Advanced Accounting by Hoyle et al, 6th Edition

Chapter SeventeenAccounting 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 17-2 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill. 17-4 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill.

Learning Objective 17-3Explain the reporting of a net pension liability resulting from a defined benefit pension plan provided to employees by a state or local government.17-6Explain the reporting of a net pension liability resulting from a defined benefit pension plan provided to employees by a state or local government.Defined Benefit Pension PlansRetirees 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.17-7. Retirees are usually entitled to future benefits based on a contractually set formula. Future pension obli- gations of both companies and state governments collectively amount to trillions of dollars; obligations of numerous pension plans can be measured individually in bil- lions of dollars.Learning Objective 17-4Record the donation and acquisition of works of art and historical treasures.17-8Record the donation and acquisition of works of art and historical treasuresWorks of Art and Historical TreasuresAlthough 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 StatementsRecord 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).17-9Although 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. Government-Wide Financial StatementsRecord the asset and the payment (if purchased) or revenue (if donated).FundFinancial StatementsRecord an expenditure and the cash payment (if purchased). No entry is made if the item is donated.

Learning Objective 17-5 Explain the reporting and possible depreciation of infrastructure assets.17-10 Explain the reporting and possible depreciation of infrastructure assets.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.17-11Infrastructure is defined as long-lived capital assets that normally are station- ary in nature and normally can be preserved for a significantly greater number of years. Government-Wide Financial Statements:Infrastructure costs are recorded as assets in the government-wide statements.Fund Financial Statements:Record the acquisition as an expenditure. For the governmental funds, these same costs continue to be recorded as expenditures in the fund statements because both acquisition and construction create a reduction in current financial resources. Learning Objective 17-6Understand the composition of a state or local governments comprehensive annual financial report (CAFR). 17-12 Understand the composition of a state or local governments comprehensive annual financial report (CAFR). Comprehensive Annual Financial Report (CAFR)Three distinct sections:Managements Discussion and Analysis (MD&A)Financial StatementsGovernment-wide Financial StatementsFund Financial StatementsNotes to the Financial StatementsRequired Supplementary Information17-13The 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. 17-13General Purpose Financial StatementsThree distinct sections:Managements Discussion and Analysis (MD&A)Financial StatementsGovernment-wide Financial StatementsFund Financial StatementsNotes to the Financial StatementsRequired Supplementary Information

Learning Objective 17-7 Explain the makeup of a primary government and its relationship to component units and related organizations as well as the combination of governments.17-14Explain the makeup of a primary government and its relationship to component units and related organizations as well as the combination of governments.Primary Government and Component UnitsReporting 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 includedAny 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.

17-1517-15 n governmental accounting, reporting entities prepare a CAFR. However, the com- position of that reporting entity must be identified. Normally, the reporting process begins with a primary government such as a town, city, county, or state. A primary government has separate legal status, a separately elected governing board, and is fiscally independent. T he reporting entity also includes activities, organizations, agencies, offices, and departments that are not legally separate from the primary government. However, many entities that interact closely with a primary government are legally separate. Should they also be included as part of the reporting entity? Except in rare cases, a business enterprise such as IBM or PepsiCo consolidates all businesses over which it has control. Special Purpose GovernmentsSpecial 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. 17-1617-16Special 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, and library services. When reporting such operations, the question arises as to whether it is truly a special purpose government or merely part of a larger general purpose government such as a city or county as either a fund or a component unit. Or, perhaps, it is not a government but rather a nongovernmental not-for-profit organization.Mergers, Acquisitions, and Transfers of OperationsCombinations 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.

17-1717-17 With so many general purpose governments, special purpose governments, component units, and related organizations, combinations and realignment transactions are common. For example, a city government could take over operations of a homeless shelter from a not-for-profit entity. ASB 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 is also said to exist if one of those entities ceases to exist while the other continues. The combination of two school systems might well meet the criteria to be deemed a merger. In a merger, the net carrying values for all assets, deferred outflows of resources, liabilities, and deferred inflows of resources are simply combined. No additional account balances are created and recognized as a result of this type of combination. A toll road operated as a special purpose government might be acquired by a local county. Or, two independent school systems can be brought together to create a more efficient operation.

