Financial Reporting: Deriving Government-Wide Financial Statements and Required Reconciliations

1. Financial Reporting:Deriving Government-WideFinancial Statements and Required Reconciliations Chapter 14

2. Learning Objectives • Understand and explain the types of worksheet adjustments needed to derive Governmental Activities data for the Government-Wide Financial Statements from Governmental Funds financial statement data. • Understand and explain the types of worksheet adjustments needed to derive Business-Type Activities data for the Government-Wide Financial Statements from Enterprise Funds financial statement data.

3. Learning Objectives • Understand both the two-worksheet approach (chapter) and one-worksheet approach (appendix) to deriving governmental activities data • Prepare the Government-Wide Financial Statements from information derived in the conversion worksheets • Prepare the required reconciliations of Fund Financial Statements to Government-Wide Financial Statements

4. Getting Started • Fund financial statements are the necessary foundation for the Government-Wide Financial Statements • Preparing the G-W statements is a matter of converting fund information into G-W information • Conversion process occurs at the end of the year

5. Sources of Information for Conversion Process • Fund financial statements – primarily the Total columns • Governmental Funds are affected by the most adjustments • Limited adjustments to the Enterprise Funds • Internal Service Funds will be eliminated • Fiduciary Funds not included in adjustment process as they are not included in Government-Wide Financial Statements • General Capital Assets • General Long-Term Liabilities

6. Major Reporting Differences for Statements: G-W vs. Funds • Reporting governmental activities in single entity in G-W statements rather than multiple fund entities • Reporting GCA and GLTL in G-W financial statements, whereas excluded from governmental fund statements • Reporting using single MFBA in G-W statements rather than multiple MFBAs in fund statements • Excluding ISFs from G-W statements

7. GCA Issues Add capital assets Deduct accumulated depreciation GLTL Issues Add Bonds Payable and Bond Premium Deduct Bond Discount Add Unamortized Bond Issue Costs (to noncurrent assets) Adjust for accrued interest payable Adjust for other noncurrent liabilities not reported as expenditures: OPEB, CA, and C&J Types of Worksheet Adjustments: Balance Sheet

8. Types of Worksheet Adjustments: Balance Sheet (continued) Other adjustments • Reduce Deferred Revenues by amounts earned or levied but deferred because of availability criterion • Eliminate or reclassify interfund receivables and payables • Eliminate intra-governmental receivables and payables • Reclassify net interfund receivables and payables with Enterprise Funds to internal balances

9. GCA Issues Eliminate Capital Outlay expenditures Add Depreciation Expense to functional areas Deduct carrying value of capital assets disposed of (converts proceeds received to gain/(loss)) GLTL Issues Eliminate OFS and OFU related to bond issues, including bond issue cost expenditures Eliminate Expenditures and OFU related to retirement/defeasance of debt Convert interest expenditure to interest expense Convert other “when due” expenditures to expenses Types of Worksheet Adjustments: Operating Statement

10. Types of Worksheet Adjustments: Operating Statement (continued) Other adjustments • Convert revenue measurements from current financial resource measurement focus (modified accrual) to economic resource measurement focus (accrual) • Eliminate or reclassify interfund transfers • Eliminate intra-governmental transfers • Reclassify net transfers with Enterprise Funds as transfers with business-type activities (could result in recording transfers not previously reported)

11. Steps in the Conversion Process • Enter governmental funds financial statement total column amounts in first column of worksheet • Enter adjustments to be made in this information to convert it of government-wide data (see previous slides) • Sum the first four columns

12. Textbook Presentation:Balance Sheet Conversion Process • Description of process in Illustration 14-8, page 564 • Sample adjustments for Farley County in Illustration 14-9, page 566 • Journal entry adjustments demonstrated on pages 567–568 (entries 1 thru 5)

13. Notes about Balance SheetConversion Worksheet • Initially, accounts are listed in same order as on Governmental Funds Balance Sheet • Accounts in italics are added as a result of the conversion process • Fund Balance / Net Assets shown on single line • Reserves and designations of fund balance not important – only total Fund Balance • Net Assets classifications will be determined later • Journal entries summarize what is recorded in worksheet – Net Assets used as balancing account whenever necessary

14. #1 GCA Adjustment [Page 567]

15. Notes on GCA Adjustment • Information comes from GCA note to the financial statements • Will always result in an increase to Fund Balances / Net Assets

16. #2a GLTL Adjustments [Page 567]

17. #2b & c GLTL Adjustments[Page 567]

18. #3a & b GLTL Adjustments[Page 568]

19. Notes on GLTL Adjustments • Most information comes from GCA note to the financial statements • 2b must be separately accounted for • Not part of GCA or GLTL • Reported as noncurrent asset • 2c results from interest not previously accrued because it is not yet due • Will always result in a decrease to Fund Balances / Net Assets

20. #4 & #5 Other Adjustments[Page 568]

21. Notes on Other Adjustments • Revenues deferred because availability criterion not met will be recognized as revenues in government-wide financial statements so long as they are earned and levied for current period • Intra-governmental fund receivables and payables cancel each other out

22. Textbook Presentation:Operating Statement Conversion Process • Description of process in Illustration 14-11, page 571 • Sample adjustments for Farley County in Illustration 14-12, page 573 • Journal entry adjustments demonstrated on pages 574–576 (entries 1 thru 5)

