Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 8: Government-Wide Financial Statements; Fixed Assets and Long-term Debt

2. Overview of Chapter 8 • Overview of entity-wide conversion process • Example of conversion process • Reconciliation schedules • Fixed Assets • Long-term Debt

3. Overview of entity-wide conversion process • Basic entries made during the year on a fund by fund basis. • Entity-wide statements are prepared at year end by • converting government type funds to full accrual basis including inclusion of depreciation, long-term assets and long-term liabilities, • Adding in the asset and liability balances from internal service funds along with any income earned through transactions with external parties, • consolidating fund statements (other than fiduciary funds).

4. Conversion adjustments: Fixed Assets • 1. Beginning of the year long-term assets of government funds net of accumulated depreciation added to the governmental activities. • 2. The balance in “Capital expenditures” is eliminated and replaced with fixed assets acquired during the year - treat as asset instead of expenditure. • 3. Depreciation for the current period is recorded. • 4. The balance in “Proceeds from sale of fixed assets” is eliminated, assets and depreciation are removed, and gain and loss are recorded.

5. Conversion adjustments: Long-term Debt • 1. Beginning of the year long-term liabilities of government funds are added to the governmental activities. • 2. Convert this year’s “bond proceeds” to bond liability (and premium if applicable) • 3. Eliminate balance in “expenditure - bond principal” and reduce the balance of the liability • 4. Amortize premium/discount amortization • 5. Accrue interest on bonds outstanding

6. Conversion adjustments: Other • 1. Deferred Rev. = Property taxes deferred under the 60 day rule may need to be recognized under the accrual basis • 2. Expenses not recorded in government funds per current economic resources model may need to be accrued (e.g. The long-term portion of compensated absences ) • 3. Other accruals as necessary

7. What do you think we do with Internal Service Funds? Internal Service Funds are included in the Government-Wide Financial Statements as: (select the best answer) • Governmental Activities • Business-like Activities • It depends on whether the fund primarily serves the general government or enterprise funds

8. Answer: What to do with Internal Service Funds • Answer: It Depends. Generally they are included with the Governmental Activities. However… Although internal service funds are reported as proprietary funds, the activities accounted for in them are usually more governmental than business-type in nature. If enterprise funds are the predominant or only participant in an internal service fund, however, the government should report that internal service fund’s residual assets and liabilities with the business-type activities. (GASB 34)

9. Worksheet entries for internal service funds included in governmental activities • 1. Add Internal Service Fund’s Assets and Liabilities to the Governmental Activities section of the Government-wide Statement of Net Assets. • 2. Income of the Internal Service Fund with entities external to the governmental activities should be brought into the Statement of Activities. • 3. Eliminate Interfund activities between the Internal Service Fund and other Funds represented within Governmental Activities.

10. Statement of Net Assets • Separate columns for Government and Business type activities (statements are ‘consolidated’ within columns) • Would have another column for component units if needed. • Government Activities column includes government type funds and (most) Internal service funds. • Fiduciary Net Assets are not included because the overall SLG cannot use these to fund day to day operations.

11. Statement of Activities • Net cost approach: • Functional expenses less allocable program revenues shows net cost. • Net cost less general revenues, special items and transfers shows overall change in net assets for Governmental and Business type activities. • Change plus beginning net assets = ending balance

12. RequiredReconciliation of Governmental Fund Balances to Government-wide Net Assets • Starts with Government fund balances • Summarizes all the changes made to get entity-wide government net assets • Note typical reconciliation items include: • Addition of long-term assets (+) • Inclusion of ISF net assets (usually +) • Handling of deferred revenue as revenue instead of as liability (+) • Addition of long-term liabilities (-)

13. Required Activity Statement Reconciliation • Shows difference in accrual vs. modified accrual • Examples: • Excess of depreciation over capital outlay expenditures • Gain/loss on sale of assets vs. full proceeds as a OFS • Deferred revenue items treated as revenues under accrual • Difference in bond proceeds and retirements • Net ISF profit from government funds • GF to ISF transfers • Difference in bond premium as OFS for government type fund vs difference in expense vs. expenditure because of premium amortizations

14. General Fixed Assets Accounting • While no specific method of keeping track of long-term assets is required, obviously some type of records should be kept on the cost, location, source of funding, and life of all fixed assets in order to support amounts reported in the Entity Wide Stmts. • Historically this was done in the General Fixed Asset Account Group

15. GASB 34 Transition – infrastructure assets • During the transition to GASB 34 some governments will begin reporting Infrastructure Assets prospectively and add past assets later in a four year transition period. • Appraisals and other estimations may be needed to approximate original costs of existing assets back to 1980. • SLGs under $10 M will have the option of recording these long-term assets on a prospective basis only … ignoring prior years’ long-term assets.

16. Collections • Capitalized, exhaustible • Record as asset and depreciate • Capitalized, inexhaustible • Record as asset, do not depreciate • Noncapitalization option (reported as expense if not capitalized) • Must be held for public exhibit, education or research • Protected • Proceeds of any sale must be put back into other collections

17. Infrastructure • Examples include roads, bridges, drainage systems, sewer systems, dams, lighting … • Capitalization was optional before GASB 34 • Once capitalized may depreciation or use “modified approach” which does not require depreciation if assets adequately maintained

18. Modified Approach to Infrastructure Accounting • Must • Maintain inventory • Do condition assessments every 3 yrs • Estimate annual cost to maintain at target level • And, • Document that target maintenance level met • Under modified approach, cost of maintaining charged to expense rather than taking depreciation. • Cost to extend the life of existing assets is charged to expense, rather than capitalized under either option

19. Long-term Debt • Common Types: • Most general obligation bonds • Long-term lease obligation amounts • Compensated absence amounts • Claims and judgments • Pension liabilities • Landfill closure liabilities

20. Long Term Debt Additional Reporting • Schedule of Changes in Long-Term (LT) Debt • Shows difference in new debt vs. amount paid off. • Schedule of Debt Service Requirements to Maturity • Helps users see any future ballooning of debt service that may require tax increases. • Computation of Legal Debt Margin • (Shows additional debt that can be legally issued.) • Schedule of Direct and Overlapping Debt • Helps citizens see their total debt obligation.