c151 chapter 15 governmental accounting: general fund and account groups

1C15

Chapter 15

Governmental Accounting:

General Fund and Account

Groups

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Comparison of Government and Not-for-Profits (GNPs) with Business

• Different mission - no profit motive

• Budget - legal document– most significant financial document– entered into accounting system– budgets drive accounting

• Level of services - expenditures drive revenues

• Need to assure interperiod equity

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Types of GNPs

• Governmental– cities, towns,counties, school districts, special

tax districts, states, townships, etc.

• Not-for-Profits– schools, universities, hospitals, social service

organizations, civic organizations, cultural organizations, religious organizations, foundations, etc.

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Purposes of Financial Reporting

• Assess financial condition

• Compare actual results with the budget

• Determine compliance with laws and regulations

• Evaluate efficiency and effectiveness

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Users of Financial Reports

• Main users identified by GASB:– citizens and taxpayers– investors and creditors– governing boards (legislators)

• Other users– donors and grantors– regulatory and oversight agencies– employees and other constituents

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Objectives of Financial Reporting

• GASB objectives for state & local governments– accountability (interperiod equity, budgetary

and fiscal compliance, service efforts and accomplishments)

– current standards - compliance reporting– new reporting model – GASB 34

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GASB 34: New Reporting Model

• Requires both fund statements and government-wide statements

• Effective in– 2002 for large governments– 2003 for mid-size governments– 2004 for small governments

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New Reporting Model, continued

• New requirements include infrastructure reporting and depreciation

• Full accrual and modified accrual information will be reported

• New model requirements explained throughout Chapters 15, 16, and 17

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What is a Fund?

• Fiscal and accounting entity with its own self-balancing set of accounts from which separate financial statements can be generated

• Governments use funds to separate resources that have restrictions– many funds in each government– assets - liabilities = fund balance

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Governmental Funds

• General Fund

• Special Revenue Fund

• Permanent Fund

• Capital Projects Fund

• Debt Service Fund

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Governmental Funds, continued

• Use modified accrual basis of accounting

• Measurement focus is flow of financial resources

• Therefore, just record inflows and outflows of financial resources

• Use account groups to keep track of the long-term debt and fixed assets

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Proprietary Funds

• Enterprise Funds

• Internal Service Funds

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Proprietary Funds, continued

• Use full accrual basis of accounting

• Measurement focus is flow of economic resources

• Therefore, record all transactions

• All assets = all liabilities + fund equity

• Used for all business-type activities

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Fiduciary Funds

• Used to account for resources that are held by the government for others (individuals, organizations, corporations, other governments)– Private Purpose Trust Funds– Pension Trust Funds– Investment Trust Funds– Agency Funds

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Account Groups

• No longer reported on the financial statements

• May still be used to keep track of general

capital assets and long-term debt

• Two types:

– General Fixed Asset Account Group (GFAAG)

– General Long-Term Debt Account Group

(GLTDAG)

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Overview of Governmental Fund Accounting

• Recording

– the budget

• Accounting for

– encumbrances

– revenues

– expenditures

– other financing sources/uses

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Recording the Budgetary Entries

Estimated Revenues+ Estimated Other Financing Sources- Appropriations- Estimated Other Financing Uses= Fund Balance

Journal Entry:Estimated Revenues xxEstimated Other Financeing Sources xx

Appropriations xxEstimated Other Financing Uses xxFund Balance (derived) xx

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Comparison with Actual Results

Appropriations (credit)- Actual Expenditures (debit) Variance

Estimated Revenues (debit) - Actual Revenues (credit) Variance

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Revenue Recognition

• Modified accrual basis

• Recognize when susceptible to accrual, i.e.– measurable and

– available defined as:• collected during the period or soon enough

thereafter to be used to pay current period liabilities (60 day cutoff is common) AND

• legally available to finance current period expenditures (usable)

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Establish Legal Claims

• For property taxes --- levy of taxes

• For charges for services --- performing services

• For sales taxes --- taxable sale by business

• For income taxes --- taxpayer earning taxable income

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Deferred Revenues

• A liability

• Recorded if – unearned or – not legally available

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Common Revenue Sources

• Taxes

• Licenses and permits

• Intergovernmental revenues

• Charges for services

• Fines and forfeits

• Miscellaneous– interest, rents, sales of fixed assets– other financing sources (OFS)

