Chapter 18

1. Chapter 18 Governmental Entities: Special Funds and Government-wide Financial Statements

2. Governmental Entities • In addition to the general fund, discussed in Chapter 17, governments have a number of other funds. • This chapter presents the accounting and financial reporting requirements for: • The four remaining governmental funds. • The two proprietary funds. • The fiduciary funds.

3. Governmental Entities • A local governmental uses as many of these funds as necessary for its operations or as required by law. • In practice, the funds and account groups are often identified with the acronyms from the first letters of their titles as found in the next two slides.

4. Governmental Entities • Governmental Funds • GF General Funds • SRF Special Revenue Funds • DSF Debt Service Funds • CPF Capital Projects Funds • PF Permanent Funds

5. Governmental Entities • Proprietary Funds • EF Enterprise Funds • ISF Internal Service Funds • Fiduciary Funds • PTF Pension Trust Funds • ITF Investment Trust Funds • P-PTF Private-Purpose Trust Funds • AF Agency Funds

6. Governmental Entities • Governmental units should establish and maintain those funds required by law and sound financial administration. • Only the minimum number of funds consistent with legal and operating requirements should be established, however, because unnecessary funds result in inflexibility, undue complexity, and inefficient financial administration.

7. Governmental Entities • A general rule followed in many governmental entities is that all activities should be accounted for in the general fund unless specifically required by law or the GAAP to be accounted for in another fund. • This rule does not prohibit the creation of additional funds but places a reasonable restraint on the proliferation of additional funds.

8. Governmental Entities • One event may require entries in several funds. For example, the construction of a new municipal building through the issuance of general obligation bonds may require entries in both a capital project fund and a debt service fund. • In addition, interfund activities require entries in two or more funds.

9. Special Revenue Funds • Current governmental resources may be restricted for specific purposes, such as construction of the state highway system, maintenance of public parks, or operation of the public school system, city libraries, and museums. • The necessary revenue often comes from special tax levies or federal or state governmental grants.

10. Special Revenue Funds • Some minor revenue may be earned through user charges, but these charges are usually not sufficient to fully fund the service. • Special revenue funds are used to account for such restricted resources. • The governmental entity usually has a separate special revenue fund for each different activity of this type.

11. Special Revenue Funds • Accounting for special revenue funds is the same as for the general fund. • The modified accrual basis of accounting is used, no fixed assets or depreciation are recorded in a special revenue fund, the operating budget is typically recorded in the accounts, and no long-term debt is recorded in a special revenue fund.

12. Capital Projects Funds • Capital projects funds account for the acquisition or construction of major capital facilities or improvements that benefit the public. • Examples are the construction of libraries, civic centers, fire stations, courthouses, bridges, major streets, and city municipal buildings.

13. Capital Projects Funds • A separate capital projects fund is created at the time the project is approved and ceases at the completion of the project. • Each project or group of related projects usually is accounted for in a separate capital projects fund.

14. Capital Projects Funds • Accounting for capital projects funds is similar to accounting for the general fund. • The modified accrual basis of accounting is used, no fixed assets or depreciation are recorded in the capital projects funds, and no long-term debt is recorded in these funds. • Capital projects funds, however, typically do not have annual operating budgets.

15. Debt Service Funds • Debt service funds account for the accumula-tion and use of resources for the payment of general long-term debt principal and interest. A government may have several types of general long-term debt obligations, as follows: • Serial Bonds. • Term Bonds. • Special Assessment Bonds. • Notes and Warrants. • Capital Leases.

16. Serial Bonds • Serial bonds • The most common form of debt issued by governments is in the form of serial bonds. • The bonds are repaid in installments over the life of the debt. • A serial bond is called “regular” if the installments are equal, “irregular” if they are not equal.

17. Term Bonds • Term bonds • This form of debt is less frequent now than in the past. • The entire principal of the debt is due at the maturity date.

