Introduction to Governmental Accounting 2006Part II

1
Introduction to Governmental Accounting 2006(Part
II)

• Brett Friedman, Audit Director McGladrey Pullen
  LLP
• Scott Montgomery, Audit Manager, McGladrey
  Pullen LLP

2
Acknowledgements

• Brian Schebler, CPA, McGladrey Pullen LLP
• E. Barrett (Barry) Atwood, Sr., CPA
• Robert J. Freeman, PhD, CPA
• Professor of Accounting, Texas Tech University
• Former GASB Vice Chairman

3
IDENTIFYING MAJOR FUNDS

• General Fund always a major fund
• Plus others meeting both criteria
• 10 of total assets, liabilities, revenues or
  expenditures / expenses of respective
• Governmental funds or
• Enterprise Funds
• 5 of the same corresponding element (assets,
  liabilities, revenues or expenditures / expenses)
  for total of all combined governmental and
  enterprise funds
• Option to treat other funds as major funds

4
FUND FINANCIAL STATEMENTS

• Required governmental funds statements
• Balance Sheet
• Statement of Revenues, Expenditures, and Changes
• in Fund Balances
• Statement of Revenues, Expenditures, and Changes
• in Fund Balances - Budget Actual
• Each statement displays
• General Fund (always a major fund)
• All major governmental funds
• The total of all non-major governmental funds
• Total for all governmental funds

5
FUND FINANCIAL STATEMENTS

• Required proprietary funds statements
• Statement of Net Assets
• Statement of Revenues, Expenses, and Changes in
  Fund Net Assets
• Statement of Cash Flows
• Each statement displays
• All major Enterprise Funds
• The total of all non-major Enterprise Funds
• Total for all Enterprise Funds
• All Internal Service Funds (No major funds)
• No total for all Proprietary Funds

6
FUND FINANCIAL STATEMENTS

• Required fiduciary funds to include columns by
• fund type not major funds
• Statement of Fiduciary Net Assets
• Statement of Changes in Fiduciary Net Assets but,
  not for Agency Funds as net assets are always
  zero)
• Each statement displays, if applicable
• Pension trust funds
• Private purpose trust funds
• Investment trust funds
• Agency funds

7
PRINCIPLE 1ACCOUNTING REPORTING CAPABILITIES

• Must report to meet both GAAP and legal
  requirements to -
• Present fairly and with full disclosure funds and
  activities in conformity with GAAP
• Determine and demonstrate compliance with
  finance-related legal and contractual provisions

8
GAAP REPORTING

• Trying to ensure comparability among and between
  governments
• Full disclosure by GASB may result in much more
  information in note disclosures than adequate
  disclosure required by FASB

9
COMPLIANCE WITH WHAT?

• With GAAP in most basic form
• With budget requirements may be complicated if
  budgetary basis is different then GAAP basis
• With requirements of grants received from other
  governments (Special reports or non-GAAP basis
  reports)

10
THREE BUDGETARY REQUIREMENTS FOR FINANCIAL
REPORTING

• Original budget as adopted
• Final budget for the reporting period
• Actual inflows and outflows on budgetary basis
• if different from GAAP (e.g., cash basis,
  encumbrance / commitment basis)
• the differences must be explained on face of
  statement/schedule or elsewhere in the financial
  report

11
4 FUND CATEGORIES

• Governmental funds
• Proprietary funds
• Fiduciary funds
• Nonfund accounts (only governmental)

12
11 FUND TYPES WITHIN THE 3 FUND CATEGORIES

• 1 - GOVERNMENTAL FUNDS
• General Fund
• Special Revenue Funds
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds

• 2 - PROPRIETARY FUNDS
• Enterprise Funds
• Internal Service Funds
• 3 - FIDUCIARY FUNDS
• Pension Trust Funds
• Investment Trust Funds
• Agency Funds
• Private Purpose Trust Funds

13
GOVERNMENTAL FUND CONCEPT

• Other financial resources and related liabilities
  are added to the checkbook concept to get a fund
• Governmental funds are working capital
  accounting entities

Cash and Other Financial Resources
Fund Balance
Related Liabilities


14
NONFUND ACCOUNTS(OF GOVERNMENTAL FUNDS)

• Accounting equation does not allow for capital
  assets and long-term liabilities
• Necessitates use of nonfund accounts
• General Capital Assets
• General Long-Term Liabilities

Unmatured General Long-term Liabilities
General Capital Assets
Net Assets Invested in General Capital Assets