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Revenue: Property Taxes

• Local governments derive most of revenue from property taxes - based on value (ad valorem taxes)

• Recognize as revenue when levied– to be collected in the current period or soon

enough thereafter…– allowance for uncollectible – deferred revenue if not “available”

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Revenue: Sales Taxes

• Recognize when merchant files sales tax return– measurable– available

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Revenue: Licenses and Permits

• Difficult to predict accurate amounts

• Normally recognize revenue when cash is received

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Grants & Other Intergovernmental Revenues• Restricted grants - expenditure driven

– food stamps, pass-through grants (if administered), on-behalf payments

• Unrestricted grants - recognize upon award

• Entitlements - recognize upon award

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Revenue: Charges for Services

• Recognize revenue when billing for services rendered

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Revenue: Fines

• Options:– when tickets are issued– date fine is due– actual payment date

• Common practice - when cash is received

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Revenue: Investment Income

• Record all investments at fair value– “mark-to-market”– unrealized gains/losses are recognized as

revenue in period

• Interest and dividends accrued as earned

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Revenue: Donations

• Treatment based on type of asset– Current assets: in funds at FMV– Fixed assets that will be used: in account

groups at FMV– Fixed assets that will be sold: in funds as short-

term investments at FMV

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Revenue: Tax Anticipation Notes

• Recorded as a liability in the fund

• Always short-term

• Will not be converted into long-term so never in the account group

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Other Financing Sources

• Not a revenue

• Proceeds from issue of long-term debt

• Sale of a fixed asset up to original cost

• Transfer of resources from another fund

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Accounting for Expenditures

• Recognize the expenditure when the fund liability is both measurable and incurred

• Current liabilities in the fund– funded by current taxpayers– using available financial resources– what is a current liability

• Long-term liability in the account group

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Types of Expenditures

• Wages and Salaries• Compensated Absences

– vacations– sick leave

• Pensions• Claims and Judgments• Supplies

• Prepayments• Fixed Assets• Leases• Debt Service

– principal– interest

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Wages and Salaries

• Accrued at year-end

• Natural (object) classification allocated to function/program

Entry:

Expenditures - payroll xx

Accrued wages and salaries xx

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Compensated Absences: VacationsRecognize if vested and probable that the benefit will be paid outExpenditure in fund if paid this period

Entry in fund:Expenditures - vacation pay xx

Accrued wages and salaries xx

If long-term liability, record in account groupEntry in account group:

Amount to be provided... xxLong-term liability for vacation pay xx

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Compensated Absences:Sick LeaveRecognize if pay-out is probable at terminationExpenditure in fund if paid this period

If long-term liability, record in account group

Entry in account group:Amount to be provided... xx

Long-term liability for sick leave benefits xx

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Pensions

ARC - Actuarial Required Contribution

Entry in fund (portion of ARC that will be paid from current resources)

Expenditures - pension benefits xx

Accrued wages and salaries xx

Entry in account group (portion of ARC that will be paid in future)

Amount to be provided... xx

Long-term liability for pension benefits xx

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Claims and Judgements

Follow FASB 5: Accrue if probable and reasonably estimable

Entry in fund (amount that will be paid from current resources)

Expenditures - Claims/Judgments xx

Accrued Claims and Judgments xx

Entry in account group (amount that will be paid in future)

Amount to be Provided... xx

Long-term liability for claims and judgments xx

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Supplies ExpenditurePurchase MethodRecord expenditure upon acquisition:

Expenditure - supplies xxVouchers payable xx

Inventory - supplies xxFund Balance - reserve for supplies xx

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Supplies Expenditure Consumption Method

Acquisition:Inventory - supplies xx

Vouchers payablexx

Record expenditure upon consumption:Expenditures - supplies xx

Inventory - suppliesxx

Fund Balance - unreserved xxFund Balance - reserve for supplies

xx

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Prepayments

Purchases Method:

Expenditure - insurance xxVouchers payable xx

Consumption Method:

Prepaid insurance xxVouchers payable xx

Expenditure - insurance xxPrepaid insurance xx

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Fixed Asset Acquisition

Acquisition:

Expenditure - Fixed Assets xx

Vouchers Payable (Cash) xx

(the fixed asset is recorded in account group)

If borrow to acquire the asset:

Cash xx

Other Financing Sources xx

(the long-term debt is recorded in account group)

