Number of Funds

Governments should use minimum number of funds in order to reduce complexity – must still comply with rules and regulations

Requires use of professional judgment

Trick Questions:

What is the minimum number of funds?

One

Which is it?

The General Fund

Some believe the answer is two:

Additional fund is Debt Service Fund – used to hide money from governing

council to keep them from spending it

Principle 5:Reporting Capital Assets

Must know which fund type is using capital assets:

Proprietary fund – reported at fund and government-wide level

Fiduciary fund – reported only at fund level

Governmental Fund – reported only at government-wide level and in notes to financial statements

Principle 6:Valuation of Capital Assets Report at historical cost (may use

estimated cost of historical cost cannot be determined)

Cost of capital asset included charges to get it to intended location and ready for use

Donated capital assets reported at fair value at time of donation, plus charges to get it to intended location and ready for use

Principle 7:Depreciation of Capital Assets

Capital assets depreciated over useful lives

Inexhaustible capital assets (land and some land improvements) should not be depreciated

Infrastructure assets may be accounted for using the “modified approach”

Reporting depreciation depends on fund category

Proprietary fund – reported at fund and government-wide level

Fiduciary fund – reported only at fund level

Governmental Fund – reported only at government-wide level and in notes to financial statements

Principle 8:Accounting for Long-Term Liabilities

Must know type of fund incurring liability Proprietary Fund – report at fund and

government-wide level Fiduciary Fund – report only at fund level Governmental Fund:

Unmatured – report at government-wide level & in the notes

Matured – report as fund liabilities

Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Government-Wide Financial Statements Measurement focus is on economic [all]

resources Basis of accounting is accrual Revenues, expenses, gains, losses,

assets, & liabilities recognition depends on transaction: Exchange – when exchange takes place Nonexchange – according to GASBS 33

Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Governmental Fund Financial Statements Measurement focus is on current

financial resources Basis of accounting is modified accrual Revenues recognized in period they

become available and measurable Expenditures recognized when liability is

incurred, except for interest on long-term debt which is recognized when due

Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Proprietary Fund Financial Statements Measurement focus is on economic [all]

resources Basis of accounting is accrual Revenues, expenses, gains, losses,

assets, & liabilities recognition depends on transaction: Exchange – when exchange takes place Nonexchange – according to GASBS 33

Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Fiduciary Fund Financial Statements Measurement focus is on economic [all]

resources Basis of accounting is accrual Exception for certain liabilities of defined

benefit pension plans and certain postemployment healthcare plans

Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Internal interfund transfers should be

reported in the accounting period in which the [related] interfund receivable and payable arise.

Revenue Recognition Rules – Must be: Earned or levied Measurable Available

Collected in current period or soon enough thereafter to pay liabilities of the current period – usually considered to be 60 days

If not collected within this period, reported as deferred revenues in current period and revenues in year when they become available

Expenditure Recognition Rules

For current operations & capital outlay, when liabilities to be paid currently by governmental funds are incurred

For debt service (principal and interest) when payments on long-term liabilities are due

Expenditure / Expense Comparison

Expenditures Expenses

OperatingSalaries, supplies,

utilities, etc.

Salaries, supplies,

utilities, etc.

Capital Outlay Acquisition Depreciation

Debt ServicePrincipal &

interestInterest

Principle 11:Transfer, Revenue, Expenditure, & Expense ClassificationAt a minimum, [government-wide]

Statement of Activities should present: Activities accounted for in Governmental

Funds by function with level of detail determined by GF operating statement

Activities accounted for in Enterprise Funds by different identifiable activities

Principle 11:Transfer, Revenue, Expenditure, & Expense ClassificationGovernmental Funds Revenues reported by fund & major

sources Expenditures reported by fund, function

(or program), organizational unit, activity, character, or principal classes of objects

Principle 11:Transfer, Revenue, Expenditure, & Expense ClassificationProprietary Funds Revenues reported by major source Expenses should be classified in same

manner as a similar private sector business

Both revenues and expenses should be reported as either operating or nonoperating

Principle 11:Transfer, Revenue, Expenditure, & Expense Classification Proceeds of general long-term debt

issues should be reported separately from revenues and expenditures in the governmental fund financial statements

Contributions, special items, extraordinary items, & transfers should be reported separately from revenues and expenditures/expenses

Reporting Interfund Activity:Reciprocal interfund activity

Interfund loans (asset / liability) Short-term (due from / due to) Long-term (advance to / advance from)

Interfund services provided and used – recognized as revenue in providing fund and expenditure/expense in using fund

Reporting Interfund Activity:Nonreciprocal interfund activity Interfund transfers

Reported in governmental funds as Other Financing Sources / Uses

Reported in proprietary funds after nonoperating revenues and expenses

Interfund reimbursements Repayment from one fund to another – increases

expenditures / expenses in paying fund while decreases them in receiving fund

Not separately reported in financial statements

Principle 12:Common Terminology & Classification

A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports of each fund or activity.

