GOVERNMENTAL ACCOUNTING:

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CHAPTER 24

• GOVERNMENTAL ACCOUNTING
• BASIC PRINCIPLES AND
• THE GENERAL FUND

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FOCUS OF CHAPTER 24

• The Governmental Accounting Standards Board
• The Nature and Diversity of Activities
• The Objectives of Governmental Financial
  Reporting
• Measurement Focus and Basis of Accounting
• Basic Principles of the GASB Codification
• The General Fund

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The Governmental Accounting Standards Board (GASB)

• GASB
• Created in 1984.
• A sister organization to the FASB.
• Establishes GAAP for state and local units.
• No authority to establish GAAP for the federal
  government.
• Seven memberssimple majority vote needed (4
  votes).

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Jurisdictional Arrangement Between GASB and FASB

• GASB has primary responsibility for state and
  local governmental units.
• State and local governmental units
• Must follow FASB rules if GASB says so.
• May elect to follow a FASB rule if GASB has not
  addressed a specific issue.
• If election is made, must use ALL such rules.

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The Government Finance Officers Association
(GFOA) Its Function

• GFOA
• The equivalent of the AICPA for the private
  sector.
• Publishes or provides the following to enhance
  and promote professional management of
  governmental units
• Books, periodicals, monthly newsletter.
• Services to members.
• Software.

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GAAFR The Blue Book

• Stands for Governmental Accounting, Auditing, and
  Financial Reporting.
• Published by the GFOA.
• Neither prescribes nor authoritatively interprets
  GAAP for governmental units.
• Provides detailed guidance (many examples) for
  applying governmental GAAP.
• Widely used by governmental units.

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The Nature Diversity of Governmental Activities

• Absence of a Profit Motive
• What to measure?
• Revenues costs of providing services?
• Inflows and outflows of all resources?
• Inflows and outflows of certain resources?

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The Nature Diversity of Governmental Activities

• Extensive Legal Requirements
• Constitutions, charters, and statutes regulate
  governmental units.
• Some legal provisions pertain to accounting and
  financial reporting matters
• Keeping separate books for certain activities.
• Being audited by outside CPAs.

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The Nature Diversity of Governmental Activities

• Diversity of ActivitiesOperations are classified
  as
• Governmentalthese activities DO NOT resemble
  commercial activities.
• Proprietary typethese activities DO resemble
  commercial activitiesCan measure profitability
  or capital maintenance.
• Fiduciaryholding and managing assets owned by
  others (e.g., pension assets).

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Use of Fund Accounting

• Fund Accounting
• Accounting for certain activities separately from
  all other operations.
• Fund defined A fiscal and accounting entity with
  a self-balancing set of accounts (like a branch
  or a division of a commercial entity).
• The General Fund The main and largest
  fundrecords most routine transactions.

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Use of Fund Accounting

• Fund Accounting (cont.)
• The difference between a funds ASSETS and
  LIABILITIES is called

Governmental and Proprietary Fiducia
ry-Type Funds Funds FUND
BALANCE Net Assets
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Use of Fund Accounting

• Specific General Ledger Accounts Used

Governmental and
Proprietary Fiduciary-Type Funds
Funds Fund
Balance Net Assets
Reserved for encumbrances Invested in
capital Unreserved
assets, net of
related
debt
Restricted

Unrestricted
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The Objectives of Governmental Financial Reporting

• GASB Concepts Statement No. 1Financial Reporting
  should
• Assist in fulfilling accountability and enabling
  users to assess accountability.
• Assist users in evaluating operating results.
• How has the financial condition changed?
• Assist users in assessing service level
  capabilities and ability to meet obligationsas
  they become due.

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Measurement Focus And Basis Of Accounting (MFBOA)

• Measurement Focus
• WHAT flows to measure for operations.
• Basis of Accounting
• WHEN should transactions and events be recognized
  in the financial statements.

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MFBOA Proprietary Activities

• Measure flow of ALL ECONOMIC RESOURCES (both
  reporting levels)
• Present a Statement of REVENUES and
  EXPENSESreveals the CHANGE IN THE ECONOMIC
  CONDITION.
• Use accrual basis of accounting (needed in order
  to report ALL revenues expenses).
• Also present a Statement of Cash Flows.

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MFBOA Governmental Activities

• Measure flow of CURRENT FINANCIAL RESOURCES at
  the fund-based reporting level
• Present a Statement of Revenues and Expenditures
  and Changes in Fund Balancereveals
• Financial resources received and spent.
• Change in net financial resources available for
  spending in the near future.
• Use modified accrual basis of accounting.

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MFBOA Current Financial Resources

• Current Financial ResourcesTypical Items
• Cash, property tax receivables, prepaids, and
  supplies inventories.
• Claims Against Current Financial
  ResourcesTypical Items
• Wages, payroll taxes, payables to vendors, and
  liabilities expected to be paid in the NEAR
  FUTURE (typically within 60 days after the
  year-end).

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MFBOA What is lacking at the Fund-Based
Reporting Level?

