Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 18
Governmental Entities:Special Funds andGovernment-wide
Financial Statements
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Learning Objective 18-1
Understand and explain the differences in financial
reporting requirements of the different fund types.
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Big Picture
A government should establish those funds required by law and the specific operating and management needs of the government entity.
Figure 18-2 summarizes the different types of funds.
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Overview of Accounting and Financial Reporting for Governments
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The Governmental Funds: General Fund (#1 of 5)
General rule: All activities should be accounted for in the
general fund unless specifically required by law or
The nature of the activities is proprietary or fiduciary.
We discussed the general fund in Chapter 17.
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The Governmental Funds: Special Revenue Funds (#2 of 5)
Purpose: To account for the proceeds of specific revenue sources that are legally restricted to expenditure for specific purposes. With the exception of inflows for Capital projects and
Expendable trusts. Includes resources and expenditures for operations, such
as public libraries, when a separate tax is levied for their
support. Inflows: Usually from specific taxes or nontax
sources not directly related to services provided. A General Fund “clone”—identical accounting.
Thus, we don’t discuss them in detail here.
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Governmental Funds Worksheets
Each of the five governmental funds will report two fund-based financial statements: The Balance Sheet The Statement of Revenues, Expenditures, and
Changes in Fund Balance
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Worksheet for the Balance Sheet for the Governmental Funds
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Worksheet for the Statement of Revenues, Expenditures, and Changes in Fund Balances for the Governmental Funds
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Practice Quiz Question #1
Which of the following statements is true about fund accounting?
a. An enterprise fund is an example of fiduciary fund.
b. Most transactions of a state or municipal government are accounted for in the general fund.
c. A capital projects fund is an example of proprietary fund.
d. Most transactions of a state or municipal government are accounted for in the internal service fund.
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Learning Objective 18-2
Make calculations and record journal entries for
capital projects funds.
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The Governmental Funds: Capital Projects Funds (#3 of 5)
Purpose: To account for financial resources used for the acquisition or construction of major capital facilities Except for those financed by:
Proprietary Funds, and
Trust Funds
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The Governmental Funds: Capital Projects Funds (#3 of 5)
A temporary fund related to the acquisition or construction of a specific capital project.
At the completion of the project: The fund is closed and The project ’s cost is recorded as a capital asset
in the GCA-GLTL general ledger. Outflows: Costs incurred during construction are
charged to expenditures. Inflows: Bond sales and transfers from the
General Fund.
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GCA-GLTL General Ledger
GCA = General Capital Assets
GLTL = General Long Term Liabilities
GCA-GLTL General Ledger
Since governmental funds only report current resources and obligations, the long-term assets and liabilities are recorded in another location.
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The Governmental Funds: Capital Projects Funds (#3 of 5)
Things to remember: Fixed assets or depreciation are not recorded in capital
projects funds Long-term debt is not recorded in capital projects funds Capital projects funds typically do not have operating
budgets A capital budget is prepared as a basis for selling bonds
to finance a project, and the capital budget is the control mechanism for the length of the project
The capital budget for the project may, or may not, be formally recorded in the accounts
The fund records capital outlays as expenditures
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Practice Quiz Question #2
Which of the following statements is true about capital projects funds?
a. Capital projects funds record depreciation.b. Capital projects funds are permanent
because long-term assets remain in the fund until disposal.
c. Capital projects funds are required by law to have operating budgets.
d. When a capital project is completed, the fund is closed and the asset is transferred to the GCA-GLTL general ledger.
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Learning Objective 18-3
Make calculations and record journal entries for debt service
funds.
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The Governmental Funds: Debt Service Funds (#4 of 5)
Purpose: To account for the servicing of debt initially recorded as a liability in the GCA-GLTL general ledger.
“Servicing of Debt” is the payment of (1) interest and (2) debt principal at maturity.
The accounting is the same as for the general fund.
Unusual Features: Interest is not accrued until the due date. Principal payments are not recorded as liabilities until
the due date.
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Debt Service Funds
Examples of general long-term debt obligations: Serial bonds Term bonds Special assessment bonds Notes and warrants Capital leases
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Special Assessments
Special Assessments are Assessments made against taxpayers (citizens or
businesses) that directly benefit from improvements.
Examples: sidewalks, street lighting, gutters Special Assessment Bonds are usually issued
to initially pay for the improvements. Over time, the special assessments levied against
taxpayers are used to pay off the bonds. All construction activity takes place in a Capital
Projects Fund.