15
NONFUND ACCOUNTS(OF GOVERNMENTAL FUNDS)

• General Capital Assets
• Property, plant, equipment used in the
  governmental (non-business) funds
• Not proprietary (business activities) or
  fiduciary funds
• General Long-term Liabilities
• Debt used to finance capital assets and other
  long-term liabilities of governmental funds
• Not proprietary (business activities) or
  fiduciary funds

16
PROPRIETARY FUNDS

• Used to account for business-like activities of
  the government
• Utilities
• Transit (bus) operations
• Airports
• Golf courses
• Use more traditional accounting equation

Current Assets Capital Assets
Current Long-term Liabilities
Net Assets


17
FIDUCIARY FUNDS

• Account for assets held by the reporting
  government in trustee or agency capacity for the
  benefit of others
• Not used to report assets held for governments
  own use

18
FIDUCIARY FUNDS

• Investment Trust Funds
• Private-Purpose Trust Funds
• Pension Trust Funds
• Where the government is acting as trustee for
  beneficiaries outside the reporting government
• Agency Funds
• Where the government is acting purely as a
  custodial agent for others outside the reporting
  government

19
PRINCIPLE 3 - TYPES OF FUNDSGOVERNMENTAL FUNDS
Distinguished by the use of financial resources

• GF
• SRF
• CPF
• DSF
• PF

• General unrestricted operating use
• Specific / restricted operating use
• Constructing / acquiring major general government
  capital projects
• Payment of GLTD principal/interest
• Legally restricted trusts nonexpendable
  principal with income use for benefit of the
  government

20
PRINCIPLE 3 - TYPES OF FUNDSENTERPRISE FUNDS
Distinguished by the customer external or
internal

• EF
• ISF

• Business activities charging fees to external
  users / required where -
• Pledge revenues to repay debt
• Laws require fees to recover all costs
• Pricing policies set to recover all costs
• Accounts for internal services on a
  cost-reimbursement basis

21
PRINCIPLE 3 - TYPES OF FUNDSFIDUCIARY FUNDS
Distinguished by resources held for others

• PTF
• PPTF
• ITF
• AF

• For members of pension and other employee benefit
  plans
• For beneficiaries of trust agreements
• For the external portion of pools sponsored by
  reporting government
• For resources held for others in a custodial
  capacity

22
PRINCIPLE 9MEASUREMENT FOCUS BASIS OF
ACCOUNTING

• Government-Wide Financial Statements
• Measurement focus - economic resources
• Basis of accounting - accrual
• Revenues, expenses, gains, losses, assets,
  liabilities recognition depends on transaction
• Exchange when exchange takes place
• Nonexchange according to GASBS 33

23
PRINCIPLE 9MEASUREMENT FOCUS BASIS OF
ACCOUNTING

• Governmental Fund Financial Statements
• Measurement focus - financial resources
• Basis of accounting - modified accrual
• Revenues recognized in period they become
  available and measurable
• Expenditures recognized when liability is
  incurred, except for interest on long-term debt
  which is recognized when due

24
PRINCIPLE 9MEASUREMENT FOCUS BASIS OF
ACCOUNTING

• Proprietary Fund Financial Statements
• Measurement focus - economic resources
• Basis of accounting - accrual
• Revenues, expenses, gains, losses, assets,
  liabilities recognition depends on transaction
• Exchange when exchange takes place
• Nonexchange according to GASBS 33

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PRINCIPLE 9MEASUREMENT FOCUS BASIS OF
ACCOUNTING

• Fiduciary Fund Financial Statements
• Measurement focus economic resources
• Basis of accounting accrual
• Exception for certain liabilities of defined
  benefit pension plans and certain postemployment
  healthcare plans

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PRINCIPLE 9MEASUREMENT FOCUS BASIS OF
ACCOUNTING

• Interfund Transfers - Internal interfund
  transfers should be reported in the accounting
  period in which the related interfund
  receivable and payable arise.