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Other Financing Uses

• Not an expenditure

• Operating transfers of resources to other funds

• Not classified as expenditures in remitting fund to avoid double counting

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Encumbrances - Year 1

Commit to future expenditure At Year-End

Encumbrance xx F.B. xx F.B. Reserve for Encumbrances xx Encumbrance xx

Expenditures xx

When invoice is received

F.B. Reserve for Encumbrances xxEncumbrance xx Leave Reserve for Encumbrances

Expenditures xx open as an equity account on the Vouchers Payable xx balance sheet

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Encumbrances - Year 2

At beginning of the year

reinstate encumbrances:

Encumbrances xxFund Bal xx

When invoice is received

F.B. Reserve for Enc. xxEncumbrances xx

Expenditures xxVouchers payable xx

At year-end

Fund Bal xxExpenditures xx

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Year End Closing Entries

Close the Budget:

Appropriations xxBudgetary Fund Balance xx

Estimated Revenues xx

Close the Actual Accounts:

Revenues xxExpenditures xx Encumbrances xx Fund Balance xx

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Statement of Revenues, Expenditures, and Changes in Fund Balance

Revenues- Expenditures

Excess of revenues over expendituresOther financing sources (uses)

Excess of revenues and other financing sources over expenditures and other financing uses

+ Beginning Fund BalanceResidual Equity Transfers

Ending Fund Balance

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Accounting for Investments

• Marketable Securities– stocks, bonds, notes, other financial instruments– recent controversies

• Orange County, Texas, Ohio, Pennsylvania

• more risky investment, more return

• more sophisticated instruments

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Sophisticated Instruments

• Repurchase agreements

• Reverse repurchase agreements

• Securities lending transactions

• Derivatives (only value is some underlying asset, interest rate, or index)

• Hedging on a changing economy

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GASB #3(1986)• Requires extensive disclosure of risk

– 3 categories • insured or collateralized with securities held by

government

• collateralized with securities held by pledging financial institution

• uncollateralized

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GASB Technical Bulletin 94-1 (1994)• reaffirmed GASB #3

– plus, disclose any violation of legal, regulatory, or contractual provisions by investing in derivatives

– explain nature of derivative transactions• reasons, exposure to credit risk, market risk legal

risk

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GASB #31(1997)• All investments are to be shown on the

balance sheet at fair value

• Adjustments up or down to fair value are included on operating statement as adjustments to current-period revenue

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Account Groups

Common Features of Account Groups:

• Focus on general government as whole

• Accounting procedures– list and offset accounting entries– primarily just add to/remove from “list”

General Fixed Assets - GFAAGGeneral Long-Term Debt - GLTDAG

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GFAAG

• Definition – tracks all fixed assets other than those accounted for in

proprietary or trust funds

• Accounting equation for GFAAG

Fixed Asset = Investment in GFA-source of funding

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GFAAG - continued

Acquisition and initial valuation– cost– estimated cost– gifts: fair market value – foreclosure: lower of FMV or amount due for

taxes– eminent domain: compensation to owner– escheat: FMV

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Classification of Fixed Assets

• Land

• Building (or Building and Improvements)

• Infrastructure (or Improvements other than Buildings)

• Machinery and Equipment

• Construction in Progress (no capitalized interest)

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Classification of Investment in GFA by Financing Source• Capital Projects Funds

– long-term borrowing– special assessments– intergovernmental grants-in-aid– interfund transfers

• General Fund and Special Revenue Funds– general revenues– special revenues

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GFA Options

• Infrastructure– immovable in nature and of value only to state

or local government– optional capitalization– disclosure policy

• Capitalization Policy - legal/materiality

• Recording of Depreciation - optional

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GLTDAG

•Definition - all unmatured debt except that of proprietary funds–unmatured principal–secured (typically) by SLG full faith & credit–not a liability of any fund

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GLTD Examples

• general government bond issue

• general government special assessment debt

• general government long-term notes

• general government claims and judgments

• general government compensated absences

• general government capital lease liabilities

• general government unfunded pension contributions

• general government unfunded landfill closure and postclosure care

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GLTDAG Accounting Equation

• 3 phases:– when incurred:

Amount to be provided = Long-term obligation

– while debt is outstanding:(Amount available + Amount to be provided) = Long-

term obligation

– when debt matures:reverse accounts from the account group