Governmental Accounting: General Fund and Account Groups

1
Chapter 15

• Governmental Accounting General Fund and
  Account Groups

2
Comparison of Government and Not-for-Profits
(GNPs) with Business

• Different mission - no profit motive
• Budget - legal document
• most significant financial document
• entered into accounting system
• budgets drive accounting
• Level of services - expenditures drive revenues
• Need to assure interperiod equity

3
Types of GNPs

• Governmental
• cities, towns,counties, school districts, special
  tax districts, states, townships, etc.
• Not-for-Profits
• schools, universities, hospitals, social service
  organizations, civic organizations, cultural
  organizations, religious organizations,
  foundations, etc.

4
Purposes of Financial Reporting

• Assess financial condition
• Compare actual results with the budget
• Determine compliance with laws and regulations
• Evaluate efficiency and effectiveness

5
Users of Financial Reports

• Main users identified by GASB
• citizens and taxpayers
• investors and creditors
• governing boards (legislators)
• Other users
• donors and grantors
• regulatory and oversight agencies
• employees and other constituents

6
Objectives of Financial Reporting

• GASB objectives for state local governments
• accountability (interperiod equity, budgetary and
  fiscal compliance, service efforts and
  accomplishments)
• current standards - compliance reporting
• new reporting model GASB 34

7
GASB 34 New Reporting Model

• Requires both fund statements and government-wide
  statements
• Effective in
• 2002 for large governments
• 2003 for mid-size governments
• 2004 for small governments

8
New Reporting Model, continued

• New requirements include infrastructure reporting
  and depreciation
• Full accrual and modified accrual information
  will be reported
• New model requirements explained throughout
  Chapters 15, 16, and 17

9
What is a Fund?

• Fiscal and accounting entity with its own
  self-balancing set of accounts from which
  separate financial statements can be generated
• Governments use funds to separate resources that
  have restrictions
• many funds in each government
• assets - liabilities fund balance

10
Governmental Funds

• General Fund
• Special Revenue Fund
• Permanent Fund
• Capital Projects Fund
• Debt Service Fund

11
Governmental Funds, continued

• Use modified accrual basis of accounting
• Measurement focus is flow of financial resources
• Therefore, just record inflows and outflows of
  financial resources
• Use account groups to keep track of the long-term
  debt and fixed assets

12
Proprietary Funds

• Enterprise Funds
• Internal Service Funds

13
Proprietary Funds, continued

• Use full accrual basis of accounting
• Measurement focus is flow of economic resources
• Therefore, record all transactions
• All assets all liabilities fund equity
• Used for all business-type activities

14
Fiduciary Funds

• Used to account for resources that are held by
  the government for others (individuals,
  organizations, corporations, other governments)
• Private Purpose Trust Funds
• Pension Trust Funds
• Investment Trust Funds
• Agency Funds

15
Account Groups

• No longer reported on the financial statements
• May still be used to keep track of general
  capital assets and long-term debt
• Two types
• General Fixed Asset Account Group (GFAAG)
• General Long-Term Debt Account Group (GLTDAG)

16
Overview of Governmental Fund Accounting

• Recording
• the budget
• Accounting for
• encumbrances
• revenues
• expenditures
• other financing sources/uses

17
Recording the Budgetary Entries

• Estimated Revenues
• Estimated Other Financing Sources
• - Appropriations
• - Estimated Other Financing Uses
• Fund Balance
• Journal Entry
• Estimated Revenues xx
• Estimated Other Financeing Sources xx
• Appropriations xx
• Estimated Other Financing Uses xx
• Fund Balance (derived) xx

18
Comparison with Actual Results
Estimated Revenues (debit) - Actual Revenues
(credit) Variance

• Appropriations (credit)
• - Actual Expenditures (debit)
• Variance

19
Revenue Recognition

• Modified accrual basis
• Recognize when susceptible to accrual, i.e.
• measurable and
• available defined as
• collected during the period or soon enough
  thereafter to be used to pay current period
  liabilities (60 day cutoff is common) AND
• legally available to finance current period
  expenditures (usable)

20
Establish Legal Claims

• For property taxes --- levy of taxes
• For charges for services --- performing
  services
• For sales taxes --- taxable sale by business
• For income taxes --- taxpayer earning taxable
  income

21
Deferred Revenues

• A liability
• Recorded if
• unearned or
• not legally available

22
Common Revenue Sources

• Taxes
• Licenses and permits
• Intergovernmental revenues
• Charges for services
• Fines and forfeits
• Miscellaneous
• interest, rents, sales of fixed assets
• other financing sources (OFS)