18. Special Assessment Bonds • Special assessment bonds are secured by tax liens on the property located within the special assessment tax district. • The governmental unit may also become obligated in some manner to assume the payment of the debt in the event of default by the property owners. • Continued on next slide.

19. Special Assessment Bonds • Special assessment bonds may be used to finance capital projects, or to acquire other assets, such as ambulances or fire engines, necessary to operate the governmental unit. • Special assessment bonds sold to acquire enterprise fund assets, however, should be accounted for within the enterprise fund. • The special assessment feature simply states the source of financing and means of repayment.

20. Notes and Warrants • Notes and Warrants • These consist of debt typically issued for one or two years. • These debts are usually secured by specific tax revenue, which may be used only to repay the debt. • Property tax anticipation warrants are an example.

21. Capital Leases • Capital Leases • Governmental units must record capital leases in accordance with generally accepted accounting principles. • These leases then become long-term liabilities of the governmental unit.

22. Permanent Funds • Permanent funds are in the governmental funds group and are established in those cases in which the fund principal must be preserved but that the income from these permanent funds is required to be used for the benefit of the government’s programs or its general citizenry. • The modified accrual basis of accounting is used to measure income. • The financial reports for the permanent funds are the same as for all other governmental funds.

23. Financial Statements • GASB 34 requires two financial statements for the governmental funds. • The first is the governmental funds balance sheet, and the second is the governmental statement of revenues, expenditures, and changes in fund balance.

24. Financial Statements • Note that fund financial statements for the governmental funds separately report only major governmental funds, not necessarily individually each of the five governmental funds. • The general fund is always considered a major fund; but some of the other governmental funds may not be considered major funds and these non-major funds are aggregated and reported in a single column as other governmental funds.

25. Financial Statements • GASB 34 specifies the general fund as always a major fund. • In addition, GASB 34 established criteria that also encompass the enterprise funds. • To determine which of the other governmental or enterprise funds are major, GASB 34 specifies that both of the following criteria must be met (see next two slides).

26. Financial Statements • 10 Percent Criterion: • Total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent of the corresponding total (assets, liabilities, revenues, or expenditures/ expenses) for all funds of that category or type (i.e., total governmental funds or total enterprise funds).

27. Financial Statements • 5 Percent Criterion: • Total assets, liabilities, revenue, or expenditures/expenses of the individual governmental or enterprise fund are at least 5 percent of the corresponding total for all governmental and enterprise funds combined.

28. Enterprise Funds • Governments sometimes offer goods or services for sale to the public. • The amounts charged to customers are intended to recover all or most of the cost of these goods or services.

29. Enterprise Funds • For example, a city may operate electric, gas, and water utilities; transportation systems such as buses, trains, and subways; airports; sports arenas; parking lots and garages; and public housing. • Such operations are accounted for in enterprise funds.

30. Enterprise Funds • Enterprise funds differ from special revenue funds in that the costs of enterprise fund activities are recovered by user charges. • Therefore, the primary difference between establishing a special revenue fund and an enterprise fund is the source of revenue.

31. Enterprise Funds • Enterprise funds are proprietary funds, and the basis of accounting is the same as for commercial entities, that is, the accrual method is used to measure revenue and expenses. • Proprietary funds report fixed assets, which are depreciated, and long-term debt, if issued, and they focus on income determination and capital maintenance.

32. Financial Statements • The financial statements for proprietary funds are very similar to those for commercial entities: • The Statement of Net Assets (Balance Sheet). • The Statement of Revenues, Expenses, and Changes in Fund Net Assets (Income Statement). • Statement of Cash Flows.

33. Enterprise Funds-Budgets • Budgeting in the proprietary funds also has the same role as in commercial entities. • A budget may be prepared for management planning purposes; however, the budget is normally not entered into the accounts.

34. Internal Service Funds • Internal service funds account for the financing of goods or services provided by one department or agency to other departments or agencies, on a cost reimbursement basis. • These services are not available to the general public, making the internal service fund different from the enterprise fund.

