Chapter 15

1. Chapter 15 Governmental Accounting: General Fund and Account Groups C15

2. 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 C15

3. 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. C15

4. Purposes of Financial Reporting • Assess financial condition • Compare actual results with the budget • Determine compliance with laws and regulations • Evaluate efficiency and effectiveness C15

5. 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 C15

6. 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 C15

7. 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 C15

8. 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 New Reporting Model, continued C15

9. 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 C15

10. Governmental Funds • General Fund • Special Revenue Fund • Permanent Fund • Capital Projects Fund • Debt Service Fund C15

11. 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 C15

12. Proprietary Funds • Enterprise Funds • Internal Service Funds C15

13. 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 C15

14. 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 C15

15. 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) C15

16. Overview of Governmental Fund Accounting • Recording • the budget • Accounting for • encumbrances • revenues • expenditures • other financing sources/uses C15

17. Recording the Budgetary Entries Estimated Revenues + Estimated Other Financing Sources - Appropriations - Estimated Other Financing Uses = Fund Balance Journal Entry: Estimated Revenues xx Estimated Other Financeing Sources xx Appropriations xx Estimated Other Financing Uses xx Fund Balance (derived) xx C15

18. Comparison with Actual Results Estimated Revenues (debit) - Actual Revenues (credit) Variance Appropriations (credit) - Actual Expenditures (debit) Variance C15

19. 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) C15

20. 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 C15

21. Deferred Revenues • A liability • Recorded if • unearned or • not legally available C15

22. 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) C15

23. 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” C15

24. Revenue: Sales Taxes • Recognize when merchant files sales tax return • measurable • available C15

25. Revenue: Licenses and Permits • Difficult to predict accurate amounts • Normally recognize revenue when cash is received C15

26. 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 C15

27. Revenue: Charges for Services • Recognize revenue when billing for services rendered C15

28. Revenue: Fines • Options: • when tickets are issued • date fine is due • actual payment date • Common practice - when cash is received C15

29. Revenue: InvestmentIncome • Record all investments at fair value • “mark-to-market” • unrealized gains/losses are recognized as revenue in period • Interest and dividends accrued as earned C15

30. 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 C15

31. 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 C15

32. 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 C15

33. 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 C15

34. Wages and Salaries Compensated Absences vacations sick leave Pensions Claims and Judgments Supplies Prepayments Fixed Assets Leases Debt Service principal interest Types of Expenditures C15

35. Wages and Salaries • Accrued at year-end • Natural (object) classification allocated to function/program Entry: Expenditures - payroll xx Accrued wages and salaries xx C15

36. Compensated Absences: Vacations Recognize if vested and probable that the benefit will be paid out Expenditure 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 group Entry in account group: Amount to be provided... xx Long-term liability for vacation pay xx C15

37. Compensated Absences:Sick Leave Recognize if pay-out is probable at termination Expenditure 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 C15

38. 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 C15

39. 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 C15

40. Supplies ExpenditurePurchase Method Record expenditure upon acquisition: Expenditure - supplies xx Vouchers payable xx Inventory - supplies xx Fund Balance - reserve for supplies xx C15

41. Supplies Expenditure Consumption Method Acquisition: Inventory - supplies xx Vouchers payable xx Record expenditure upon consumption: Expenditures - supplies xx Inventory - supplies xx Fund Balance - unreserved xx Fund Balance - reserve for supplies xx C15

42. Prepayments Purchases Method: Expenditure - insurance xx Vouchers payable xx Consumption Method: Prepaid insurance xx Vouchers payable xx Expenditure - insurance xx Prepaid insurance xx C15

43. 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) C15

44. Other Financing Uses • Not an expenditure • Operating transfers of resources to other funds • Not classified as expenditures in remitting fund to avoid double counting C15

45. Encumbrances - Year 1 Commit to future expenditureAt 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 xx Encumbrance xx Leave Reserve for Encumbrances Expenditures xx open as an equity account on the Vouchers Payable xx balance sheet C15

46. Encumbrances - Year 2 At beginning of the year reinstate encumbrances: Encumbrances xx Fund Bal xx When invoice is received F.B. Reserve for Enc. xx Encumbrances xx Expenditures xx Vouchers payable xx At year-end Fund Bal xx Expenditures xx C15

47. Year End Closing Entries Close the Budget: Appropriations xx Budgetary Fund Balance xx Estimated Revenues xx Close the Actual Accounts: Revenues xx Expenditures xx Encumbrances xx Fund Balance xx C15

48. Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues - Expenditures Excess of revenues over expenditures Other financing sources (uses) Excess of revenues and other financing sources over expenditures and other financing uses + Beginning Fund Balance  Residual Equity Transfers Ending Fund Balance C15

49. 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 C15

50. 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 C15