An Introduction to Accounting for State and Local Governmental Units

1. An Introduction toAccounting for State andLocal Governmental Units Chapter 18

2. Learning Objective 1 Learn about the historical development of accounting principles for state and local governmental units.

3. State and Local Governmental Units With the exception of the federal government, state and local governmental units constitute the largest single category of nonprofit organizations.

4. Historical Development 1951 – The Municipal Finance Officers Association (MFOA) National Committee on Governmental Accounting) issued Municipal Accounting and Auditing. 1968 – Governmental Accounting, Auditing, and Finance Reporting (GAAFR, or Blue Book, succeeded Municipal Accounting and Auditing.

5. Historical Development 1974 – The AICPA issued its industry audit guide, Audits of State and Local Governmental Units, in which it noted that GAAFR’saccounting and reporting principles constituted GAAP except when modified by the audit guide.

6. Historical Development 1979 – The MFOA National Council on Governmental Accounting issued Governmental Accounting and Financial Reporting Principles, Statement 1. 1980 – AICPA issued Statement of Position 80-2 amending Audits of States and Local Government Units to recognize the principles of NCGA Statement 1 as GAAP.

7. (1984) Historical Development Financial Accounting Foundation FASB GASB

8. Historical Development 1985 – Codification of Governmental Accounting and Financial Reporting Standards was issued. It integrated all NCGA and AICPA and all subsequent GASB pronouncements. It is revised annually.

9. GAAP Hierarchy for Stateand Local Governmental Entities 1. GASB Statements and Interpretations 2. GASB Technical Bulletins 3. Consensus positions of GASB’s Emerging Issues Task Force (EITF) 4. Implementation Guides 5. Other accounting literature

10. Learning Objective 2 Define fund accounting and explain why it is used.

11. Fund Definition and Categories A fund is a self-contained accounting entity. It records its own assets, liabilities, revenues, expenditures, or expenses and fund balance.

12. The Proprietary FundAccounting Model Current Assets + Noncurrent Assets – Current Liabilities – Noncurrent Liabilities = Net Assets

13. The Governmental FundAccounting Model Current Assets – Current Liabilities = Fund Balance Fund G Fund SR A = L + FB A = L + FB General General Fund Long-Term Assets Debt

14. Learning Objective 3 Perform transaction analysis using proprietary and governmental accounting models.

15. Applying the Models –Transaction Analysis 1. Incurred salary cost of $5,000. 2. Charges for services rendered, $2,500, were billed and collected immediately. 3. Borrowed $30,000 on a one-year, 6% note six months before year end. 4. Year-end accrual of interest on the note. 5. Borrowed $15,000 by issuing a three-year note.

16. Applying the Models –Transaction Analysis 6. Purchased computer equipment costing $2,800 for cash. 7. Sold a truck for $1,000. It was originally purchased three years ago for $18,000, had an estimated residual value of $1,200, and is fully depreciated. 8. Computed depreciation on the computer equipment for the year, $875.

17. No. 1 No. 2 No. 3 No. 4 +5,000 –5,000 +2,500 +2,500 +30,000 +30,000 +900 –900 +5,000 –5,000 +2,500 +2,500 +30,000 +30,000 +900 –900 Applying the Models –Transaction Analysis Proprietary Fund Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net assets Government Fund Current assets Current liabilities Fund Balance

18. No. 5 No. 6 No. 7 No. 8 +15,000 +15,000 –2,800 +2,800 +1,000 –1,200 –200 –875 –875 +15,000 –15,000 –2,800 –2,800 +1,000 +1,000 Applying the Models –Transaction Analysis Proprietary Fund Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net assets Government Fund Current assets Current liabilities Fund Balance

19. Learning Objective 4 Recognize various fund categories, as well as their measurement focus and basis of accounting.

20. Proprietary Fund Types Internal service funds Enterprise funds

21. Governmental Fund Types Special revenue funds Permanent funds Capital project funds Debt service funds General fund

22. Fiduciary (Trust and Agency)Fund Types Pension trust funds Investment trust funds Private- purpose trust funds Agency funds

23. Applying the Model UsingSpecific Funds 1. Issued general obligation bonds, par value of $3,000,000, at 101 to finance construction of a government office building. 2. Transferred the premium on the bonds to the fund used to account for payment of principal and interest on the bonds. 3. Incurred and paid construction costs of $12,500 on the building.

24. Applying the Model UsingSpecific Funds 4. Levied and collected sales taxes restricted to use for economic development, $6,000. 5. Paid general government employees’ salaries, $4,500. Another $500 of salaries accrued but has not been paid. 6. Borrowed $7,500 on a six-month note to finance general operating costs of the government.