Learning Objective 17-8Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements. 17-18 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements. Government-Wide Statements Statement of Net PositionReports economic resources controlled by the government.Includes all assets, capital assets, and liabilities.Capital assets except land, inexhaustible works of art, and construction in progress reported net of accumulated depreciation. Several amounts are restricted; restrictions are reported if usage of the resources has been specified.Statement of ActivitiesContains information on functions of state or local government. Expenses are shown by function.Related program revenues should be shown for each function.Shows the net revenue figure for each function.General revenues are shown at the bottom of the statement.

17-1917-19 Several aspects of this statement of net position should be noted:The measurement focus is on the economic resources controlled by the government. Thus, all assets including capital assets are reported. Noncurrent liabilities are presented for the same reason. Capital assets other than land, inexhaustible works of art, and construction in progress (and infrastructure assets if the modified approach is applied) are reported net of accumulated depreciation because depreciation of most capital assets is required on the government-wide statements. New categories have recently been added that are titled Deferred Outflows of Resources and Deferred Inflows of Resources. These sections include balances that do not qualify as either assets or liabilities. The primary government is divided into governmental activities and business-type activities. Governmental funds are reported as governmental activities whereas enterprise funds comprise most, if not all, of the business-type activities. Even though recorded within the proprietary funds, internal service funds are normally included within the governmental activities because those services are rendered primarily for the benefit of activities within the governmental funds. The internal balances shown in the asset section (Point B) reflect receivables and payables between the governmental activities and the business-type activities. These internal balances offset, so that no effect is created on the totals for the primary government. Discretely presented component units are grouped and shown to the far right side of the statement (Point C) so that reported amounts do not affect the primary government figures. However, blended component units are included, as appropriate, within either the governmental activities or the business-type activities as if they were individual funds. This city has only one discretely presented component unit: the Eastern South Regional Art Space. The city could also have blended component units but their presence can only be ascertained by a review of the disclosure notes. As the Net Position section shows, several amounts have been restricted for capital projects, debt service, and the like. Restrictions are reported in this manner only if usage of those resources has been specified (a) by external parties such as creditors, grantors, or other external party, or (b) as a result of laws that have been passed through constitutional provisions or enabling legislation. Governmental Funds Fund Financial StatementsBalance SheetReports current financial resources (modified accrual accounting).Does not include proprietary funds, component units, or fiduciary funds.Separate columns for the General Fund and each major fund.Identifies balances for both restricted and committed amounts.17-20Statement of Revenues, Expenditures, & Other Changes in Fund BalancesNet revenues not identified for specific functions.Reports expenditures, not expenses.Other financing sources and uses reflect long-term debt, sale of property, and transfers between funds.Reconcile ending fund balance and ending change in net assets.