23
Revenue Property Taxes

• Local governments derive most of revenue from
  property taxes - based on value (ad valorem
  taxes)
• Recognize as revenue when levied
• to be collected in the current period or soon
  enough thereafter
• allowance for uncollectible
• deferred revenue if not available

24
Revenue Sales Taxes

• Recognize when merchant files sales tax return
• measurable
• available

25
Revenue Licenses and Permits

• Difficult to predict accurate amounts
• Normally recognize revenue when cash is received

26
Grants Other Intergovernmental Revenues

• Restricted grants - expenditure driven
• food stamps, pass-through grants (if
  administered), on-behalf payments
• Unrestricted grants - recognize upon award
• Entitlements - recognize upon award

27
Revenue Charges for Services

• Recognize revenue when billing for services
  rendered

28
Revenue Fines

• Options
• when tickets are issued
• date fine is due
• actual payment date
• Common practice - when cash is received

29
Revenue Investment Income

• Record all investments at fair value
• mark-to-market
• unrealized gains/losses are recognized as revenue
  in period
• Interest and dividends accrued as earned

30
Revenue Donations

• Treatment based on type of asset
• Current assets in funds at FMV
• Fixed assets that will be used in account groups
  at FMV
• Fixed assets that will be sold in funds as
  short-term investments at FMV

31
Revenue Tax Anticipation Notes

• Recorded as a liability in the fund
• Always short-term
• Will not be converted into long-term so never in
  the account group

32
Other Financing Sources

• Not a revenue
• Proceeds from issue of long-term debt
• Sale of a fixed asset up to original cost
• Transfer of resources from another fund

33
Accounting for Expenditures

• Recognize the expenditure when the fund liability
  is both measurable and incurred
• Current liabilities in the fund
• funded by current taxpayers
• using available financial resources
• what is a current liability
• Long-term liability in the account group

34
Types of Expenditures

• Wages and Salaries
• Compensated Absences
• vacations
• sick leave
• Pensions
• Claims and Judgments
• Supplies

• Prepayments
• Fixed Assets
• Leases
• Debt Service
• principal
• interest

35
Wages and Salaries

• Accrued at year-end
• Natural (object) classification allocated to
  function/program
• Entry
• Expenditures - payroll xx
• Accrued wages and salaries xx

36
Compensated Absences Vacations

• Recognize if vested and probable that the benefit
  will be paid out
• Expenditure in fund if paid this period
• Entry in fund
• Expenditures - vacation pay xx
• Accrued wages and salaries xx
• If long-term liability, record in account group
• Entry in account group
• Amount to be provided... xx
• Long-term liability for vacation pay xx

37
Compensated AbsencesSick Leave

• Recognize if pay-out is probable at termination
• Expenditure in fund if paid this period
• If long-term liability, record in account group
• Entry in account group
• Amount to be provided... xx
• Long-term liability for sick leave benefits xx

38
Pensions

• ARC - Actuarial Required Contribution
• Entry in fund (portion of ARC that will be paid
  from current resources)
• Expenditures - pension benefits xx
• Accrued wages and salaries xx
• Entry in account group (portion of ARC that will
  be paid in future)
• Amount to be provided... xx
• Long-term liability for pension benefits xx

39
Claims and Judgements

• Follow FASB 5 Accrue if probable and reasonably
  estimable
• Entry in fund (amount that will be paid from
  current resources)
• Expenditures - Claims/Judgments xx
• Accrued Claims and Judgments xx
• Entry in account group (amount that will be paid
  in future)
• Amount to be Provided... xx
• Long-term liability for claims and
  judgments xx

40
Supplies ExpenditurePurchase Method

• Record expenditure upon acquisition
• Expenditure - supplies xx
• Vouchers payable xx
• Inventory - supplies xx
• Fund Balance - reserve for supplies xx

41
Supplies Expenditure Consumption Method

• Acquisition
• Inventory - supplies xx
• Vouchers payable xx
• Record expenditure upon consumption
• Expenditures - supplies xx
• Inventory - supplies xx
• Fund Balance - unreserved xx
• Fund Balance - reserve for supplies xx

42
Prepayments

• Purchases Method
• Expenditure - insurance xx
• Vouchers payable xx
• Consumption Method
• Prepaid insurance xx
• Vouchers payable xx
• Expenditure - insurance xx
• Prepaid insurance xx

43
Fixed Asset Acquisition

• Acquisition
• Expenditure - Fixed Assets xx
• Vouchers Payable (Cash) xx
• (the fixed asset is recorded in account group)
• If borrow to acquire the asset
• Cash xx
• Other Financing Sources xx
• (the long-term debt is recorded in account group)

