chapter 24 governmental accounting: basic principles and the general fund

CHAPTER 24

GOVERNMENTAL ACCOUNTING:

BASIC PRINCIPLES AND

THE GENERAL FUND

FOCUS OF CHAPTER 24

• The Governmental Accounting Standards Board

• The Nature and Diversity of Activities• The Objectives of Governmental Financial

Reporting• Measurement Focus and Basis of

Accounting • Basic Principles of the GASB Codification• The General Fund

The Governmental Accounting Standards Board (GASB)

• GASB:– Created in 1984.– A sister organization to the FASB.– Establishes GAAP for state and local

units.– No authority to establish GAAP for

the federal government.– Seven members—simple majority

vote needed (4 votes).

Jurisdictional Arrangement Between GASB and FASB

• GASB has primary responsibility for state and local governmental units.

• State and local governmental units:– Must follow FASB rules if GASB says

so.– May elect to follow a FASB rule if

GASB has not addressed a specific issue. • If election is made, must use ALL

such rules.

The Government Finance Officers Association (GFOA): Its Function

• GFOA:– The equivalent of the AICPA for the

private sector.– Publishes or provides the following to

enhance and promote professional management of governmental units:• Books, periodicals, monthly newsletter.• Services to members.• Software.

GAAFR: “The Blue Book ”

• Stands for Governmental Accounting, Auditing, and Financial Reporting.

• Published by the GFOA.• Neither prescribes nor authoritatively

interprets GAAP for governmental units.• Provides detailed guidance (many

examples) for applying governmental GAAP.

• Widely used by governmental units.

The Nature & Diversity of Governmental Activities

• Absence of a Profit Motive:– What to measure?

• Revenues & costs of providing services?

• Inflows and outflows of all resources?

• Inflows and outflows of certain resources?


• Extensive Legal Requirements:– Constitutions, charters, and statutes

regulate governmental units.– Some legal provisions pertain to

accounting and financial reporting matters:• Keeping separate books for certain

activities.• Being audited by outside CPAs.


• Diversity of Activities—Operations are classified as:– Governmental—these activities DO NOT

resemble commercial activities.– Proprietary type—these activities DO

resemble commercial activities—Can measure profitability or capital maintenance.

– Fiduciary—holding and managing assets owned by others (e.g., pension assets).

Use of Fund Accounting

• Fund Accounting:– Accounting for certain activities separately

from all other operations.– Fund defined: A fiscal and accounting

entity with a self-balancing set of accounts (like a branch or a division of a commercial entity).

– The General Fund: The main and largest fund—records most routine transactions.


• Fund Accounting (cont.):– The difference between a fund’s

ASSETS and LIABILITIES is called:

Governmental and ProprietaryFiduciary-Type Funds Funds

FUND BALANCE Net Assets


• Specific General Ledger Accounts Used:

Governmental and Proprietary Fiduciary-Type Funds Funds Fund Balance: Net Assets:

Reserved for encumbrances Invested in capital Unreserved assets, net of related debt Restricted Unrestricted

The Objectives of Governmental Financial Reporting

• GASB Concepts Statement No. 1—Financial Reporting should:– Assist in fulfilling accountability and

enabling users to assess accountability.– Assist users in evaluating operating results.

• How has the financial condition changed?

– Assist users in assessing service level capabilities and ability to meet obligationsas they become due.

Measurement Focus And Basis Of Accounting (MFBOA)

• Measurement Focus:– WHAT flows to measure for operations.

• Basis of Accounting:– WHEN should transactions and events be

recognized in the financial statements.

MFBOA: Proprietary Activities

• Measure flow of ALL ECONOMIC RESOURCES (both reporting levels):– Present a Statement of REVENUES

and EXPENSES—reveals the CHANGE IN THE ECONOMIC CONDITION.

– Use accrual basis of accounting (needed in order to report ALL revenues & expenses).

– Also present a Statement of Cash Flows.

MFBOA: Governmental Activities

• Measure flow of CURRENT FINANCIAL RESOURCES at the fund-based reporting level:– Present a Statement of Revenues and

Expenditures and Changes in Fund Balance—reveals:• Financial resources received and spent.• Change in net financial resources available

for spending in the near future.– Use modified accrual basis of accounting.

MFBOA: Current Financial Resources

• Current Financial Resources—Typical Items:– Cash, property tax receivables, prepaids, and

supplies inventories.• Claims Against Current Financial Resources

—Typical Items:– Wages, payroll taxes, payables to vendors,

and liabilities expected to be paid in the NEAR FUTURE (typically within 60 days after the year-end).

MFBOA: What is lacking at the Fund-Based Reporting Level?

• A Statement of Revenues and Costs of Providing Services—It would:– Reveal the flow of all economic

resources.– Be a “true” operating statement.– Include ALL expenses—not just those

actually paid and expected to be paid in the near future.