25. Applying the Model UsingSpecific Funds Current Current Fund No. Fund Assets Liabilities Balance 1 Capital projects + 3,030,000 – 3,030,000 2a Capital projects – 30,000 – 30,000 2b Debt service + 30,000 + 30,000 3 Capital projects – 12,500 – 12,500 4 Special revenue + 6,000 + 6,000 5 General – 4,500 + 500 – 5,000 6 General + 7,500 + 7,500

26. Measuring focus Economic resources Measuring focus Flow of current financial resources Bases of Accounting Accrual Modified Accrual

27. Financial Reporting In June 1999, the GASB issued GASB Statement No. 34, “Basic Financial Statements and Management’s Discussion and Analysis – for State and Local Governments.” The statement establishes standards for preparing government-wide financial statements and fund-level financial statements.

28. Financial Reporting Management’s discussion and analysis Government-wide financial statements Statement of net assets (accrual basis) Statement of activities (accrual basis) Fund financial statements Governmental funds Statement of net assets (modified accrual basis) Statement of revenues, expenditures, and changes in fund balances (modified accrual basis)

29. Financial Reporting Fund financial statements (cont’d.) Proprietary funds Statement of net assets (accrual basis) Statement of revenues, expenses, and changes in net assets (accrual basis) Statement of cash flows (accrual basis, direct method) Fiduciary funds Statement of net assets (accrual basis) Statement of changes in net assets (accrual basis)

30. Learning Objective 5 Review basic governmental accounting principles.

31. Revenue Recognition Revenue recognition within governmental entities is determined by the nature of the underlying transaction. GASB Statement No. 33, “Accounting and Financial Reporting for Nonexchange Transaction,” characterizes revenue transactions.

32. GASB Statement No. 33 established four categories of nonexchange transactions. Revenue Recognition Derived tax revenues Imposed nonexchange transactions Government-mandated nonexchange transactions Voluntary nonexchange transactions

33. Expense and ExpenditureRecognition Expenses reflect the cost of assets or services used by an entity. Expenditures typically reflect the use of governmental fund working capital. Expenditures normally reflect the cost of goods or services acquired during a period and the maturing of general long-term debt principal.

34. Interfund Activity Loans Transfers Reimbursements

35. Capital Program 2003 2004 2005 2006 2007 The Role of the Budget 2003 Capital Budget 2003 Current Budget 2003 Operating Budget

36. The Financial Reporting Entity GASB Statement No. 14, “The Financial Reporting Entity,” explains that the financial reporting entity is made up of the primary government and its component units. Each state and general-purpose local government is a primary government.

37. 1 Separately elected governing body 2 Legally separated 3 Fiscally independent Primary Governments

38. Component Units These are legally separate organizations for which the primary government is financially accountable. Blending Discrete Presentation

39. Learning Objective 6 Learn about the contents of a governmental entity’s comprehensive annual financial report under GASB 34.

40. Accountability Operational accountability measures the extent of a government’s success at meeting operating objectives efficiently and effectively and its ability to meet operating objectives in the future. Fiscal accountability is the responsibility of a government to demonstrate compliance with public decisions.

41. Prior to GASB 34 General purpose financial statements were prepared using the appropriate basis of accounting. The combined balance sheet included columns for each fund type.

42. CAFR Major Sections Introductory Section Table of contents Letter of transmittal List of officers Organizational chart

43. CAFR Major Sections Financial Section Management’s discussion and analysis Auditor’s report Government-wide financial statements Fund financial statements

44. CAFR Major Sections Statistical Section Statistical tables

45. Financial Section MD&A Management’s discussion and analysis is required supplementary information (RSI) that is presented before the financial statements. The Board requires that MD&A precede the statements.

46. Financial Section Government-wide Financial Statements Governmental and proprietary funds are consolidated and reported in a single set of government-wide financial statements. Statement of net assets Statement of activities

47. Assets (Liabilities) Net Assets Governmental Activities Business Activities Total Statement of Net Assets City of Davie Statement of Net Assets December 31, 2003 Primary Government

48. Functions Primary Government Governmental Activities Function 1 Function 2 Business Type Activities Activity 1 Expenses Revenues Net Statement of Activities

49. Fund Financial Statements Governmental funds Proprietary funds Fiduciary funds

50. Major Fund Reporting Governmental Funds General fund Each major governmental fund All nonmajor governmental funds Total funds