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PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Minimum GAAP reporting requirements
• Managements Discussion Analysis
• Basic Financial Statements
• Government-wide financial statements
• Fund financial statements
• Notes to the financial statements
• Required supplementary information other than MDA

28
PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Financial Reporting Entity consists of
• Primary government (PG)
• Organizations for which the PG is financially
  accountable
• Other organizations whose omission would cause
  financial statements to be misleading or
  incomplete

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PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Fund financial statements include
• Major funds individually
• Nonmajor funds in the aggregate
• Fiduciary fund statements are not included in the
  government-wide statements

30
PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Financial Reporting Entity
• Nucleus is the PG
• Other activities include
• Discretely presented component units
• Blended component units
• Joint ventures
• Jointly governed organizations
• Related organizations

31
PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Government-wide Financial Statements
• Statement of Net Assets
• Statement of Activities

32
PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Governmental Fund Statements (Schedules)
• Balance Sheet
• Statement or Revenues, Expenditures, and
• Changes in Fund Balance
• Statement or Revenues, Expenditures, and
• Changes in Fund Balance Budget-to-Actual (may
• be either BFS or RSI)

33
PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Proprietary Fund Statements
• Statement of Net Assets / Balance Sheet
• Statement of Revenues, Expenses, Changes in Net
  Assets
• Statement of Cash Flows

34
PRINCIPLE 13ANNUAL FINANCIAL REPORTS

• Fiduciary Fund Financial Statements
• Statement of Fiduciary Fund Net Assets
• Statement of Changes in Fiduciary Fund Net Assets

35
GENERAL AND SPECIAL REVENUE FUNDS

• Basic distinction summarized
• General Fund - primarily unrestricted resources
• Special Revenue Funds - typically all or part of
  resources are restricted
• Accounting and reporting are basically identical
  in both fund types

36
MEASUREMENT FOCUS BASIS OF ACCOUNTING

• Measurement Focus (MF) is current financial
  resources what is expendable
• Basis of Accounting (BA) is modified accrual
  recognition occurs for
• Revenues when measurable available.
• Expenditures when underlying liability is
  incurred,
• except for long-term debt principal and interest
  
• payments (when due)

37
MEASUREMENT FOCUS

• Flow of current financial resources
• This measurement is used due to recurring nature
  of revenues and commitments
• Results in a need to measure the flows and
  balances of current financial resources
• Contrary to business that measures income

38
MEASUREMENT FOCUS

• Current means financial resources
• Assets that can be converted to cash
• Liabilities to be paid in following year
• Working capital accounting entities
• (Current assets - current liabilities fund
  balance)
• Fund Balance means Net Financial Assets

39
MEASUREMENT FOCUS

• Measures the financial resources
• Balance sheet displays
• Financial resources on hand
• Related current liabilities
• Fund balance (or net financial assets)
• If some are not available, they are reserved
• Unreserved balances are available

40
MEASUREMENT FOCUS

• Treatment of capital asset acquisitions
• Purchases reported as an expenditure
• Have same impact on financial resources as
  salaries, supplies and services
• Capital assets are not financial resources
• Not capitalized in the General and Special
  Revenue Funds
• Are capitalized in the General Capital Assets
  accounts

41
MEASUREMENT FOCUS

• Treatment of long term debt incurred
• Debt proceeds accounted for in the fund
• Recorded as other financing source (increases
  fund balance)
• Long-term debt liability
• Not recorded in the General and Special Revenue
  Funds
• Is recorded in the General Long-Term Liabilities
  accounts

42
GENERAL AND SPECIAL REVENUE FUNDS

• Required financial statements
• Balance Sheet
• Statement of Revenues, Expenditures, and Changes
• in Fund Balance
• (the "GAAP operating statement)
• Statement of Revenues, Expenditures and Changes
• in Fund Balance-Budget and Actual
• (the "budgetary operating statement)
• Include in BFS or RSI

43
BALANCE SHEET

• Standard Report Format
• Current Assets Current Liabilities Fund
  Balance
• Generally, do not include capital assets or
  long-term debt (Permanent Fund is exception)
• Fund Balance presented in two sections
• Reserved with specific reserves identified
• Unreserved which may be further divided into
• Designated with specific designations
  identified
• Undesignated

44
PROPRIETARY FUNDS MFBA

• Measurement focus-Flow of economic resources
• Basis of accounting - Accrual
• Recorded in the proprietary funds
• Capital assets
• Long-term liabilities
• Capital outlay and debt principal reported in the
  balance sheet (not in operating statement)
• Capital use and consumption (interest and
  depreciation) recorded as expenses

45
ACCOUNTING STANDARDS FOR PROPRIETARY FUNDS

• All Proprietary Funds follow
• GASB Standards
• APB Opinions, and FASB Standards through 102,
  unless it conflicts with GASB Standards
• GASB 20 requires governments to either
• Follow FASB Standards issued after 102, unless
  it conflicts with GASB Standards, OR
• Not to apply subsequent standards usual choice

