advanced accounting 6e by jeter chaney chapter 18

The Structure of Governmental Accounting• Eleven Categories of Fund Entities – Governmental Funds expendable— – Focus on sources, use, and balances of current financial resources.. Gove

Learning Objectives

• Identify the issues involved in developing standards for nonprofit organizations.

• Describe the broad categories of government fund entities.

• Distinguish between a general fund and a special revenue fund.

• Explain the use of a capital projects fund.

• Describe the purpose of a debt service fund.

• Explain the use of a permanent fund.

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Learning Objectives

• Distinguish proprietary funds from government funds.

• Describe where capital assets and long-term obligations are reported in government financial statements.

• Describe the changes in reporting requirements under

GASB Statement No 34.

• Explain the benefits of government-wide statements.

• Describe the types of interfund activities.

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Governmental Accounting

• GASB’s Statement No 34, issued June 1999, requires:

– Financial statements using government-wide wide) approach (This does not eliminate traditional fund accounting.)

(entity-– Statements emphasizing major funds.

– Management’s discussion and analysis (MD&A)

• GASB Statement No 34 requires “full accrual” accounting for all government-wide statements (i.e., flow of economic resources approach).

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Statement of net position Governmental funds:

Statement of activities Balance sheet

Statement of revenues, expenditures, and changes in fund balances

Reconciliation to government-wide statements

History of Governmental Accounting Standards

• GASB was established (1984):

– Separate board under oversight of Financial Accounting Foundation (FAF).

– Responsible for establishing financial and reporting standards for governments

– GASB endorsed prior statements and interpretations of the NCGA, as well as standards embodied in the 1974 AICPA Industry Audit Guide.

– Pronouncements of the GASB are codified The codification is updated annually.

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History of Governmental Accounting Standards

Hierarchy of Standards

–GASB Statement No 55 establishes the hierarchy used to

establish generally accepted reporting standards for all state and local government-owned entities, including government-owned colleges and universities, health care providers, and utilities.

– The GASB and the FASB each has primary responsibility for setting standards for entities under its jurisdiction.

– Pronouncements of one Board should not be mandatory for

entities under the jurisdiction of the other Board, unless designated as such by the primary Board.

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The Structure of Governmental Accounting

• Eleven Categories of Fund Entities

– Governmental Funds (expendable)—

– Focus on sources, use, and balances of current financial resources.

–General Fund –Special Revenue Funds –Capital Projects Funds –Debt Service Funds –Permanent Funds8

The Structure of Governmental Accounting

• Eleven Categories of Fund Entities (continued)

– Proprietary Funds (nonexpendable)—

– Focus on determination of operating income, changes in

net position, financial position, and cash flows.

–Enterprise Funds –Internal Service Funds

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The Structure of Governmental Accounting

• Eleven Categories of Fund Entities

– Fiduciary Funds – Reports assets held in a trustee or agency capacity for others – Focus on net position.

–Pension Trust Funds –Investment Trust Funds –Private-Purpose Trust Funds –Agency Funds

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Special Revenue Fund

• Used to account for and report the proceeds of specific revenue

sources that are restricted or committed to expenditure for

specified purposes other than debt service or capital projects

– The term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues should

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Governmental Fund Entities

• In special revenue funds, as in the general fund, the

• following steps are taken:

– A budget is established and recorded in the accounts.

– Encumbrances are used to control budgeted expenditures.

– Fixed assets are only reported on government-wide statement.

– Depreciation is not recorded

– Long-term debt is only reported on government-wide statements 12

Governmental Fund Entities

Capital Projects Fund

• Used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction

of capital facilities and other capital assets Capital project funds exclude those types of capital-related outflows financed by proprietary funds or for assets that will be held in trust for individuals, private

organizations, or other governments

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Governmental Fund Entities

• Capital Projects Fund – Resources to acquire or construct major capital facilities.

– Resources for the acquisition include

–proceeds of long-term debt issues, –grants or payments from other governmental units, –funds from private sources,

–transfers of current revenues from other governmental funds, –special assessments, and

–other sources.