– Reveal the change in economic condition.

Basic Principles of the GASB Codification: Grouped into 7 Categories

• Accounting & Reporting Capabilities• Types of Funds• Basis of Accounting• Financial Reporting• Long-Term Liabilities• Capital Assets• Budgets and Budgetary Accounting

Basic Principles: Category 1—Accounting & Reporting Capabilities

• Present financial statements on a GAAP basis.

• When conflicts exist between GAAP BASIS and LEGAL REQUIREMENTS:– Demonstrate legal compliance by

either:• Additional schedules and narrative

explanations or• A separate legal basis report.

Basic Principles: Category 2—Types of Funds

• Governmental Funds:– General Fund—Accounts for all

activities not required to be accounted for in another fund.

– Special Revenue Fund—A clone of the General Fund.

– Capital Projects Funds– Debt Service Funds– Permanent Funds

Basic Principles: Category 2—Types of Funds & Account Groups

• Proprietary Funds:– Enterprise Funds—Provides services

PRIMARILY to nongovernmental users (city-owned utilities are prime example).

– Internal Service Funds—Provides services SOLELY governmental departments.

Basic Principles: Category 2—Types of Funds & Account Groups

• Fiduciary Funds:– Trust Funds:

• Pension (and similar) Trust Funds• Investment Trust Funds• Private-Purpose Trust Funds

(these activities do not benefit the government unit)

– Agency Funds

Basic Principles: Category 3—Basis of Accounting

• Accrual Basis Funds:– Proprietary funds—

• Enterprise Funds• Internal Service Funds

– Fiduciary funds (3 Trust & 1 Agency)• The two propriety funds and the three trust

funds have either a profitability or capital maintenance orientation.


• Modified Accrual Basis Funds:– Governmental funds—

• General Fund• Special Revenues Fund• Capital Projects Funds• Debt Service Funds• Permanent Funds


• Modified Accrual Basis Defined:– REVENUES: Recognize in period in

which they become available and measurable.• Available means: Collectible within

the current period or soon enough thereafter to be used to pay current period liabilities.


• Pointers on Recognizing REVENUES:– Revenues STAND ALONE.– Revenues are not “earned” as in the

private sector.– The delivery of services requires

expenditures—but delivery does not “generate” revenues.


• Modified Accrual Basis Defined:– EXPENDITURES: Recognize in the

accounting period in which the fund liability is incurred. • One exception exists for interest on

general long-term liabilities.


• Pointers on recognizing EXPENDITURES:– Liabilities are recorded when they are

incurred.– The offsetting debit will usually be to:

• Expenditures (and thus reported in the current operating statement) OR

• The Net Assets—Unrestricted account in the GCA-GLTL g/l—the debit balance will be reported as expenditures in a later future period.

Basic Principles: Category 4(A)—Financial Reporting—The Basics

• THE BALANCE SHEET—Display restrictions of the fund balance in the following manner: Fund Balance: Reserved for encumbrances.... $ 33,000 Unreserved................................. 417,000 Total Fund Balance.............. $450,000

– Numerous types of restrictions can exist—thus several types of “reservations” are used.

Basic Principles: Category 4(A)—Financial Reporting—The Basics

• THE OPERATING STATEMENT—Use the “all-inclusive” format that includes the analysis of the fund balance (modified accrual basis funds) or net assets (accrual basis funds) for the period:– Revenues (inflows)

Expenditures (outflows) Excess of Revenues over Expenditures Fund Balance, 1/1/06 Fund Balance, 12/31/06

Basic Principles: Category 4(B)—Financial Reporting—Bond Proceeds

• BOND PROCEEDS—For governmental funds, report in a special category in the operating statement as follows:

Revenues (inflows) Expenditures (outflows) Other Financing Sources and Uses: Bond proceeds (an inflow)

Basic Principles: Category 4(B)—Financial Reporting—Interfund Transfers

• INTERFUND ACTIVITIES—Report in one of the following four categories (A and B are reciprocal in nature; C & D are nonreciprocal in nature):– (A) Interfund loans.– (B) Interfund services provided and

used.– (C) Reimbursements.– (D) Transfers (“ the last resort”).


• (B) INTERFUND SERVICES PROVIDED AND USED:– Transactions in which one fund provides a

service to another fund.– Such service would be provided by an

outside company if not provided internally.

Service provider reports REVENUES.Service recipient reports EXPENDITURES(or expenses if an accrual basis fund).


• (C) REIMBURSEMENTS:– Occur when a fund that is ultimately

responsible for a particular expenditure or expense repays (or agrees to repay) some other fund that initially paid for the item on its behalf.

– Results in getting the expenditure or expense recorded in the proper general ledger.


• (D) TRANSFERS:– The default category: For transfers that

cannot be classified into one of the other three categories (A, B, and C).