35. Internal Service Funds • Examples are motor vehicle pools, central computer facilities, printing shops, and centralized purchasing and storage facilities. • Separate internal service funds are established for each of these functions maintained by the local governmental unit.

36. Financial Statements • Accounting and financial reporting for internal service funds are the same as for enterprise funds or for commercial entities. • The accrual basis is used to measure revenue and expenses, and the balance sheet may include fixed assets, which are depreciated, and long-term debt, if issued.

37. Financial Statements • The statement of revenue, expenses, and changes in fund net assets reports the fund’s income for the period. • The statement of cash flows is also required.

38. Trust Funds • Trust funds account for resources held by a government unit in a trustee capacity. • The governmental unit acts as a fiduciary for monies or properties held on behalf of individuals, employees, or other governmental agencies.

39. Trust Funds • The trust fiduciary funds cannot be used to support the government’s own programs but rather are for the benefit of specific individuals, organizations, or other governmental units. • The three main types of fiduciary trust funds are: • Pension and Other Employee Benefit Trust Funds. • Investment Trust Funds. • Private-Purpose Trust Funds.

40. Financial Statements • The accrual basis of accounting is used for the fiduciary funds, and the financial statements required for fiduciary funds are statement of fiduciary net assets and the statement of changes in fiduciary net assets. • 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—their assets must equal their liabilities.

41. Agency Funds • Agency funds account for resources held by a governmental unit as an agent for individuals, private organizations, other funds, or other governmental units. • Examples are tax collection funds that collect property taxes and then distribute them to local governmental units, and employee benefit funds for such items as dental insurance or charitable contributions that employees authorize as withholdings from their paychecks.

42. Financial Statements • The accrual basis of accounting is used to account for agency funds. • The financial statement for agency funds is the statement of fiduciary net assets. • Because agency funds are custodial in nature, assets always equal liabilities and there is no fund equity; therefore, no statement of changes in fiduciary net assets is required for agency funds.

43. The Government Reporting Model • GASB 34 specifies the reporting model for governmental entities. • All general-purpose units such as states, counties, and municipalities must provide all the financial statements required in GASB 34. • These statements are both the fund-based financial statements presented earlier in this chapter plus the government-wide financial statements.

44. The Government Reporting Model • The government-wide financial statements include the (a) statement of net assets, and (b) statement of activities. • GASB 34 requires that government-wide financial statements be prepared on the economic resources measurement focus with the accrual basis of accounting.

45. The Government Reporting Model • The government-wide financial statements present both the long-term capital assets, including infrastructure assets, and long-term debt. • Government entities must include required supplemental information (RSI) in their annual reports, as specified by GASB 34. • This RSI includes Management’s Discussion and Analysis, Reconciliation Schedules, and a Budgetary Comparison Schedule.

46. The Government Reporting Model • Some special-purpose government units such as cemetery associations that are engaged in a single governmental activity are not required to provide the government-wide financial statements but must still provide fund-based financial statements.

47. The Reporting Entity • The first issue to address is the reporting entity for which the statements will be provided. • The primary government is part of the reporting entity, but the question concerns what other boards, commissions, agencies, or authorities should be included within the reporting entity.

48. GASB 14 • GASB 14 provides guidance for: • Defining component units to be included in the reporting entity. • Whether the financial results of the component unit should be discretely reported in a separate column or blended into the financial statements of the primary government unit.

49. Auditing Governmental Entities • Most governmental units are audited annually because of state or federal requirements or because long-term creditors demand audited statements as part of the debt agreements. • The audit of a governmental unit is different from the audit of a commercial entity.

50. Auditing Governmental Entities • The auditor not only must express an opinion on the fairness of the audited entity’s financial statements in conformity with applicable accounting principles but must also assess the audited entity’s compliance with legal or contractual provisions of state law, debt covenants, terms of grants from other governmental entities, and other restrictions on the governmental unit.