46
ACCOUNTING PRINCIPLES

• Similar to private sector counterparts
• Often use fixed budgets
• May cause activity accounted for on budgetary
  basis during the year
• Convert to GAAP basis at year end
• Legal or contractual reporting requirements that
  differ from GAAP met in CAFR or by issuing
  special purpose reports

47
ACCOUNTING PRINCIPLES

• Accounting and reporting similar to business
• However, there are the following differences
• Reporting uncollectible accounts as revenue
  reductions
• Accounting for pensions
• Accounting for debt refundings
• Accounting for interest capitalization on
  construction projects that are financed at least
  in part by tax-exempt debt or restricted grants
• The substance of the financial statements
  presented for proprietary funds

48
FINANCIAL STATEMENTS

• Three required financial statements
• Statement of Net Assets (Balance sheet)
• Statement of Revenues, Expenses, and Changes in
  Net Assets (Operating statement)
• Statement of Cash Flows

49
STATEMENT OF NET ASSETS

• Two formats allowed
• Traditional Balance Sheet format
• New Net Asset format
• Either way, statement must be classified
• Unlike governmental funds, statement includes
• Capital assets
• Intangible assets
• Long-term liabilities

50
STATEMENT OF NET ASSETS

• Similar to private sector statement presents
• Current and noncurrent assets
• Current and noncurrent liabilities
• What is different is the equity section presented
  in three (3) categories
• Invested in capital assets, net of related debt
• Restricted net assets
• Unrestricted net assets
• No Contributed Capital and Retained Earnings

51
INVESTED IN CAPITAL ASSETS, NET OF RELATED DEBT

• Discloses the funds net investment in
• capital assets
• Equal to
• Historical cost of capital assets
• Less accumulated depreciation
• Net book value
• Less outstanding capital-related debt, but
  excluding any unexpended proceeds
• Invested in Capital Assets, Net of Debt

52
RESTRICTED NET ASSETS

• Discloses amount of restricted net assets in
  excess of non-capital debt and other liabilities
  directly associated with (payable from) those
  same restricted assets
• Includes the unexpended proceeds of capital
  asset-related debt (an equal amount of the
• related capital debt is deducted to offset these
  proceeds)
• Constraints must be narrower than general limits
  of the activity (Airport EF vs. GWS)

53
CALCULATION OFRESTRICTED NET ASSETS
54
RESTRICTIONS IMPOSED BY

• Creditors, grantors, contributors, laws or
  regulations of other governments
• Constitutional provisions
• Enabling legislation that
• Authorizes the government to assess, levy,
  charge, or otherwise mandate payment of resources
  externally and
• Places a legally enforceable purpose
• restriction on those resources

55
RESTRICTED NET ASSETS IMPORTANT POINTS

• Must be more limited than scope of activities
  accounted for in entity reported (EF vs. GWS)
• May not be reported as a negative amount
• If liabilities exceed assets, report amount as
  zero and deduct the excess from Unrestricted Net
  Assets
• Must classify Restricted Net Assets as
• expendable and nonexpendable (rare) if assets
  must be maintained in perpetuity

56
UNRESTRICTED NET ASSETS

• The net assets that do not meet the definition of
  
• Restricted or
• Invested in Capital Assets, Net of Related Debt
• The remainder of net assets equal to
• Unrestricted financial assets
• Less non-capital debt not payable from restricted
  assets

57
UNRESTRICTED NET ASSETS

• Management is permitted to establish designations
  of unrestricted net assets
• Four (4) points about designations are important
  to understand
• They are internal and management change
• Not the same as expendable available financial
  assets like in Governmental Funds
• GASB prohibits reporting on face of statement
• Very rare in practice

58
CALCULATION OFUNRESTRICTED NET ASSETS
59
SUMMARY CALCULATION OF NET ASSETS
60
OPERATING STATEMENT FORMAT

• Operating revenues (by source)
• Sales
• Charges for services
• Total operating revenues
• Operating expenses (detailed)
• Cost of sales and services
• Administration
• Depreciation
• Total operating expenses
• OPERATING INCOME
• (Continued)

61
OPERATING STATEMENT FORMAT

• OPERATING INCOME
• Nonoperating revenues and expenses (detailed)
• Intergovernmental operating grants
• Interest income (expense)
• Gains (losses) on sale of capital assets
• Total nonoperating revenues and expenses
• INCOME BEFORE OTHER REVENUES, EXPENSES AND
  TRANSFERS
• Capital grants and contributions
• Transfers in (out)
• CHANGE IN NET ASSETS
• Net assets, beginning of year
• Net assets, end of year