Like, what else would you do?

Principle 13:Annual Financial Reports

Appropriate interim reports should be prepared to facilitate management control

One problem – no GAAP for this requirement

Some governments have very formal process – most don’t


Comprehensive Annual Financial Report (CAFR)

Should be prepared for all governmental entities

Sections include: Introductory – little GAAP for this section Financial – most GASB standards apply to

this section Statistical – see recently issued GASBS 44


Notes

Nonmajor Fund Combining Financial Statements

Individual Fund Financial Statements& Schedules

Transaction Data(the accounting system)

CAF

R

MD&A

Government-Wide

Financial Statements

Major Fund & CUFinancial Statements

Other RSI

ME

FR

BFS

CAFR--Comprehensive Annual Financial ReportBFS--Basic Financial Statements

MEFR--Minimum External Financial ReportingCopyright 2001, G. Robert Smith, Jr.C


Minimum reporting requirements Management’s Discussion & Analysis Basic Financial Statements

Government-wide financial statements Fund financial statements Notes to the financial statements

Required supplementary information other than MD&A


Financial Reporting Entity consists of Primary government (PG) Organizations for which the PG is

financially accountable Other organizations whose omission

would cause financial statements to be misleading or incomplete


Government-wide financial statements should include separate columns for Governmental Activities, Business-Type Activities, Total column for PG, and discretely presented component units


Management’s Discussion & Analysis Brief discussion of financial statements Condensed government-wide financial

information Analysis of position & results of operations Analysis of individual funds Budget analysis Significant capital assets and LTL events Modified approach Description of currently known facts


Fund Financial Statements include major funds individually and nonmajor funds in the aggregate. Fiduciary fund statements are not included in the basic financial statements.


Financial Reporting Entity Nucleus is the PG Other activities include:

Discretely presented component units Blended component units Joint ventures Jointly governed organizations Related organizations


Government-wide Financial Statements Statement of Net Assets Statement of Activities


Governmental Fund Statements (Schedules)

Balance Sheet Statement or Revenues, Expenditures, &

Changes in Fund Balance Statement or Revenues, Expenditures, &

Changes in Fund Balance – Budget-to-Actual (may be either BFS or RSI)


Proprietary Fund Statements Statement of Net Assets / Balance Sheet Statement of Revenues, Expenses, &

Changes in Net Assets Statement of Cash Flows


Fiduciary Fund Financial Statements Statement of Fiduciary Fund Net Assets Statement of Changes in Fiduciary Fund

Net Assets

Preparation Process: Step 1

TransactionData

Start with the transaction data – the basic building blocks for everything in the Comprehensive Annual Financial Report (CAFR),


TransactionData

Schedules

Individual FundStatements

1

From the transaction data, prepare the individual fund financial statements and schedules. Also, some of the transaction data will be used later in the CAFR preparation process.


TransactionData

Schedules


Major FundDetermination

1

2

3

Determine the major funds (this process will be discussed later). Also, information from the individual fund statements and schedules will be used later in the process.


TransactionData

Schedules



Non-Major FundCombiningStatements

Major FundStatements

1

2

3Once the major funds have been determined, the non-major fund combining statements can be prepared. The total column from these statements becomes a single column in the major fund statements along with a separate column for each major fund.


TransactionData

Schedules





ConversionProcess

CUStatements

Govt.-wideStatements

1

2

3

The major funds statements undergo a conversion process and are combined with the component units financial statements to complete the government-wide statements.


TransactionData

Schedules





ConversionProcess


Notes

1

2

2

3

3

CUStatements

Information from all the financial statements and the schedules are used to prepare the notes to the financial statements. This process completes the Basic Financial Statements (BFS).


TransactionData

Schedules





ConversionProcess


Notes

OtherRSI

BudgetPersonnel

Dept.Heads

ProgramManagers

MD&A

1

1

2

2

3

3

CUStatements

Information from the transaction data, individual fund statements, and schedules are used to complete the Other RSI. Then information from all sources combine to provide data for the MD&A.

Documents

GOVERNMENTAL AND NONPROFIT ACCOUNTING THEORY AND PRACTICE