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Governmental Fund Entities – Capital Projects

• Exercise 18-12: The town of Aberdeen authorized a fire station to be built at an estimated cost of $150,000 On January 1, 2015, 6% bonds with a par value of

$150,000 were authorized and issued Any difference between the par value of the bonds and the proceeds from their sale is transferred to the Debt Service Fund The following transactions relating to the Capital Project Fund occurred during 2015.

– Encumbrances were recorded in the amount of $150,000.

– Proceeds from bond issue were received in amount of $155,000.

– Premium on bond issue was transferred to the Debt Service Fund.

– Contract billings of $150,000 were approved for payment on the completion of the fire station.

– Contractor was paid except for retention of 5% of the contract.

– Final contract price was paid The nominal accounts were closed.

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Exercise 18-12: Prepare the journal entries necessary in the Capital Projects

Fund to record the transactions and events

1.Encumbrances were recorded in the amount of $150,000

Governmental Fund Entities – Capital Projects

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Exercise 18-12: Prepare the journal entries necessary in the Capital Projects

Fund to record the transactions and events

Transfer to Debt Service Fund 5,000

Cash5,000

3.Premium was transferred to the Debt Service Fund

Governmental Fund Entities – Capital Projects

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Exercise 18-12: Prepare the journal entries necessary in the Capital Projects

Fund to record the transactions and events

Fund Balance - Assigned (encumbrances) 150,000

Encumbrances150,000

4.Contract billings of $150,000 were approved for payment on the

completion of the fire station

Contracts Payable 150,000

Governmental Fund Entities – Capital Projects

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Exercise 18-12: Prepare the journal entries necessary in the Capital Projects

Fund to record the transactions and events

Governmental Fund Entities – Capital Projects

Exercise 18-12: Prepare the journal entries necessary in the Capital Projects

Fund to record the transactions and events

Contracts Payable - Retained Percentage 7,500

Cash7,500

6.Final contract price was paid The nominal accounts were closed

Transfer to Debt Service Fund 5,000

Fund Balance - Unassigned150,000

Expenditures

Governmental Fund Entities – Capital Projects

Governmental Fund Entities

Debt Service Fund

• Used to account for and report financial resources that

are restricted, committed, or assigned to expenditure for

principal and interest Debt service funds should be used

to report resources if legally mandated (i.e debt payable from property taxes) Financial resources that are being accumulated for principal and interest maturing in future years should be reported in debt service funds.

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Governmental Fund Entities

Debt Service Fund

• Resources for, and the payment of, general long-term debt principal and interest.

• Financed by the following sources 1) General property tax

2) Sales tax or other specified tax revenues 3) Transfers of other fund revenues

4) Special assessments 5) Revenue from investment of debt service fund resources.

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There is no interest payable accrual on general obligation long-term debt

Governmental Fund Entities – Debt Service

• Problem 18-1: On January 1, 2015, the City of Cape May authorized and issued $200,000 of 5%, three-year term bonds Interest is payable annually on December 31 A debt service fund is established to accumulate the necessary resources to pay the annual interest on the bonds and to redeem the bonds when they mature The required annual addition for principal and interest will be transferred annually to the debt service fund from the general fund It is assumed that amounts

received by the debt service fund for the payment of principal can be invested at an annual return of 8%.

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Problem 18-1: Prepare a schedule to calculate the annual required

additions and annual required earnings to repay the principal on the bonds assuming the first installment for principal and interest is transferred to the debt service fund from the general fund on Dec 30, 2015

Governmental Fund Entities – Debt Service

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Authorized Transfer from the General Fund 71,607

Appropriations ($200,000 × 5%)

10,000Fund Balance - Committed

66,536

Problem 18-1: Prepare the journal entries to be recorded by the debt service fund as follows:

1.The 2015 budget entry

Governmental Fund Entities – Debt Service

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3.The entry to record the annual payment of interest.

Governmental Fund Entities – Debt Service

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Problem 18-1: Prepare the journal entries to be recorded by the debt service

fund as follows:

Cash 4,929

Interest income 4,929

4.The entry to record $4,929 in interest income for 2015

Governmental Fund Entities – Debt Service

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Problem 18-1: Prepare the journal entries to be recorded by the debt

service fund as follows:

Appropriations 10,000

Expenditures 10,000

Authorized Transfer from the General Fund71,607

5.The entry(s) to close the accounts at the end of 2015

Governmental Fund Entities – Debt Service

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Problem 18-1: Prepare the journal entries to be recorded by the debt

service fund as follows:

Governmental Fund Entities

Permanent Fund

• Used to account for and report financial resources that are

restricted to the extent that only earnings, and not principal,

may be used for purposes that support the reporting government’s programs – that is, for the benefit of the government or its citizenry Permanent funds do not include private-purpose trust funds, which should be used to report situations in which the government is required to use the principal or earnings for the benefit of individuals, private organizations, or other governments.