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Purpose of GCA-GLTL General Ledger: Accounts for capital assets (at historical cost)
and Long-term debt not accounted for in Enterprise
Funds, Internal Service Funds, or Trust Funds.
The GCA-GLTL General Ledger is not a fund It has no cash for paying liabilities.
It is a self-balancing set of accounts.
The GCA-GLTL General Ledger
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General Capital Assets
Categories of Assets Land Buildings Improvements other than buildings Equipment Construction work in progress (being performed
by Capital Projects Funds) Infrastructure assets (see next slide)
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General Capital Assets: Infrastructure Assets
Capitalization is mandatory for public domain or “infrastructure” capital assets such as: Streets and roads Sidewalks Bridges and tunnels Water and sewer systems Lighting systems
Characteristics of infrastructure Stationary in nature Normally preserved longer than other capital assets.
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General Capital Assets: Post-capitalization Periods
Depreciation is mandatory—except for certain infrastructure assets: Depreciation Expense is never
reported in the operating statement of governmental funds.
It is reported only in the two government-wide statements.
Sales of Assets: record proceeds as other financing sources in General Fund.
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General Long-term Liabilities
Examples of Debt Recorded in GCA-GLTL general ledger General obligation bonds (usually issued to
pay for capital projects). Claims and judgments. Compensated absences (vacation & sick pay). Unfunded pension contributions. Capital leases payable. Special assessment debt having government
commitment (explained earlier).
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General Long-term Debt Liabilities
Liquidation of GLTL Debt Issuance Liabilities: at the maturity date,
the liability is transferred to a Debt Service Fund. Nondebt Issuance Liabilities: at the payment
date, the liability is transferred to the General Fund.
Note that the GLTL is not removed from the GCA-GLTL general ledger when it becomes a current liability (due within 12 months).
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Practice Quiz Question #3
Which of the following statements is true? a. Long-term debt resides permanently in
the debt service fund.b. The GCA-GLTL General Ledger services
interest payments on long-term debt.c. Special assessments are levied against
the general population.d. A debt service fund only makes interest
and principal payments.e. Debt service funds accrue liabilities as
incurred.
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Learning Objective 18-4
Make calculations and record journal entries for permanent
funds.
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The Governmental Funds: Permanent Funds (#5 of 5)
Permanent Funds: Are established when there is a donor restriction
requiring that the fund principal be preserved and the income from these permanent funds be used
to benefit the government’s programs or its general citizenry.
The accounting for permanent funds is similar to that of the general fund.
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Practice Quiz Question #4
Which of the following is NOT true about permanent funds?
a. The principal of permanent funds is usually required to be preserved.
b. The income from permanent funds is usually allowed to be spent for the benefit of the governmental entity and its citizens.
c. Permanent funds are accounted for in the general fund.
d. The accounting for permanent funds is similar to the accounting in the general fund.
e. Permanent funds usually have donor restrictions.
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Learning Objective 18-5
Understand and explain how governmental funds are
reported and rules for separatereporting as major funds.
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Governmental Funds Financial Statements
Required financial statements1. The Governmental Funds Balance Sheet
2. The Governmental Statement of Revenues, Expenditures, and Changes in Fund Balance.
These statements are prepared for each individual governmental fund These individual fund statements are the
foundation for the financial statements prepared for the governmental entity.
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Governmental Funds Financial Statements
Major funds must be reported in separate columns
GASB 34 specifies that the general fund is always a major fund.
Major funds: revenues, expenditures or expenses, assets, or liabilities >= 10% of the total for their fund category or type
(governmental or enterprise) and 5% of the aggregate amount for all governmental and
enterprise funds
Nonmajor funds are Aggregated and reported in a separate column (labeled
“other governmental funds”).
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Practice Quiz Question #5
Which of the following is NOT true about governmental reporting?
a. The special revenues fund is always a major fund.
b. Non-major funds are aggregated and reported in a single column.
c. The general fund is always a major fund.d. Major funds are defined as those that
constitute at least 10% of their fund category or 5% of all funds.
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Learning Objective 18-6
Make calculations and record journal entries for enterprise
funds.
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The Proprietary Funds: Enterprise Funds
Enterprise Funds account for activities that provide services primarily to the public Examples: Gas, electric, water utilities
Accounting like business accounting. Measurement focus on all economic
resources and the accrual basis of accounting.
Report fixed assets, which are depreciated, and long-term debt.
Focus on income determination and capital maintenance.