Report in the OTHER FINANCING SOURCES AND USES section of the operating statement for governmental funds.

Basic Principles: Category 4(B)—Financial Reporting—Other Financing Sources and

Uses

• OTHER FINANCING SOURCES AND USES category of the operating statement—limited to the following types of transactions:– Bond proceeds– Transfers in– Transfers out– Proceeds from sale of general capital

assets– Proceeds from capital lease

Basic Principles: Category 4(C)—Financial Reporting—The CAFR

• Comprehensive Annual Financial Report (CAFR):– Includes 2 types of financial

statements:• #1: Government-wide statements

(show the “big picture”)• #2: Fund-based statements.

Basic Principles: Category 4(C) —Financial Reporting—The CAFR

• The General Purpose Financial Statements:– GOVERNMENT-WIDE STATEMENTS:

Consists of two specific financial statements designed to present an OVERVIEW of financial position and operations.

– FUND-BASED STATEMENTS: Consists of seven specific financial statements (narrow focus statements).

Basic Principles: Category 5—Long-Term Liabilities

• Certain funds account for and reportlong-term liabilities.

• Long-term liabilities not accounted for in a specific fund is called General Long-Term Liabilities: – GLTL is accounted for in the GCA-GLTL

g/l.– GLTL is the liability of the government as

a whole and not that of any specific fund.

Basic Principles: Category 6—Fixed Assets

• Certain funds account for & report capital assets.

• Fixed assets not accounted for in a specific fund are called General Capital Assets. – They are reported in the GCA-GLTL g/l.

• Depreciation expense is not reported in the operating statement of the governmental funds—at the fund-based reporting level.

Basic Principles: Category 7—Budgets and Budgetary Accounting

• Appropriation: The statutory authorization for spending a budgeted amount during a coming year.

• Annual Budgets for the General Fund and the Special Revenue Funds are always recorded in the general ledger for control purposes.– Also done for Capital Projects Funds

and Debt Service Funds if useful.

Basic Principles: Category 7—Budgets and Budgetary Accounting

• Encumbrances: Commitments related to unperformed (executory) contracts for goods or services.

• Special general ledger accounts are used to record encumbrances—the purpose is to prevent spending more than has been appropriated.

• SUCH ENTRIES HAVE NO EFFECT ON REPORTED OPERATIONS.

Inventories of Supplies: Two Alternative Ways to Handle

• Consumption Method:– The preferred method—it parallels

business practice.– The ACQUISITION of inventory is

treated as the conversion of resources (debit Inventory).

– The USE of inventory is treated as an outflow of resources (credit Inventory and debit Expenditures or Expenses).

Inventories of Supplies: Two Alternative Ways to Handle

• Purchases Method:– The ACQUISITION of inventory is

treated as an outflow of resources (debit Expenditures or Expenses).

The Operating Statement for Governmental Funds: Classifications

• REVENUES:– Always classified by source.

• EXPENDITURES:– Always classified by character:

• Current, Capital Outlay, or Debt Service

– And then by function (for example):• Health, Welfare, Sanitation, Public

Safety

Measuring FLOWS: Cash Only

STATEMENT OF CASH FLOWS (simplified)INFLOWS: Property tax collections...................... $100,000 Parking meter receipts........................ 5,000 Total CASH Inflows....................... $105,000OUTFLOWS: Payments to employees..................... $ 90,000 Payments to services vendors........... 11,000 Total CASH Outflows................... $101,000 Net CASH Inflow...................... $ 4,000

Measuring FLOWS: Cash & Receivables Only

STATEMENT OF FLOWS OF CASH & RECEIVABLES (simplified) INFLOWS (REVENUES): Property tax assessments, net........... $120,000 Parking meter receipts....................... 5,000 Total Inflows................................... $125,000OUTFLOWS:.. Payments to employees.................... $ 90,000 Payments to services vendors.......... 11,000 Total Outflows.............................. $101,000 Net Inflow..............................… $ 24,000

Measuring FLOWS: Cash, Receivables, & Vouchers Payable Only

STATEMENT OF FLOWS OF CASH, RECEIVABLES, & VOUCHERS PAYABLE (simplified)INFLOWS (REVENUES): Property tax assessments, net................. $120,000 Parking meter receipts............................. 5,000 Total Inflows........................................ $125,000OUTFLOWS (EXPENDITURES): Employee salary costs incurred............. $ 96,000 Services provided by service vendors.. 17,000 Total Outflows.................................... $113,000 Net Inflow.....................................… $ 12,000

End of Chapter 24

Time to Clear Things Up—Any Questions?

chapter 24 governmental accounting: basic principles and the general fund

Documents

governmental gaap

local governmental units

accounting entity

funds assets

local units

fasb gasb

certain activities

financial reporting