Chapter 2

The Use of Funds in Governmental Accounting

For businesses, annual report is the most significant financial document. For governments and non-profits, budget is very important. Budget is the culmination of the political process. Need to ensure inter-period equity for most governments and nonprofits. Revenues may not be linked to constituent demand or satisfaction. No direct link between revenues and expenses. Many of the assets of government and non-profits are restricted to particular activities and purposes. No distinguished ownership interests. Less distinction between internal and external accounting and reporting.

1.

Interperiod equity
is a governments obligation to disclose whether current-year revenues were sufficient to pay for current-year benefitsor did current citizens defer payments to future taxpayers?

2.

Budgetary and fiscal compliance:

Identify whether resources were obtained and used in accordance with entitys legally adopted budget. Should also demonstrate compliance with other finance-related legal or contractual requirements.

3.

Service Efforts and Accomplishments:

Financial reporting should provide information to assist users in assessing the service efforts costs and accomplishments of the governmental entity. Helps assess economy, efficiency and effectiveness and may help form a basis for voting or funding decisions

What Caused Problems for GASB in deciding on a Financial Accounting Reporting Model for Governments?

Clash Among Reporting Objectives (1)

Consider the following: Voters approved the establishment of a county sanitation district, and the county provided the new district with $10 million in start-up funds. During the first year of operations the district prepared a cashbased budget and engaged in the following summary transactions, all of which occurred without variance from the budget.
The following example is simplified and for illustration purposes only. Discussion of basis of accounting used by various types of funds is coming

1.

2.

3.

It purchased sanitation vehicles and other equipment for $10 million cash. The anticipated economic lives of the assets were ten years. It billed residents for $9 million, but because bills for the last month of the year were not mailed until early the following year (as planned), it collected only $8.2 million It incurred operating costs, all paid in cash, of $6 million

Clash Among Reporting Objectives (3)

How should the district report the expense related to the equipment?
Should it use the $10 million paid to purchase the equipment or $1 million, an amount representative of the one-tenth of the assets consumed during the period? The broader question is whether governments should be required to depreciate their assetswe will discuss this later.

How much revenue should the district recognize?

Should it be the $9 million billed or the $8.2 million collected? More generally should revenues be recognized on a cash or accrual basis? Or some other basis?

Clash Among Reporting Objectives (4)

Since the district prepared it budget on a cash basisa statement of operations of reporting on whether the entity obtained and used in accordance with the budget would need to be on the cash basis and look like:
Revenues from customers $ 8.2

Operating costs
Vehicle relates costs Excess of revenues over expenses

$ 6.0
10 16.0 $ (7.8)

Clash Among Reporting Objectives (5)

However, the cash basis statement does not reflect the objective of interperiod equity. An accrual based statement would present the activity as below:
Revenues from customers Operating costs Vehicle relates costs $ 6.0 1.0 7.0 $ 9.0

Excess of revenues over expenses

$ 2.0

Clash Among Reporting Objectives (6)

The conflict between interperiod equity and budgetary compliance characterizes many of the issues that government accountants face in ensuring that f/s are informative and useful to the parties that rely upon them.
In fact GASB statement 34 (issued in 1999) mandated that governments prepare the two sets of financial statements.

General Purpose External Financial Reports

Managements discussion and analysis Government-wide financial statements Fund financial statements

Notes to the financial statements Required supplementary information (other than MD&A)

Government wide financials are required to be presented on an accrual basiswith information about governmental activities and business type activities separated Fund Financials are required to be presented on a modified accrual basis for those Governmental Funds and accrual for Proprietary Funds Also Budgetary compliance reporting is required

What is measured? Where is the focus of an entity? Economic resources measurement focus -Report on the determination of net income, financial position, and cash flows (ie., capital maintenance) -To measure operational accountability Current financial resources measurement focus -Report on the inflows and outflows of current financial resources (ie., cash or other items expected to be converted into cash during the current period) -To measure fiscal accountability; meet the legal and budget needs of government

Full Accrual: Revenues recognized when earned; expenses recognized when incurred

Cash: Revenues recognized when received in cash; expenses/expenditures recognized when paid in cash

