GOVERNMENTAL ACCOUNTING: What You Don’t Know Could Hurt You

1. GOVERNMENTAL ACCOUNTING: What You Don’t Know Could Hurt You Karen Tenace CPA, CMA City of Tucson

2. Objectives • What makes governmental accounting different than private sector? • Budgetary Accounting • What’s a fund? • Measurement Focus & Basis of Accounting

3. PRIVATE SECTOR Exists to enhance owners wealth Are free to provide only those goods and services they feel will enhance their profits Harmony in purpose-make a PROFIT Are NOT restricted to use resources in certain areas of their business Budgets are used for INTERNAL purposes and are NOT the force of law Continuity in leadership GOVERNMENT Exist to provide goods and services to their constituents Are required by law to provide certain services LACK harmony in purpose-different agendas and different politics Financial resources have restrictions Budgets are used BOTH internally and externally and ARE a force of law Do NOT have a continuity of leadership? How is Government different from Private Sector?

4. PRIVATE SECTOR Shareholders Securities Exchange Commission Lending Institutions Internal Management GOVERNMENT Taxpayers Donors Investors Bond Rating Agencies Grantors Political Groups Users of Accounting Information

5. Principles and Standards FASAB- Federal Accounting Standard Advisory Board Recommends financial reporting standards for the federal government

6. Principles and Standards GASB- Governmental Accounting Standards Board Standard making board for STATE AND LOCAL governments as well as GOV’T RELATEDNFP’S

7. Principles and Standards Cont. FASB- Financial Accounting Standards Board Lays out rules for both profit seeking businesses as well as NONGOV’T NFP entities.

8. Other Acronyms… • FAF- Financial Accounting Foundation oversees GASB and FASB • GAAP- Generally Accepted Accounting Principles

9. FAF Principles and Standards cont. FASB GASB FASAB GAAP

10. Objectives of Financial Reporting • Fulfill government’s duty to be publicly accountable to constituents • Evaluate operating results for the year • Assess level of services provided • Assess financial position • Disclose restrictions and risk potential loss of revenue sources

11. Budgetary Accounting • Budgets are Used Internally & Externally and are a Force of Law • Budget Accounts Integrate with General Ledger (GL)

12. Budgetary Accounts in GL • Estimated Revenues • Appropriations- authorized estimated expenditures • Encumbrances- commitment of budgetary resources

13. Encumbrance Accounting • An extra step in the procurement process to ensure that governments do NOT spend more than what’s appropriated. • An encumbrance is an obligation NOT a liability (Think Purchase Order)

14. Example: Public Safety BudgetJuly 1, 2007

15. Example: Public Safety BudgetSally issues P.O. for Vehicles

16. Example: Public Safety BudgetGeorge runs payroll (600k)

17. Example: Public Safety BudgetSarah runs A/P (150k)

18. Chief wants to buy a $60k SWAT Vehicle-Can he do it?

19. Example: Public Safety BudgetVehicles Rec’d; Paid For * *3 WAY MATCH = PO, RECEIVER, INVOICE

20. Unique Characteristics of Governmental Accounting • Use of Fund Accounting • Measurement Focus and Basis of Accounting or MFBA Full Accrual AND Modified Accrual

21. What’s a Fund? Fund: A self contained accounting entity with its own asset, liability, revenue, expenditure or expense and fund balance or other equity accounts.

22. GOVERNMENTAL FUNDS General Fund Special Revenue Fund Capital Project Fund Debt Service Fund Permanent Fund PROPRIETARY FUNDS Enterprise Funds Internal Service Funds FIDUCIARY FUNDS Agency Funds Pension Funds Investment Trust Funds Private Purpose Trust Funds Fund Types

23. Governmental Funds • General Fund- day to day operations; can only have ONE General Fund • Special Revenue Funds- accounts for proceeds of specific revenue sources that should be used for specific purposes (HURF) • Capital Project Funds- accounts for financial resources used for acquisition or construction of major assets

24. Governmental Funds Cont. • Debt Service Fund- to account for accumulation of resources that will be used to pay general long-term debt • Permanent Fund- used to report resources that are legally restricted to the extent that only earnings, not principal, can be spent. Program must benefit the government or its citizenry, not a specific group or organization.

25. Proprietary Funds • Enterprise Funds- may be used to report any activity for which a fee is charged to EXTERNAL users for goods and services. Must be used if: • Debt is secured solely by a pledge of net revenues • Laws or regulations require fees to cover full cost of providing the service • Pricing policies require full cost recovery

26. Proprietary Funds Cont. • Internal Service Fund- accounts for the financing of goods and services provided by one department or agency to other INTERNAL departments or agencies of a governmental unit. Fees are charged with the intent to BREAK EVEN.