• A Statement of Revenues and Costs of Providing
  ServicesIt would
• Reveal the flow of all economic resources.
• Be a true operating statement.
• Include ALL expensesnot just those actually paid
  and expected to be paid in the near future.
• Reveal the change in economic condition.

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Basic Principles of the GASB Codification
Grouped into 7 Categories

• Accounting Reporting Capabilities
• Types of Funds
• Basis of Accounting
• Financial Reporting
• Long-Term Liabilities
• Capital Assets
• Budgets and Budgetary Accounting

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Basic Principles Category 1Accounting
Reporting Capabilities

• Present financial statements on a GAAP basis.
• When conflicts exist between GAAP BASIS and LEGAL
  REQUIREMENTS
• Demonstrate legal compliance by either
• Additional schedules and narrative explanations
  or
• A separate legal basis report.

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Basic Principles Category 2Types of Funds

• Governmental Funds
• General FundAccounts for all activities not
  required to be accounted for in another fund.
• Special Revenue FundA clone of the General Fund.
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds

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Basic Principles Category 2Types of Funds
Account Groups

• Proprietary Funds
• Enterprise FundsProvides services PRIMARILY to
  nongovernmental users (city-owned utilities are
  prime example).
• Internal Service FundsProvides services SOLELY
  governmental departments.

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Basic Principles Category 2Types of Funds
Account Groups

• Fiduciary Funds
• Trust Funds
• Pension (and similar) Trust Funds
• Investment Trust Funds
• Private-Purpose Trust Funds (these activities do
  not benefit the government unit)
• Agency Funds

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Basic Principles Category 3Basis of Accounting

• Accrual Basis Funds
• Proprietary funds
• Enterprise Funds
• Internal Service Funds
• Fiduciary funds (3 Trust 1 Agency)
• The two propriety funds and the three trust funds
  have either a profitability or capital
  maintenance orientation.

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Basic Principles Category 3Basis of Accounting

• Modified Accrual Basis Funds
• Governmental funds
• General Fund
• Special Revenues Fund
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds

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Basic Principles Category 3Basis of Accounting

• Modified Accrual Basis Defined
• REVENUES Recognize in period in which they
  become available and measurable.
• Available means Collectible within the current
  period or soon enough thereafter to be used to
  pay current period liabilities.

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Basic Principles Category 3Basis of Accounting

• Pointers on Recognizing REVENUES
• Revenues STAND ALONE.
• Revenues are not earned as in the private
  sector.
• The delivery of services requiresexpendituresbut
  delivery does not generate revenues.

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Basic Principles Category 3Basis of Accounting

• Modified Accrual Basis Defined
• EXPENDITURES Recognize in the accounting period
  in which the fund liability is incurred.
• One exception exists for interest on general
  long-term liabilities.

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Basic Principles Category 3Basis of Accounting

• Pointers on recognizing EXPENDITURES
• Liabilities are recorded when they are incurred.
• The offsetting debit will usually be to
• Expenditures (and thus reported in the current
  operating statement) OR
• The Net AssetsUnrestricted account in the
  GCA-GLTL g/lthe debit balance will be reported
  as expenditures in a later future period.

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Basic Principles Category 4(A)Financial
ReportingThe Basics

• THE BALANCE SHEETDisplay restrictions of the
  fund balance in the following manner Fund
  Balance Reserved for encumbrances....
  33,000 Unreserved....................
  ............. 417,000 Total
  Fund Balance.............. 450,000
• Numerous types of restrictions can existthus
  several types of reservations are used.

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Basic Principles Category 4(A)Financial
ReportingThe Basics

• THE OPERATING STATEMENTUse the all-inclusive
  format that includes the analysis of the fund
  balance (modified accrual basis funds) or net
  assets (accrual basis funds) for the period
• Revenues (inflows) Expenditures (outflows)
  Excess of Revenues over Expenditures Fund
  Balance, 1/1/06 Fund Balance, 12/31/06

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Basic Principles Category 4(B)Financial
ReportingBond Proceeds

• BOND PROCEEDSFor governmental funds, report in a
  special category in the operating statement as
  follows Revenues (inflows) Expenditures
  (outflows) Other Financing Sources and Uses
  Bond proceeds (an inflow)

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Basic Principles Category 4(B)Financial
ReportingInterfund Transfers

• INTERFUND ACTIVITIESReport in one of the
  following four categories (A and B are reciprocal
  in nature C D are nonreciprocal in nature)
• (A) Interfund loans.
• (B) Interfund services provided and used.
• (C) Reimbursements.
• (D) Transfers ( the last resort).

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Basic Principles Category 4(B)Financial
ReportingInterfund Transfers

• (B) INTERFUND SERVICES PROVIDED AND USED
• Transactions in which one fund provides a service
  to another fund.
• Such service would be provided by an outside
  company if not provided internally.

Service provider reports REVENUES. Service
recipient reports EXPENDITURES (or expenses if
an accrual basis fund).
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Basic Principles Category 4(B)Financial
ReportingInterfund Transfers

• (C) REIMBURSEMENTS
• Occur when a fund that is ultimately responsible
  for a particular expenditure or expense repays
  (or agrees to repay) some other fund that
  initially paid for the item on its behalf.
• Results in getting the expenditure or expense
  recorded in the proper general ledger.