Modified Accrual: revenues recognized when available and measurable; expenditures when incurred

Counties 3,034 Municipalities 19,431 Townships 16,506 School districts 13,522 Special districts 35,356 Total 87,849 Source: U.S. Census Bureau. 2002 Census of Governments, GC02-1(P) http://ftp2.census.gov/govs/cog/2002COGpr elim_report.pdf

 Governmental Activities

Core governmental services like police and fire protection, streets, highways, etc. Public utilities, toll roads and toll bridges, airports Sometimes known as Trust & Agency Funds. Accounts for resources for which the government is acting in a trustee capacity

Proprietary Activities

Fiduciary Activities

Fund accounting reports financial information for separate selfbalancing sets of accounts, segregated for separate purposes or to account for resources restricted as to use by donors or grantors
Funds are separate accounting and fiscal entities Fund accounting uses the equation:

Assets = Liabilities + fund balance ( often referred to as net assets)

Fund balance = difference between funds assets and claims against these assets

Governmental Funds (5)

General Fund; Special Revenue Funds; Capital Projects Funds; Debt Service Funds; Permanent Funds

Proprietary Funds (2)

Internal Service Funds; Enterprise Funds

Fiduciary Funds (4)

Agency Funds; Investment Trust Funds; Private purpose Trust Funds; Pension (and other employee benefit) Trust Funds

Measurement Focus Government-wide statements (GASB 34) Governmental fund statements Proprietary fund statements Fiduciary fund statements Economic resources Current financial resources Economic resources Economic resources

Basis of Accounting Accrual Modified accrual Accrual Accrual

Are accounted for on a spending or financial flow measurement focus. This means that only current assets and current liabilities are generally included on their balance sheets. Their reported fund balance (net current assets) is considered a measure of available spendable resources. Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets.

 General Fund (GF)

Only one per government Most of general government operating activities are accounted for in the GF This is the operating fund of the government.
General Activities of city government (ex. Fire, police)

Special Revenue Funds (SRF)

Used when required by law or by policy to account for financial resources earmarked for a specified operating purpose Accounting and budgeting usually identical to GF Example: City of Orlando has 14 SRF funds--Such as Housing and Urban Development Grants, Forfeitures Act, HP Leu Gardens, Cemetary, Economic Devlopment, etc.

Capital Projects Funds (CPF)

Used to account for financial resources segregated to pay for construction and/or acquisition of long-lived general capital assets, except those financed by Enterprise funds. Ex Parks Initiative, Narcoosee Road Contstruction, Performing Arts Center construction, Public Safety construction

Debt Service Funds (DSF) Used to account for financial resources segregated to pay principal and interest on general long-term liabilities. For ex., the total fund balance in the DSF (City of Orlando) at 9/30/2008 was $13,680,250.

The total outstanding debt of the city of Orlando at 09/30/2008 was $1,236,314,652.

Permanent Funds
Used to account for resources provided by trust in which the earnings but not the principal must be used for public purposes; i.e. to benefit the government and its citizenry.

 Current financial resources measurement focus Modified accrual basis of accounting used Account for expenditures of appropriations (not expenses) Capital assets or long-term liabilities are not accounted for within governmental funds

Classified as:

Expendable funds sources received from taxes, fees, and other sources. Non expendable funds Government makes initial contribution but thereafter the fund is expected to pay its own way.

Are accounted for on a cost for services or economic resources measurement focus. This means that all assets and liabilities (whether current or non-current) associated with these activities are included on their balance sheets. Their reported fund equity (net total assets) is segregated into contributed capital and retained earnings components. Proprietary fund type operating statements are presented in the full accrual basis of accounting. In simple words, these funds are operated like a normal for-profit business

Internal Service Funds (ISF)

Used to account for activities in which goods or services are provided to other departments of the same government or to other governments for a charge on a cost reimbursement basis. Examples include central stores, central computing, motor pools, and printing. ISF are reported as governmental activities in the government-wide statements because they primarily benefit the government.

