Internal Service Funds

1. Internal Service Funds Chapter 11

2. Understand nature and usage. Understand applicable accounting principles. Understand pricing policies and methods. Prepare basic journal entries. Prepare financial statements. Understand unique aspects of self-insurance funds. Understand problems associated with significant accumulated increases or decreases in total net assets. Learning Objectives

3. Purpose To finance, administer, and account for departments or agencies whose exclusive or nearly exclusive mission is to provide goods and services to the government’s other departments on a cost reimbursement basis.

4. Goals of ISFs • Attain greater economy, efficiency, and effectiveness in acquisition and distribution of common goods and services used by other departments • Facilitate the equitable sharing of costs among departments served

5. General Principles • Measurement Focus – economic resources • Basis of Accounting – accrual

6. Creating an ISF:Transfer from GF

7. Create an ISF:Long-Term Loan

8. Create an ISF:Issue Bonds

9. Create an ISF:General Obligation Bonds

10. Create an ISF:General Obligation Bonds (continued)

11. Create an ISF:Transfer of Capital Assets

12. Special Notes on This Transfer • No entry in GF since asset is not accounted for there • Asset may be written down prior if fair value is less than net book value (NBV) • Reclassification is a Capital Contribution in ISF – may become a transfer when government-wide statements are prepared • Asset could be accounted for at NBV in ISF, but this entry is usual practice to maintain audit trail

13. Pricing Policies • Typical choices • Historical cost • Direct cost, when other costs are insignificant • ISFs usually have a monopoly, so pricing needs to be monitored closely • Excessive charges must be avoided

14. Pricing Methods • Predetermined rates – so much per page, mile, or order • Charge departments based on actual cost Predetermined rates preferred because • Departments need to know charges at time work is done • Actual cost charges may result in inequitable allocations among departments

15. Relation to Budget • Budget may not be used since level of activity depends on demand, not predetermined spending by the fund

16. ISF Accounting Illustrations Three funds in example: • Central Automotive Equipment Fund (CAEF) • Stores Fund (SF) • Self-Insurance Fund (SIF)

17. CAEF Buys Equipment & Supplies

18. CAEF Pays Salaries & Wages

19. CAEF Pays for Utilities

20. CAEF Records Depreciation

21. Billings to Other Departments

22. Routine Voucher Payments

23. Collections from Other Departments

24. Paying General Expenses &Using Supplies

25. Year-end Accruals

26. CAEF Financial Statements • Statement of Net Assets (balance sheet format) • Statement of Revenues, Expenses, and Changes in Net Assets • Statement of Cash Flows 1 2 3

27. Central Stores Fund • Used to centralize purchasing and warehousing operations • Enhances economy, efficiency, and control • Holds inventory until requested by departments • Billings based on direct inventory cost plus overhead factor

28. CSF Inventory Acquisition

29. Perpetual Inventory Procedures • Department submits stores requisition • Storekeeper issues requested supplies • Cost of issuance determined using direct cost of supplies and overhead application • Department billed for supplies issued

30. Inventory Issued

31. Overhead Expenses

32. Physical Inventory • Should be done at least annually • Adjust records to match physical count – usually have a shortage due to breakage, theft, or improper recording • Losses would be included in subsequent overhead charges

33. Recording Inventory Shortage

34. Self-Insurance Fund • Full insurance coverage for all types of risk can be prohibitive expensive • Self-insurance used to cover some losses • Amounts set aside should be actuarially determined

35. Consolidating Risk Financing Activities GASB Statement #10 gives governments two options: • General Fund • Internal Service Fund

36. General Fund • All claims and judgments recorded in GF when paid or due • Remainder is recorded in GLTL accounts • Amounts charged to other funds recorded as reduction of expenditures – reimbursements, not revenues • May not accumulate reserves for catastrophic losses

37. Internal Service Fund • All claims and judgments recorded in ISF when incurred – may be current or long-term liability • GLTL accounts are not involved • Amounts charged to other funds recorded as revenues • May accumulate reserves for catastrophic losses

38. Requirements in Using ISFs • Recognize all claims & judgments liabilities & expenses in ISF • Charge other funds amounts that are reasonable and equitable – preferably actuarially based – so that ISF revenues and expenses are approximately equal • Accumulated net assets should be disclosed in notes as being designated for future catastrophic losses • Determine whether amounts paid to ISFs that differ from required amounts are in substance interfund loans or transfers

39. Accounting Aspects for SIFs • Revenues from billings to departments • Investment of SIF resources • Recognition and settlement of claims & judgments

40. Revenue Recognition • Amounts paid based on actuarial estimates should be recorded as revenues • Overpayments • If intended to cover next year’s contribution, record as deferred revenues • If not so intended, payment may be a loan, advance, or transfer

41. Expense Recognition • Information prior to issuance of financial statements indicate that it is probable that an asset was impaired or a liability was incurred at date of statements. AND • Amount of loss can be reasonably estimated.

42. Establish SIF

43. Billings to Departments

44. Collections of Billings

45. Purchase of Investments

46. Paid Premiums to Insurers

47. Payments to Settle Claims

48. Accruing Probable Losses and Paying Administrative Expenses

49. Accruing Interest on Investments & Recording Change in Fair Value

50. Disposition of Increase/Decrease in Net Assets • Charged or credited to billed departments based on usage. • Closed to Net Assets with intention of modifying subsequent years’ charges • Closed to Net Assets with no adjustments – assumes that fund will have profitable and loss years and will breakeven over time