Advanced accounting 10th by a beams athony ch18

Chapter 18: An Introduction to Accounting for State and Local Governmental Units by Jeanne M.. Learn about the historical development of accounting principles for state and local gover

Chapter 18: An Introduction to Accounting for State and Local

Governmental Units

by Jeanne M David, Ph.D., Univ of Detroit Mercy

to accompany Advanced Accounting , 10th edition

by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

Governmental: Objectives

1 Learn about the historical development of

accounting principles for state and local

governmental units.

2 Understand the need for fund accounting and its

basic premises.

3 Perform transaction analysis using proprietary

and governmental accounting models.

4 Recognize various fund categories, as well as

their measurement focus and basis of accounting.

Objectives (cont.)

5 Review basic governmental accounting

principles.

6 Learn about the contents of a governmental

entity's comprehensive annual financial report.

1: History

An Introduction to Accounting for State and Local

Governmental Units

– Net assets revert to government

• Power to enact or enforce a tax

Developing Standards

• Municipal Finance Officers Association

• Governmental Accounting, Auditing and Financial

Reporting, 1968

• AICPA

• Audits of State and Local Governmental Units, 1974

• National Council on Governmental Accounting

• Governmental Accounting and Financial Reporting

Principles (beginning 1979)

• Governmental Accounting Standards Board

• GASB Statements (beginning 1984)

• Codification (1985, updated continually)

Hierarchy of GAAP

GAAP for local and state governmental

accounting:

1 GASB Statements and Interpretations

2 GASB Technical Bulletins

3 Consensus positions of GASB's Emerging

Issues Task Force

4 Implementation Guides

5 Other accounting literature

2: Fund Accounting

An Introduction to Accounting for State and Local

Governmental Units

Accounting for Governments

Focus on continuing ability to fund and provide

goods and services

– Not profit

Types of activities

1 Business type activities

• Provide services or goods to users for fees

2 General governmental activities

• Provide services or goods to citizens

without regard for ability to pay

Fund (def.)

"a fiscal or accounting entity with a self balancing set of accounts recording cash and other …

balances, and changes therein, which are

segregated for the purpose of carrying on

specific activities…" [GASB Codification]

Groups of funds:

– Proprietary funds

– Governmental funds

– Fiduciary funds

A single governmental unit, e.g., one city, has

multiple funds each with their own financial

statements There is a comprehensive report.

Proprietary Fund Model

Current assets + noncurrent assets

Governmental Fund Model

Current assets – current liabilities

= fund balance

CA – CL = Fund Balance

Accounting focuses on current financial resources.

Expenditures reflect the use of working capital, instead

of expenses which focus on consumption of resources.

General FA and LTD

General fixed assets (FA) are not recorded in

governmental funds.

– General fixed asset and depreciation records

are maintained separately

General long term debt (LTD) is not recorded in governmental funds.

– Separate records are also kept

Both are reported in the government-wide

3: Transaction Analysis

An Introduction to Accounting for State and Local

Governmental Units

1 Borrowed $75 by issuing a 3-year note.

2 Purchased equipment costing $30 for cash.

3 Sold a fully depreciated truck costing $80, with

a residual value of $10 for $8 cash.

4 Computed current depreciation as $15.

5 Borrowed $30 on a six month note.

Using Proprietary Fund Model

Model: CA + NCA – CL – NCL = Net Assets

1 Borrowed long term 75     75  

Using Governmental Fund Model

• The long term borrowing is a source of current financial

resources, as is the sale of the truck.

• Acquisition of equipment uses current financial resources

Model: CA – CL = Fund balance

4: Fund Categories

An Introduction to Accounting for State and Local

Governmental Units

Proprietary Fund Types

1 Internal service funds

– Provide goods or services on a business type

basis primarily for internal customers

• For departments and agencies of that

government

• Motor pools, central printing

2 Enterprise funds

– Provide goods or services on a business type

basis primarily for external customers

• For citizens and others

Governmental Fund Types

1 Special revenue funds

– General governmental financial resources

restricted for specific purposes

2 Permanent funds

– Resources are restricted but earnings benefit

government or citizens

3 Capital projects funds

– Resources used to construct or acquire

major governmental fixed assets

Governmental Funds (cont.)

4 Debt service funds

– Resources to be used to pay principle,

interest and charges on long term debt

Fiduciary Fund Types

Basic proprietary model:

CA + NCA – CL – NCL = Net Assets

1 Pension trust funds

2 Investment trust funds

3 Private purpose trust funds

An abbreviated model:

CA = CL

4 Agency funds

Apply Model to Specific Funds

1 Issued general obligation bonds, par value of $3,000, at 101

to finance construction of a government office building.

2 Transferred the premium on the bonds to the fund used to

account for payment of principal and interest on the

5 Paid general governmental employees’ salaries, $450

Another $50 of salaries accrued but has not been paid.

6 Borrowed $7,500 on a six-month note to finance general

operating costs of the government.

Model: CA – CL = Fund balance

1Capital projects fund 3,030   3,030 2a Capital projects fund (30)   (30)

3 Capital projects fund (125)   (125)

Transactions in Governmental

Type Funds

Bases of Accounting

• Governmental type funds

– Modified accrual basis of accounting

– Focus on flow of current financial resources – Record expenditures

• Proprietary & fiduciary type funds

– Accrual basis of accounting

– Focus on economic resources

– Record expenses

5: Governmental Accounting

Principles

An Introduction to Accounting for State and Local

Governmental Units

Revenue Recognition

• Exchange or exchange-like transactions

• Nonexchange transactions

– Derived tax revenues (sales or income tax)

– Imposed nonexchange (property tax)

– Government mandated nonexchange (federal

mandates)

– Voluntary nonexchange (donations)

• Recognize revenue in governmental funds

– Transaction is substantially complete

– Funds are measurable and available

• Not more than 60 days

Expenditures and Expenses

• Expenses

– Cost of assets or services used

– Recognize in period incurred

• Expenditures

– Cost of goods or service acquired, whether or not consumed

– Maturing of long term debt principal

– Recognized in period current liability is

incurred

When approved by the legislative body, the budget for expenditures becomes a spending ordinance that has the force of law An approved revenue plan also has the force of law.

Financial Reporting Entity

• Primary government

– City, town, state

• Special purpose government

– Water district, hospital, transit authority

– Treated as primary government

• Separately elected body, legally separate,

fiscally independent

• Component unit

• Legally separate, but primary government is

6: Comprehensive Annual Financial Report (CAFR)

An Introduction to Accounting for State and Local

Governmental Units

Primary Government Reporting

Annual report called Comprehensive Annual

Financial Report (CAFR)

• Includes primary government and blended

component units

GASB Statement No 34

• Government wide financial statements

• Fund financial statements

CAFR – Introductory Section

• Table of contents

• Letter of transmittal

• Principal officers

• Organizational chart

CAFR – Financial Section

• Management's Discussion & Analysis

• Auditor's report

• Government-wide financial statements

– Statement of Net Assets

– Statement of Activities

• Fund financial statements (detailed later)

• Notes and required supplementary information

Statement of Net Assets

Statement of

Activities

Fund Financial Statements

• Balance sheet – Governmental funds (GF)

• Statement of revenues, expenditures, and changes

in fund balance – GF

• Statement of net assets – Proprietary funds (PF)

• Statement of revenues, expenses and changes in net assets – PF and similar trust funds

• Statement of cash flows – PF and similar trust

funds

• Statement of fiduciary net assets

CAFR – Statistical Section

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