62
STATEMENT OF CASH FLOWS

• GASB requires reporting all cash flows and
  balances both restricted and unrestricted cash
  and cash equivalents
• Several important differences from private sector
• Sections (GASB has 4 FASB uses 3)
• Direct method required (FASB allows either
  method)
• Noncash transactions reported on face of
  statement (FASB allows reporting in notes)

63
STATEMENT OF CASH FLOWS(Comparison of Statement
Sections)

• GASB
• Operating Activities
• Noncapital Financing Activities
• Capital and Related Financing Activities
• Investing Activities

• FASB
• Operating Activities
• Financing Activities
• Investing Activities

GASB divides Financing Activities into two (2)
sections
64
CASH FLOWS FROM OPERATING ACTIVITIES

• Includes cash effects of transactions related to
  operating income not net income
• Excludes interest revenue and expense
• GASB requires using the direct method of
• presenting cash flows from operating activities
• Unlike businesses, governments cannot use the
  indirect (reconciliation) method
• Reconciliation to operating income required

65
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES

• Borrowings for noncapital construction /
• acquisition / improvement purposes
• Repayments of above borrowings
• Interest payments on those borrowings
• Certain intergovernmental receipts / payments
• Interfund transfers from other funds except those
  made to finance capital construction /
  acquisition / improvement
• ALL interfund transfers to other funds

66
CASH FLOWS FROM CAPITAL RELATED FINANCING
ACTIVITIES

• Acquisition / disposal of capital assets
• Proceeds of capital asset disposals
• Borrowing and repayments for capital assets
  acquisition/construction
• Interest payments on those borrowings
• Intergovernmental receipts restricted solely for
• capital assets acquisition/construction/improveme
  nt
• Interfund transfers from other funds made clearly
  and specifically to finance capital assets
  acquisition/ construction/improvement

67
CASH FLOWS FROM INVESTING ACTIVITIES

• Acquiring / disposing of investments
• Collection of related interest and dividends
• Making / collecting loans (except for program
  loans that are reported in the Operating
  Activities section)

68
NONCASH TRANSACTIONS

• Transactions not involving the actual flow of
  cash
• Examples
• Signing a capital lease
• Capital assets (or other noncash items) donated
  to the Proprietary Fund
• Issuing debt to acquire a capital asset
• Unrealized gains and losses on investments

69
ENTERPRISE FUNDS VS.INTERNAL SERVICE FUNDS

• Enterprise Funds
• Account for activities that provide goods and
  services primarily to the public on a charge
  basis
• If primary customers are internal to government,
  should reclassify as Internal Service Funds

• Internal Service Funds
• Account for activities that provide goods and
  services to other departments of the governmental
  unit
• If primary customers are external to the
  government, should reclassify as Enterprise Funds

70
ENTERPRISE FUND REQUIRED WHEN ANY ONE OF
FOLLOWING MET

• Activity financed with debt secured solely by a
  pledge of the activity's net revenues
• Laws or regulations require that the fees and
  charges recover the activitys costs of providing
  services, including capital costs (such as
  depreciation or debt service)
• Pricing policies of the activity establish fees
  and charges designed to recover its costs,
  including capital costs

71
USE OF ENTERPRISE FUNDS

• Two (2) elements must be present for an activity
  to be reported in an Enterprise Fund. The
  activity must
• Provide goods or services to outside entities or
  individuals (typically the general public) and
• Charge fees to external users for its goods or
  services

72
COMMON EXAMPLES OF EFs

• Water Sewer Departments
• Electric Utilities
• Gas Utilities
• Sanitary Sewer Operations
• Garbage and other waste collection disposal
  services
• Off-street Parking Lots and Garages
• Solid Waste Landfills
• Airports

73
OPTIONAL USE OF EFS EVEN WHEN NOT REQUIRED

• Uses EF accounting consistently even when
  requirements not always met
• Reports activity using full cost
• Makes reporting more comparable to other
  governments, in some cases
• However, if option elected, must
• Serve external users
• Account separately

74
OTHER EXAMPLES OF ENTERPRISE FUNDS

• Mass transit operations
• Civic centers
• Toll highways and bridges
• Public housing
• Public school food services

75
IN CONCLUSION

• Questions???
• Comments???
• Thanks for your participation!!!