23. Notes about Operating StatementConversion Worksheet • Initially, accounts are listed in same order as on Governmental Funds Operating Statement and in same format • No accounts are added; only adjustments in amounts • Change in Fund Balance / Net Assets shown on single line – Fund Balance information on statement not important here • Journal entries summarize what is recorded in worksheet – Change in Net Assets used as balancing account whenever necessary

24. #1a GCA Adjustment:Capital Outlay[Page 574]

25. #1b GCA Adjustment:Depreciation[Page 574]

26. #1c GCA Adjustment:Sale of GCA[Page 574]

27. Notes on GCA Adjustments • Capital outlay expenditures that do not meet capitalization threshold would be reclassified as functional expenses • If capital outlay expenditures charged as functional expenditures during the year, these would be deducted from those functional expenditures • Information for depreciation comes from GCA schedule in notes • When adjusting sale proceeds to gain or loss • Gain reported as General Revenues • Loss reported as functional expense

28. #2a & b GLTL Adjustments:Bond Entries[Page 575]

29. #2c GLTL Adjustments:Interest [Page 575]

30. #3 Other GLTL Adjustments [Page 576]

31. Notes on GLTL Adjustments • All bond-related items – OFS, OFU, and expenditures – are not expenses and must be eliminated • Interest must be adjusted for amortizing premiums, discounts, bond issue costs, deferred charges resulting from refundings, and accrual adjustment for interest accrued but not previously recognized since it wasn’t due • Adjust for changes in GLTL items – claims & judgments and compensated absences – not previously recognized as expenditures

32. #4 & #5 Other Adjustments [Page 576]

33. Notes on Other Adjustments • Revenue adjustment has two parts • Increase in revenues from deferral on Balance Sheet Conversion Worksheet • Decrease in revenues for collections made in current year but recognized as revenues in previous year(s) • Transfer adjustment similar to receivables and payables adjustment on Balance Sheet Conversion worksheet – does not affect change in fund balance

34. Reconciliations • Reconciliations • Fund Balance to Net Assets [Page 569] • Change in Fund Balance to Change in Net Assets [Page 577] • Tied directly to preceding adjustments • Adjustment #5 on both worksheets has no effect on Net Assets or Change in Net Assets • Reconciliations should be prepared at same time as the conversion worksheets

35. Business-Type Activities Adjustments • Enterprise Funds and Business-Type Activities (BTAs) have same MFBA – simplifies adjustment process • Principal adjustments • Intra-EF receivables, payables, and transfers are eliminated • Reclassification of some capital contributions as transfers if from governmental activities • Netting of receivables & payables with Governmental Funds as internal balances and netting transfers with Governmental Funds • ISF elimination

36. Completion ofStatement of Net Assets • Takes data from GF Balance Sheet Conversion Worksheet and Enterprise Funds total column (± adjustments) • Must demonstrate reconciliation of internal balances • Calculate components of Net Assets • Invested in Capital Assets, Net of Related Debt • Restricted Net Assets • Unrestricted Net Assets

37. Completion ofStatement of Activities • Takes data from GF Balance Sheet Conversion Worksheet and Enterprise Funds total column (± adjustments) • Transition process from worksheet typically more complicated than Statement of Net Assets • Classification of revenues as either program revenues or general revenues • Classification of program revenues to appropriate functions • Classification of grants and contributions as operating or capital and program or general revenues

38. More on Reconciliations • Formal reconciliations prepared once G-W statements are complete • Governmental Funds reconciliations placement: • Bottom of statement • Separate page • Enterprise Funds reconciliations usually at bottom of respective statements • May present summary reconciliations in financial statements with details in the notes

39. The One-Worksheet Approach Appendix 14-1

40. Broad Steps • Addition of beginning balances of GCA and GLTL accounts to Governmental Funds preclosing trial balance • Capital assets-related adjustments and conversions • Long-term liabilities-related adjustments and conversions • Other MFBA adjustments • Elimination of interfund activities

41. GCA Adjustments • Eliminate capital outlay expenditures and record assets acquired • Eliminate OFS for the proceeds from sale of capital assets, remove carrying value of assets sold or disposed of, and recognize gain or loss on sale or disposal • Record depreciation expense

42. GLTL Adjustments • Eliminate OFS/OFU from GLTL issuances and related expenditures for bond issue costs • Eliminate expenditures for retirement of GLTL principal • Convert interest expenditures to interest expense

43. (a) Capital Outlay Expenditures[Page 588]

44. (b) Sales of Capital Assets [Page 588]

45. (c) Record Depreciation Expense[Page 589]

46. (d) Long-Term Debt Issues[Page 589]

47. (e) Long-Term Debt Retirement[Page 590]

48. (f) Convert Interest Expenditures to Interest Expense [Page 590]

49. Special Notes on Interest Adjustment • Some of expenditures for current year may be expenses in previous year • Must accrue interest incurred since last interest payment dates

50. Basis of Accounting Adjustments • Convert claims and judgments expenditures to expenses • Convert compensated absences expenditures to expenses • Convert modified accrual tax revenues to accrual basis tax revenues