27. Fiduciary Funds • Pension Fund- to account for resources that are required to be held in trust for the members and beneficiaries of pension and/or benefit plans. • Private Purpose Trust Funds- to account for all other trust arrangements under which principal and income benefit individuals

28. Fiduciary Funds Cont. • Investment Trust Funds- to account for the external portion of investment pools reported by a sponsoring government. • Agency Funds- used to report resources held by the reporting government in a purely custodial capacity. Assets = Liabilities

29. Measurement Focus & Basis of Accounting (MFBA) • Measurement Focus tells you WHAT to recognize • Basis of Accounting tells you WHEN to recognize it

30. Two Types of MFBA’s in Governmental Accounting #1 Economic Resources Measurement Focus and Accrual Basis of Accounting WHAT: Economic resource measurement focus considers ALL inflows, outflows and balances affecting or reflecting on an entity’s net assets.

31. Two Types of MFBA’s in Governmental Accounting #1 • Full Accrual Basis Cont. WHEN: Accrual basis of accounting recognizes the financial effect of transactions, events, and interfund activities when they occur, regardless of the timing of related cash flows.

32. Two Types of MFBA’s in Governmental Accounting #2 Current Financial Resources Measurement Focus and Modified Accrual Basis of Accounting WHAT: Current financial resource measurement focus only considers SHORT-TERM or CURRENT inflows, outflows and balances of expendable financial resources.

33. Two Types of MFBA’s in Governmental Accounting #2 Modified Basis Cont. WHEN: Modified accrual basis of accounting in which: - Revenues are recognized in the accounting period in which they become available and measurable. - Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable.

34. GOVERNMENTAL FUNDS (Current Resources/Modified) General Fund Special Revenue Fund Capital Project Fund Debt Service Fund Permanent Fund PROPRIETARY FUNDS (Economic Resources/Full Accrual) Enterprise Funds Internal Service Funds FIDUCIARY FUNDS (Economic Resources/Full Accrual) Agency Funds Pension Funds Investment Trust Funds Private Purpose Trust Funds Fund Types

35. Exercise • Turn PowerPoint presentation over – No peaking  • Pull out exercise handout • Get with neighbor or two • Compare/Contrast pg 1 vs. pg 2 • Compare/Contrast pg 3 vs. pg 4

36. Modified Expenditures (Capital Outlay and Principal Payments) Assets-Liabilities=Fund Balance Only Current Assets and Current Liabilities Shown Myopic View * No Long-term Assets means no Depreciation Expense Full Accrual Expenses Assets-Liabilities=Net Assets Current AND Long-Term Assets and Liabilities Shown Long-term View * Depreciation Expense Included in Operating How can you tell MFBA by looking at a financial statement? • What You Don’t Know Could Hurt You!!! • See Handout

37. Governmental FundFinancial StatementsCurrent Resources; Modified Accrual • Balance Sheet • Statement of Revenues, Expenditures and Changes in Fund Balance

38. Proprietary FundsFinancial StatementsEconomic Resources; Full Accrual • Statement of Net Assets or Balance Sheet • Statement of Revenues, EXPENSES, and Changes in Fund Net Assets • Statement of Cash Flows

39. Fiduciary FundsFinancial StatementsEconomic Resources; Full Accrual • Statement of Fiduciary Net Assets • Statement of Changes in Fiduciary Net Assets

40. Let’s Make Gov’t Look More Like Private Sector-GASB 34 (2002)

41. PRE-GASB 34: General Purpose F/S Emphasis on FUND TYPE Governmental Fund Financial Statements were ONLY presented using modified accrual accounting basis POST-GASB 34: Basic F/S Emphasis on MAJOR Fund vs. NONMAJOR Fund Governmental Fund Financial Statements presented in BOTH modified and full accrual accounting basis GASB Statement No. 34The “New” Model

42. GASB 34Modified AND Full Accrual – Governmental Fund Impact • Capital Assets have to be shown in the financial statements for the first time! • Infrastructure had to be shown on the financial statements for the first time! • Depreciation had to be shown in the financial statements for the first time! • Long-term liabilities shown for the first time!

43. Other GASB 34 Impacts • New Fund Type-Permanent Fund • Required Management Discussion and Analysis (MD&A) • New “Entity-wide”/”Government-wide” Statements: • Statement of Net Assets • State of Activities

44. CAFRComprehensive Annual Financial Report 3 Things to Comply with GAAP MD&A Basic Financial Statements Required Supplementary Information

45. Conclusion: What You Don’t Know Will Hurt You!