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Practice Quiz Question #6
Which of the following statements is true about enterprise funds?
a. The activities accounted for in enterprise funds primarily benefit other government units.
b. The accounting for enterprise funds is similar to the accounting for businesses.
c. Enterprise never report long-term assets or depreciation.
d. A maintenance service center for public busses other city vehicles is an example of an activity accounted for in an enterprise fund.
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Learning Objective 18-7
Understand and explain the financial reporting of
proprietary funds.
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The Financial Statements of Proprietary Funds
Financial statements for the proprietary funds Can be major funds
If a governmental entity has more than one enterprise fund, each must be individually assessed, and
Must meet either the 10 percent criterion or the 5 percent criterion.
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The Financial Statements of Proprietary Funds
The financial statements for proprietary funds are very similar to those for commercial entities
1. The statement of net assets (balance sheet)
2. The statement of revenues, expenses, and changes in fund net assets (income statement)
3. The statement of cash flows
Budgeting in the proprietary funds also has the same role as in commercial entities
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The Financial Statements of Proprietary Funds
Statement of net assets Proprietary funds report their own fixed assets,
investments, and long-term liabilities GASB 34 specifies that the net assets section be
separated into three components:
1. Invested in capital assets, net of related debt
2. Restricted because of restrictions beyond the government’s control
3. Unrestricted
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The Financial Statements of Proprietary Funds
Statement of Revenues, Expenses, and Changes A separation of operating and nonoperating
revenues and expenses is made to provide more information value regarding the operations of the proprietary funds.
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The Financial Statements of Proprietary Funds
Statement of Cash Flows Because of the large number of capital asset
acquisition and financing transactions, the GASB specified 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
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Practice Quiz Question #7
Which of the following statements is true about the financial reporting of proprietary funds?
a. The financial statements are identical to those of the general fund.
b. Proprietary funds do not need to meet the 10% or 5% tests to be major funds .
c. Enterprise funds are always major funds.d. Internal service funds are not required
to provide a statement of cash flows.e. Proprietary funds provide financial
statements very similar to those of commercial businesses.
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Learning Objective 18-8
Make calculations and record journal entries for internal
service funds.
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The Proprietary Funds: Internal Service Funds
Purpose: to account for activities that provide services solely to other departments.
These services are not available to the general public, making it different from the enterprise fund.
Accounting like business accounting. Measurement focus on all economic resources
and the accrual basis of accounting. Report fixed assets, which are depreciated, and
long-term debt.
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Practice Quiz Question #8
Which of the following an example of an activity that would be accounted for in an internal service fund?
a. A public swimming pool.b. A municipal golf course with a club house
used for weddings and other public gatherings.
c. A maintenance department that provides services to various government offices.
d. A state beach or park.e. A city recreation center with weight rooms, a
workout facility, and a pool available to citizens of the community.
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Learning Objective 18-9
Make calculations and record journal entries for trust funds.
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The Fiduciary Funds
Two categories (four types of funds) Trust Funds
Pension (and other employee benefit) Trust Funds
Investment Trust Funds
Private-Purpose Trust Funds
Agency Funds
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The Fiduciary Funds: Trust Funds
Purpose: to account for the investing and using of money in accordance with stipulated provisions of trust indenture agreements or statutes. Pension (and other employee benefit)
Trust Funds Investment Trust Funds (created by
GAS 31) Private-Purpose Trust Funds
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The Fiduciary Funds: Trust Funds
Private-purpose Trust Funds account for property held under trust arrangements which benefit:
Individuals
Private organizations
Other governments
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The Fiduciary Funds: Trust Funds
Trust funds use the accrual basis of accounting.
Financial statements required: The statement of fiduciary net assets
includes all trusts and agency funds
the statement of changes in fiduciary net assets. includes only the trust funds because agency funds
do not have a net asset balance.
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Practice Quiz Question #9
Which of the following is NOT true trust funds?
a. Trust funds use the accrual basis of accounting.
b. Trust funds can account for money that belongs to employees.
c. Trust funds are not required to provide financial statements.
d. Pension funds are an example of a trust fund.
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Learning Objective 18-10
Make calculations and record journal entries for agency funds.
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The Fiduciary Funds: Agency Funds
Agency Funds serve as conduits for the transfer of money. This role is purely custodial in nature.
Since the assets belong to someone else, assets always equal liabilities.
The following items do not exist for agency funds: A fund balance/equity An operating statement
A = L
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The Fiduciary Funds: Agency Funds
Agency funds account for resources held by a governmental unit as a custodial agent for individuals, private organizations, other funds, or other governmental units.
Agency funds use the accrual basis of accounting.