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Basic Principles Category 4(B)Financial
ReportingInterfund Transfers

• (D) TRANSFERS
• The default category For transfers that cannot
  be classified into one of the other three
  categories (A, B, and C).

Report in the OTHER FINANCING SOURCES AND USES
section of the operating statement for
governmental funds.
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Basic Principles Category 4(B)Financial
ReportingOther Financing Sources and Uses

• OTHER FINANCING SOURCES AND USES category of the
  operating statementlimited to the following
  types of transactions
• Bond proceeds
• Transfers in
• Transfers out
• Proceeds from sale of general capital assets
• Proceeds from capital lease

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Basic Principles Category 4(C)Financial
ReportingThe CAFR

• Comprehensive Annual Financial Report (CAFR)
• Includes 2 types of financial statements
• 1 Government-wide statements (show the
  big picture)
• 2 Fund-based statements.

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Basic Principles Category 4(C) Financial
ReportingThe CAFR

• The General Purpose Financial Statements
• GOVERNMENT-WIDE STATEMENTS Consists of two
  specific financial statements designed to present
  an OVERVIEW of financial position and operations.
• FUND-BASED STATEMENTS Consists of seven
  specific financial statements (narrow focus
  statements).

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Basic Principles Category 5Long-Term Liabilities

• Certain funds account for and reportlong-term
  liabilities.
• Long-term liabilities not accounted for in a
  specific fund is called General Long-Term
  Liabilities
• GLTL is accounted for in the GCA-GLTL g/l.
• GLTL is the liability of the government asa
  whole and not that of any specific fund.

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Basic Principles Category 6Fixed Assets

• Certain funds account for report capital
  assets.
• Fixed assets not accounted for in a specific fund
  are called General Capital Assets.
• They are reported in the GCA-GLTL g/l.
• Depreciation expense is not reported in the
  operating statement of the governmental fundsat
  the fund-based reporting level.

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Basic Principles Category 7Budgets and
Budgetary Accounting

• Appropriation The statutory authorization for
  spending a budgeted amount during a coming year.
• Annual Budgets for the General Fund and the
  Special Revenue Funds are always recorded in the
  general ledger for control purposes.
• Also done for Capital Projects Funds and Debt
  Service Funds if useful.

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Basic Principles Category 7Budgets and
Budgetary Accounting

• Encumbrances Commitments related to unperformed
  (executory) contracts for goods or services.
• Special general ledger accounts are used to
  record encumbrancesthe purpose is to prevent
  spending more than has been appropriated.
• SUCH ENTRIES HAVE NO EFFECT ON REPORTED
  OPERATIONS.

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Inventories of Supplies Two Alternative Ways to
Handle

• Consumption Method
• The preferred methodit parallels business
  practice.
• The ACQUISITION of inventory is treated as the
  conversion of resources (debit Inventory).
• The USE of inventory is treated as an outflow of
  resources (credit Inventory and debit
  Expenditures or Expenses).

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Inventories of Supplies Two Alternative Ways to
Handle

• Purchases Method
• The ACQUISITION of inventory is treated as an
  outflow of resources (debit Expenditures or
  Expenses).

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The Operating Statement for Governmental Funds
Classifications

• REVENUES
• Always classified by source.
• EXPENDITURES
• Always classified by character
• Current, Capital Outlay, or Debt Service
• And then by function (for example)
• Health, Welfare, Sanitation, Public Safety

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Measuring FLOWS Cash Only
STATEMENT OF CASH FLOWS
(simplified) INFLOWS
Property tax collections......................
100,000 Parking meter receipts...............
......... 5,000 Total CASH
Inflows.......................
105,000 OUTFLOWS Payments to
employees..................... 90,000
Payments to services vendors...........
11,000 Total CASH Outflows...............
.... 101,000 Net CASH
Inflow...................... 4,000
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Measuring FLOWS Cash Receivables Only
STATEMENT OF FLOWS OF CASH
RECEIVABLES
(simplified) INFLOWS
(REVENUES) Property tax assessments,
net........... 120,000 Parking meter
receipts....................... 5,000
Total Inflows.................................
.. 125,000 OUTFLOWS.. Payments to
employees.................... 90,000
Payments to services vendors..........
11,000 Total Outflows....................
.......... 101,000 Net
Inflow.............................. 24,000
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Measuring FLOWS Cash, Receivables, Vouchers
Payable Only
STATEMENT OF FLOWS OF CASH,
RECEIVABLES, VOUCHERS PAYABLE
(simplified) INFLOWS
(REVENUES) Property tax assessments,
net................. 120,000 Parking meter
receipts.............................
5,000 Total Inflows......................
.................. 125,000 OUTFLOWS
(EXPENDITURES) Employee salary costs
incurred............. 96,000 Services
provided by service vendors.. 17,000
Total Outflows...................................
. 113,000 Net Inflow.............
........................ 12,000
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End of Chapter 24

• Time to Clear Things UpAny Questions?