17-20 This statement reports only current financial resources (along with some supplies and prepaid items) and claims to those current financial resources. It was produced using modified accrual accounting for timing purposes. No proprietary funds, discretely-presented component units, or fiduciary funds are included; this fund-based statement reflects just the governmental funds. Several parts of this statement should be noted: Separate columns are shown for the General Fund and any other major fund within the governmental funds. The city has identified two other funds as major. The High- way 61 Construction Fund is a major capital projects fund. The Educational Services Fund is a major special revenue fund. All funds that are not considered major are combined and reported as Other Governmental Funds. The balance sheet reports no capital assets or long-term debts simply because they are neither current financial resources nor claims to current financial resources. The Fund Balances figures reported indicate the nonspendable, restricted, committed, assigned, and unassigned categories discussed in the previous chapter. Statement of Net PositionShows 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 AssetsShows information about the same funds.Revenues, expenses, nonoperating items, and transfers reported here.17-21Fund Financial Statements - Proprietary Funds17-21The assets and liabilities of the City of Eastern Souths proprietary funds, as reported in the fund financial statements, are presented in Exhibit17.5 . This statement shows individual information about three major enterprise funds, with a single column for the summation of all other enterprise funds. The statement then provides a combined total for all of the enterprise funds. Because of their size, specific information is available for the water fund, sewer fund, and parking fund. In examining Exhibit17.5 , several features should be noted: This fund statement combines and exhibits all internal service funds (Point U) because they are also proprietary funds. However, government-wide financial statements usually report these same internal service funds as part of governmental activities. Because the proprietary funds utilize accrual accounting to measure economic resources, the totals for the enterprise funds in Exhibit17.5 agree in most ways with the total figures in Exhibit17.1 . The amount of detail, however, is more extensive in the fund financial statements. For example, the statement in Exhibit17.1 uses only two accounts to describe capital assets whereas Exhibit17.5 uses five. Just as the statement of net position in Exhibit17.5 provides individual information about specific enterprise funds (and totals for the internal service funds), the statement of revenues, expenses, and changes in net position in Exhibit17.6 gives the revenues, expenses, nonoperating items, and transfers for those same funds in detail. As an example, in Exhibit17.2 operating expenses were listed for each of the business- type functions. Here, in E xhibit17.6 (Point V), operating expenses are separately listed for employee services, services and supplies, depreciation and amortization, utilities, maintenance and repairs, and others, for each major enterprise fund. In addition, several nonoperating items are identified including investment earnings and a gain on disposal of a capital asset. Finally, because this statement reflects all changes in the net position of each proprietary activity, transfers are included at the bottom. Thus, extensive information is available about the operation of each of these enterprise funds, which is the objective of fund financial statements. 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 FlowsFour sectionsCash flows from operating activities. Cash flows from noncapital financing activities.Cash flows from capital and related financing activities. Cash flows from investing activities. Note that the Direct Method is required for presentation.

17-22Fund Financial Statements - Proprietary Funds17-22 Because a proprietary fund operates in a manner similar to a for-profit business, information about cash flows is considered as vital as it is in analyzing Intel and Coca-Cola. However, the physical structure is not entirely the same. O ne of the main differences is that the statement of cash flows shown for the propri- etary funds has four sections rather than just three: 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. The presentation of cash flows from operating activities (Point W) is similar to that prepared by a for-profit business. However, the direct method of reporting is required rather than being an allowed option as in for-profit accounting. The indirect method that is almost universally used by businesses is not allowed for state and local governments. Cash flows from noncapital financing activities includes (1) proceeds and payments on debt not attributable to the acquisition or construction of capital assets and (2) grants and subsidies not restricted for either capital purposes or operating activities. Cash flows from capital and related financing activities focus on the amounts spent on capital assets and the source of that funding. Exhibit17.7 shows typical examples (Point X): proceeds from issuance of debt, acquisition of capital assets, and proceeds from disposition of capital assets. Cash flows from investing activities disclose amounts paid and received from investments. The government should also provide a reconciliation of operating income to operating cash flows. That information has been omitted here because of space considerations. Learning Objective 17-9Understand the presentation of financial statements for a public college or university. 17-23 Understand the presentation of financial statements for a pub- lic college or university. Public Colleges and UniversitiesA 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.17-2417-24The operations of public colleges and universities differ in at least two important ways from private schools. First, state or other governments directly provide a significant amount of funding (at least for qualifying students), lessening the reliance on tuition and fees through federal grants and contracts with state and local governmental appropriations. Second, because of the ability to generate money each year from the government, public schools often raise and accumulate a smaller amount of endowment funds than private colleges and universities. GASB has officially selected the fourth option by specifying that public colleges and universities are special purpose governments - Adopt the same reporting model for public schools that has been created for state and local governments. Because a large amount of funding for public schools comes directly from governments, the financial statement format utilized by a city or county could be applied. Public universities, hospitals, utilities, and other business-type activities may operate similar to businesses but they are nonetheless governmentsand therefore are accountable to the citizenry. said GASB Chair- man Robert H. Attmore. This decision creates a standard reporting model for public colleges and universities, but most public schools only need to prepare a single set of statements equivalent to those of an enterprise fund.