The financial statement for agency funds is the statement of fiduciary net assets.
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Practice Quiz Question #10
Which of the following is a good example of an activity that would be accounted for in an agency fund?
a. A public parking lot available to all citizens that charges a fixed daily or monthly rate.
b. A county tax assessment agency that collects property taxes for all cities in the county.
c. A county owned ski resort that is available to both county residents and non-residents.
d. A public water utility providing services to all residents of the county.
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Learning Objective 18-11
Understand and explain the preparation of government-wide
financial statements.
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The Government Reporting Model
GASB 34 specifies the reporting model What organizations comprise the
reporting entity? The primary government A component unit for which the primary
government is financially accountable Any organization that has a significant
relationship with the primary government
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The Government Reporting Model
What constitutes financial accountability? Financial accountability is evidenced when the
primary government appoints a majority of the organization’s governing board.
Financial accountability may also exist if the organization has a separately elected or appointed board but fiscally depends on the primary government for the financial resources required to operate.
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The Government Reporting Model
What other organizations should be included in the reporting entity? GASB 14 specifies a third category of
organizations to be evaluated to determine if they are part of the reporting entity with the primary government.
These are legally separate, tax-exempt entities for which the primary government is not financially accountable.
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The Government Reporting Model
How should the financial results of the component units be reported? A choice between two methods:
Discrete presentation in a separate column of the primary government’s financial statements
Blended presentation by combining the organization’s results into the primary government’s financial results
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The Government Reporting Model
The Comprehensive Annual Financial Report (CAFR)
The CAFR Government-wide statements (2) Fund-based statements (7)
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The Government Reporting Model
Two government-wide statements: The Statement of Net Assets
includes all GCA and GLTL.
The Statement of Activities includes depreciation expense.
Presented on the accrual basis. Measure the flow of economic resources
Like statements for a commercial enterprise.
These two statements are presented in addition to the 7 Fund-Based Financial Statements.
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The Government Reporting Model
The two government-wide statements must distinguish between
1. Governmental activities, and
2. Business-type activities.
The total primary government must be discretely presented in addition to the component units reported in separate columns.
Fiduciary activities are excluded from the government-wide statements if their resources are not available to finance the government’s programs.
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The Government Reporting Model
Important features of the government-wide Statement of Net Assets: Reports all “general capital assets”—including
infrastructure. Reports all debt—including GLTL. Reports net assets in 3 categories:
1. Invested in capital assets, net of related debt2. Restricted3. Unrestricted
In general, interfund balances (loans, advances, and due to and due from accounts) are eliminated.
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The Comprehensive Annual Financial Report
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Government-wide Statement of Net Assets
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Government-wide Statement of Activities
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Practice Quiz Question #11
Which of the following is NOT true about the CAFR?
a. Government-wide financial statements are similar to the balance sheet and income statement disclosed by businesses.
b. Government-wide financial statements are based on the modified accrual basis of accounting.
c. Since governments provide the two government-wide financial statements, they are not required to provide fund statements.
d. Governmental reporting requires a government-wide statement of cash flows.
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Learning Objective 18-12
Understand and explain the additional disclosures that
accompany government-widefinancial statements.
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The Government Reporting Model
Reconciliation schedules Required to reconcile the net change in the total amounts
reported on the governmental funds statements with the amounts reported on the government-wide statements
Reconciliation schedule for Statement of Net Assets
Reconciliation schedule for Statement of Activities
Budgetary comparison schedule This should be presented as required supplementary
information for the general fund and for each special revenue fund that has a legally adopted annual budget.
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The Government Reporting Model
Management’s Discussion and Analysis MD&A should be included in the required
supplementary information of the government-wide financial statements to provide an analytical overview of the government’s financial and operating activities.
Notes to the government-wide financial statements GASB 34 specified a number of required note
disclosures.
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The Government Reporting Model
Interim reporting Governmental entities generally are not required
to publish interim reports, although many prepare monthly or quarterly reports
Internal management control instrument
Auditing governmental entities Most entities are audited annually Different from the audit of a commercial entity Single Audit Act of 1984
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Additional Considerations
Special-purpose governmental entities
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Practice Quiz Question #12
Which of the following is true about required supplemental disclosures of governmental entities?
a. Governments are autonomous and need not provide any specific disclosures.
b. The CAFR must include management discussion and analysis.
c. No one reads governmental financial reports, so it doesn’t really matter what is disclosed.
d. Governments must provide quarterly interim reports as part of the CAFR.
Conclusion
The End
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