Enterprise Funds (EF)

Used to account for activities in which goods or services are provided to the general public for a charge Ex. include electric and water utilities, airports, parking garages, transportation systems, and liquor stores EF are reported as business-type activities in the government-wide financial statements. Ex. For the city of Orlandothe parking system and the wastewater system are EFs.

 Accounting and reporting are essentially the same as those of forprofit entities, including full accrual accounting

Capital assets and long-term liabilities are accounted for in the funds
Depreciation expense is reported in the funds Reports expenses not expenditures

Trust and Agency funds are used to account for assets held by a SLG in a trustee capacity or as an agent for individuals, private organizations, other governments, and/or other funds. Each trust is classified for accounting measurement purposes as either a governmental fund or a proprietary fund (ex. Employee Retirement funds, Privatepurpose trusts, Investment trusts, Agency).

Pension (and other employee benefits) Trust Funds (one or more) To account for financial resources in which the government (or other designated trustee) is acting in a trustee capacity for the employees of the government to provide retirement benefits. Uses business-type accounting practices.

Investment Trust Funds

Used to account for external investment pools in which the assets are held for other (external) governments, along with funds of the sponsoring government. The assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants is reported in this fiduciary fund.

Private-purpose Trust Funds

To account for financial resources in which the government is acting in a trustee capacity for the benefit of individuals, other organizations, or other governments (e.g., an endowment in which the principal amount must be kept intact) Accounting is virtually identical to that for an enterprise fund.

Agency Funds (often several)

To account for financial resources in which the government is acting in an agency capacity
Accounting is simple: assets = liabilities. No revenue and expenditure accounts are used, nor is there a fund equity account Examples are tax agency funds, certain special assessment funds, and pass-through agency funds

 The minimum requirements for general purpose external reporting include:

Management Discussion & Analysis Basic financial statements Required Supplemental Information other than MD&A

The Comprehensive Annual Financial Report (CAFR) is the recommended annual report of a governmental unit. It has 3 sections.

Introduction section Financial section Statistical section

Sample problem 1

Trust funds. Joe decided to donate $500,000 to his local city library with the condition that the monies will be held in trust. Joe specifies that the library board can determine how to spend investment earnings from the $500,000 for the library. In which fund should these monies be recorded? In which fund should the spending of the investment earnings be recorded?
Answer. A Permanent fund will account for the $500,000 principal, the income generated, and expenses from the fund.

Sample Problem 2
Governmental or business-type activity. Ernie gets elected mayor. Ernie decides to privatize city garbage collection and charge residents a fee for pickup of garbage. Garbage collection was previously paid for from the general budget. In which fund should the new garbage fees be recorded? Which fund previously paid for the budgeted garbage collection services? Answer. An Enterprise fund would account for garbage collection services since pricing policies of the enterprise establish fees and charges that are intended to recover all costs. The question states that garbage collection was previously paid for from the general budget so that would be recorded in the General fund.

Other Questions

Assume Kendal County engaged in the following transactions. Identify the fund these transactions would be recorded in.
1.

2.

3.

4.

5.

It levied and collected $1 million in taxes dedicated to the repayment of outstanding general obligation bonds Debt Service It billed sponsors of a charity bicycle ride $5,000 for providing police patrols during the ride General It recognized $60,000 of cash dividends on investments dedicated to the support of a county arts center Permanent fund It recognized $70,000 of cash dividends on investments dedicated to scholarships for needy county residents Fiduciary fund It incurred $6 million in constructions costs to complete a new county jail. The new jail was funded entirely with the proceeds of long-term bonds.

Capital Projects

Other Questions
It transferred $400,000 of unrestricted funds to an appropriate fund to be invested and eventually used to repay the principal on the long-term jail bonds (entries in two funds required)

6.

General Fund and Debt Service

7.

8.

It recognized depreciation of $100,000 on equipment in a vehicle repair center that services all county departments that have motor vehicles Internal service Fund Fund It collected $30,000 in parking fees at the county-owned garage

Enterprise Fund
9.

10.

It issued $8 million in bonds to improve the city-owned electric utility Enterprise Fund It distributed $3 million in taxes collected on behalf of school districts located within the county.

Agency Fund

The end of Chapter 2 lecture