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Governmental Fund Entities

Permanent Fund

• Two types of Nonexpendable Trust funds:

– Principal must be retained intact but earnings may be expended.

– Principal and the earnings must be retained intact.

• Established as a result of a gift, a bequest, or some other action that requires the governmental unit to act in a

fiduciary capacity.

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Proprietary Funds

• Proprietary fund reporting focuses on determination of operating income, changes in net position (or cost

recovery), financial position, and cash flows

• Net Position Approach: All changes in net position are included somewhere in the “statement of activities.”

• Proprietary funds include:

– Enterprise Funds.

– Internal Service Funds.

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Proprietary Funds

Enterprise Funds

– Resources may come from contributions or from the proceeds of long-term debt issues or both

– Contributions may be obtained from

• Other governmental units,

• Resources of the General Fund

• Property owners,

• Subdivision developers, or 33

Proprietary Funds

Enterprise Funds

– Activities are required to be reported as Enterprise Funds if any one

of the following is met:

1 The activity is financed with debt that is secured solely by a pledge

of the net revenues from fees and charges of the activity.

2 Laws or regulations required that costs of providing services must

be recovered with fees and changes (rather than with taxes or similar revenues).

3 Pricing policies establish fees and charges designed to recover its costs, including capital costs.

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Proprietary Funds

Internal Service Funds

• Activity that provides goods or services to other funds, departments, or agencies of the primary governmental unit and its component units, or to other governments, on

a cost reimbursement basis.

• Should be used only if the reporting government is the predominant participant in the activity.

– Otherwise, the activity should be reported as an

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Proprietary Funds

Internal Service Funds

– Common examples:

• Central computer facilities,

• Central garages and motor pools,

• Central purchasing and stores departments, and

• Central printing departments – Resources obtained from contributions from

• Other funds,

• Proceeds from sale of general obligation bonds, or

• Long-term advances from other funds.

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Fiduciary Funds

Trust and Agency Funds

– Fiduciary funds are used to report assets held in a trustee or agency capacity and therefore cannot be used to support the government’s own programs

– Purely custodial, and assets always equal liabilities.

– Fiduciary funds include:

• Pension trust funds,

• Investment trust funds,

• Private-purpose trust funds, and 37

Capital Assets and Long-Term Debt

• The purchase of capital assets are recorded as an expenditure in the governmental fund statements.

• Proceeds from the issuance of long-term debt is recorded as Other Financing Sources in the governmental fund

statements.

• Under GASB Statement No 34, governments report all capital assets, including infrastructure assets, and unmatured general long-term debt on a government-wide basis and

report depreciation expense as a charge to operations in each period.

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External Reporting Requirements (GASB

No 34)

• The following statements and disclosures are required:

– Governmental Fund Financial Statements – Proprietary Fund Financial Statements – Fiduciary Funds (and Similar Component Units) Financial Statements

– Government-wide Statements – Combining Statements for Major Component Units – Notes to Financial Statements

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Government Fund-Based Reporting

• Governments are required only to report the major funds

in separate columns, but have flexibility to report more funds separately if desired

• Individual governmental funds and proprietary funds are

major funds if the total assets, liabilities, revenues, or expenditure/expenses of that individual fund are at least 10% of the corresponding total for the relevant fund

category (governmental or enterprise funds) and at least

5% of the corresponding total for all governmental and enterprise funds combined.

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• These primary statements include:

1) The statement of net position.

2) The statement of activities.

• Governmental-wide statement of cash flows is not required 41

Government-wide Reporting

Statement of Net Position

– Prepared using the accrual basis and includes both financial and capital resources

– At a minimum, assets, liabilities, and net position should be disclosed for each of the following categories:

a) A Primary Government1) Government activities2) Business-type activities3) Total primary government activities b) Discretely Presented Component Units

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