Chapter 6: Proprietary Funds Internal Service and Enterprise

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• Chapter 6 Proprietary Funds -- Internal Service
  and Enterprise

2
Overview of Chapter 6

• Review of common characteristics of proprietary
  type funds
• Internal Service Funds
• Enterprise Funds
• Review of Fund statements - Proprietary type
  funds

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Review of Proprietary Type Funds

• Use accrual basis
• Match Revenues and Expenses, including
  depreciation
• Emphasis on income measurement
• Balance sheet includes both short term and
  long-term assets and liabilities
• Economic Resources Measurement Focus
• Can handle related construction and debt service
  within the proprietary funds
• Typically do not record budgets or encumbrances

4
Internal Service Funds

• Used for sales of service primarily to others
  within the government unit on a cost
  reimbursement basis
• Purpose is to pool resources for more efficient
  operations
• More efficient to have separate department
  responsible for these types of services and
  charge their costs back to other departments

5
Internal Service Funds

• Examples of internal service fund uses
• Motor pool,
• Telecommunications,
• Maintenance,
• Purchasing /supplies/central stores,
• Insurance/risk management

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Capital Inflows

• Transfers in that are not repaid
• Advances that are to be repaid

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Self-Insurance and Risk Management

• Governments have a choice of using the GF or an
  Internal Service fund for self-insurance
  activities
• If an ISF is used, the amount of premium is
  treated as a revenue to the ISF and as an Expense
  or Expenditure to other funds provided that the
  amount paid is a reasonable amount calculated in
  a manner that will yield an amount roughly equal
  to the amount of average long-term claims

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Reasonable Premium Requirement

• The purpose of this accounting requirement is to
  prevent governments from managing their budgets
  by hiding part of government fund resources in a
  proprietary fund when they have a surplus and
  underfunding in other years
• Otherwise, treat payments as Transfers

9
Enterprise Funds

• Used for sales of service primarily to others
  outside the government unit such as the general
  public

• Mandatory if
• Have debt backed solely by fees and charges
• Legally required to charge fees that will recover
  the cost, including depreciation
• Government policy of requiring cost recovery from
  fees

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Use of Enterprise Fund

• Not mandatory, but permitted if
• None of the three mandatory requirements are met,
  but management would like to see the activitys
  net cost after depreciation expense
• Implicationbus system or swimming pool charging
  fees can be handled in government or proprietary
  type fund

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Common Examples of Enterprise Funds

• Usually in mandatory enterprise funds
• Water utilities
• Gas or electric utilities
• Airports
• Mandatory or permissive
• Bus systems
• Swimming pools
• Hospitals, parking garage, toll roads, public
  housing
• Civic Centers

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Bonds in Enterprise Funds

• Revenue Bonds
• Revenue bonds promise bondholders that enterprise
  revenues will be used to make payments. These
  are listed as Bonds Payable in the enterprise
  funds.

• General obligation bonds
• These are backed by the full faith and credit of
  the government (i.e. the taxing authority of the
  government.
• Shown in the fund statements if debt service is
  to come from enterprise revenues

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Some Issues

• Impact fees treated as capital contributions
  (a nominal account)
• Interest during construction is capitalized
• Bad debt expense is a contra-revenue (see JE 16)

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Proprietary FundClosing Entries

• All revenue and expense type accounts as well as
  transfers are closed to Net Assets
• Net Assets are divided into three categories
• Invested in Capital Assets net of Related Debt
• Restricted (if needed) and
• Unrestricted for the remainder

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Statement of Net Assets

• Must classify assets and liabilities by
  current/noncurrent
• Net assets 3 categories
• Unrestricted
• Restricted
• Restricted means restricted by external parties
  or by legislation, including legislation by the
  governments governing body
• capital assets net of related debt

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Statement of Revenues, Expenses and Changes in
Fund Net Assets

• Format
• Revenues
• - Expenses
• Operating NI
• - nonoperating revenues and expenses
• - capital contributions and transfers
• Change in Net Assets
• Beginning Net Assets
• Ending Net Assets

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Cash Flow Statements

• Commercial Statements
• May use Direct or Indirect Methods for Cash Flows
  from Operating Activities
• Interest and dividends received are reported in
  operating section
• Interest payments are reported in operating
  section
• Purchases or sales of long-term assets are
  reported in investing
• The reconciliation of income and cash flows from
  operations starts with Net Income

• Proprietary Fund Statements
• Direct Method is required for Cash Flows from
  Operating Activities
• Interest and dividend revenue is reported in
  investing section
• Interest Payments are reported in capital or
  noncapital related financing section
• Fixed asset transactions are reported in capital
  related financing
• The reconciliation of income and cash flows from
  operations starts with Operating Income

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Cash Flow Categories

• 1. Operating
• Receipts from customers, payments to suppliers,
  etc
• 2. Noncapital Financing
• Cash flows from debt not related to capital
  outlay, non-capital related grants, transfers to
  other funds, etc
• 3. Capital and Related Financing
• Cash flows from debt related to capital
  acquisition (including interest), grants related
  to capital acquisition, cash outlays related to
  purchase or construction of capital assets
• 4. Investing
• Cash flows from purchase or sale of Investments
  and their associated revenues.

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Proprietary Funds and the Government-wide
Statements

• Enterprise Funds are Business-Type Activities.
• They are included in the Government-Wide
  statements without adjustment.
• Internal Service Funds are generally classified
  as Governmental Activities
• Their assets and liabilities are included in the
  Statement of Net Assets.
• Only revenues and expenses on outside sales are
  reported in the Statement of Activities.

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Solid Waste LandfillsEnterprise Fund

• Accrual basis and closure costs
• Costs of complying with environmental protection
  laws after closure have to be estimated and
  accrued as a cost of operating the landfill
  during its life.
• Each year accrue
• Post-closure expenses XX
• Liability for post-closure expenses XX
• (units of production method used to determine )
• After closure, as maintenance costs are incurred
• Liability for post-closure expenses XX
• Cash XX

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Solid Waste Landfills Governmental Activities

• Alternatively, some governments may operate
  landfills within the Governmental Activities.
• In this case, the long-term portion of any
  liability for closure and post-closure care costs
  will appear in the government-wide statement of
  net assets and the periodic expense in the
  government-wide statement of activities.