44
Other Financing Uses

• Not an expenditure
• Operating transfers of resources to other funds
• Not classified as expenditures in remitting fund
  to avoid double counting

45
Encumbrances - Year 1

• Commit to future expenditure At
  Year-End
• Encumbrance xx F.B. xx
• F.B. Reserve for Encumbrances xx Encumbrance
  xx
• Expenditures xx
• When invoice is received
• F.B. Reserve for Encumbrances xx
• Encumbrance xx Leave Reserve for Encumbrances
• Expenditures xx open as an equity
  account on the
• Vouchers Payable xx balance sheet

46
Encumbrances - Year 2
At beginning of the year reinstate
encumbrances Encumbrances xx Fund Bal xx When
invoice is received F.B. Reserve for
Enc. xx Encumbrances xx Expenditures xx Voucher
s payable xx
At year-end Fund Bal xx Expenditures xx
47
Year End Closing Entries

• Close the Budget
• Appropriations xx
• Budgetary Fund Balance xx
• Estimated Revenues xx
• Close the Actual Accounts
• Revenues xx
• Expenditures xx
• Encumbrances xx
• Fund Balance xx

48
Statement of Revenues, Expenditures, and Changes
in Fund Balance

• Revenues
• - Expenditures
• Excess of revenues over expenditures
• ? Other financing sources (uses)
• Excess of revenues and other financing sources
  over expenditures and other financing uses
• Beginning Fund Balance
• ? Residual Equity Transfers
• Ending Fund Balance

49
Accounting for Investments

• Marketable Securities
• stocks, bonds, notes, other financial instruments
• recent controversies
• Orange County, Texas, Ohio, Pennsylvania
• more risky investment, more return
• more sophisticated instruments

50
Sophisticated Instruments

• Repurchase agreements
• Reverse repurchase agreements
• Securities lending transactions
• Derivatives (only value is some underlying asset,
  interest rate, or index)
• Hedging on a changing economy

51
GASB 3(1986)

• Requires extensive disclosure of risk
• 3 categories
• insured or collateralized with securities held by
  government
• collateralized with securities held by pledging
  financial institution
• uncollateralized

52
GASB Technical Bulletin 94-1 (1994)

• reaffirmed GASB 3
• plus, disclose any violation of legal,
  regulatory, or contractual provisions by
  investing in derivatives
• explain nature of derivative transactions
• reasons, exposure to credit risk, market risk
  legal risk

53
GASB 31(1997)

• All investments are to be shown on the balance
  sheet at fair value
• Adjustments up or down to fair value are included
  on operating statement as adjustments to
  current-period revenue

54
Account Groups
General Fixed Assets - GFAAG General Long-Term
Debt - GLTDAG

• Common Features of Account Groups
• Focus on general government as whole
• Accounting procedures
• list and offset accounting entries
• primarily just add to/remove from list

55
GFAAG

• Definition
• tracks all fixed assets other than those
  accounted for in proprietary or trust funds
• Accounting equation for GFAAG
• Fixed Asset Investment in GFA-source of
  funding

56
GFAAG - continued

• Acquisition and initial valuation
• cost
• estimated cost
• gifts fair market value
• foreclosure lower of FMV or amount due for taxes
• eminent domain compensation to owner
• escheat FMV

57
Classification of Fixed Assets

• Land
• Building (or Building and Improvements)
• Infrastructure (or Improvements other than
  Buildings)
• Machinery and Equipment
• Construction in Progress (no capitalized interest)

58
Classification of Investment in GFA by Financing
Source

• Capital Projects Funds
• long-term borrowing
• special assessments
• intergovernmental grants-in-aid
• interfund transfers
• General Fund and Special Revenue Funds
• general revenues
• special revenues

59
GFA Options

• Infrastructure
• immovable in nature and of value only to state or
  local government
• optional capitalization
• disclosure policy
• Capitalization Policy - legal/materiality
• Recording of Depreciation - optional

60
GLTDAG

• Definition - all unmatured debt except that of
  proprietary funds
• unmatured principal
• secured (typically) by SLG full faith credit
• not a liability of any fund

61
GLTD Examples

• general government bond issue
• general government special assessment debt
• general government long-term notes
• general government claims and judgments
• general government compensated absences
• general government capital lease liabilities
• general government unfunded pension contributions
• general government unfunded landfill closure and
  postclosure care

62
GLTDAG Accounting Equation

• 3 phases
• when incurred
• Amount to be provided Long-term obligation
• while debt is outstanding
• (Amount available Amount to be provided)
  Long-term obligation
• when debt matures
• reverse accounts from the account group