Advanced financial accounting by baker chapter 17

Major Concepts of Governmental Accounting – To accomplish the objectives of the governmental unit, the unit establishes a variety of funds as fiscal and accounting entities of the govern

Governmental

Entities:

Introduction and General

Fund Accounting

17

objectives different from those of

commercial entities; therefore,

governmental accounting is different from

accounting for commercial enterprises

1 Collect resources and make expenditures to

fulfill societal needs

2 Absence of profit motive except for some

activities

3 Have legal authorization for their existence,

conduct revenue-raising through the power of taxation, and have mandated expenditures they must make to provide their services

4 Control mechanism - Use of comprehensive

budgetary accounting

5 Accountability for the flow of financial

resources is a chief objective

6 Typically are required to establish separate

funds to carry out various missions; each fund

is an independent accounting and fiscal entity

7 Many fund entities do not record fixed assets

or long-term debt in their funds

8 An important objective of governmental

financial reporting is accountability

History of Governmental Accounting

– Before 1984, directed by the Municipal

Finance Officers Association (MFOA)– In 1934, the first statement on local

governmental accounting published– In 1968, Governmental Accounting, Auditing,

and Financial Reporting (GAAFR) was published

• The GAAFR is periodically updated to include the most recent

governmental reporting standards

History of Governmental Accounting

– 1974 –The American Institute of Certified

Public Accountants (AICPA) published an

industry audit guide, in which it stated that

“except as modified in this guide, they

[GAAFR] constitute generally accepted

accounting principles”

– March 1979 – The National Council on

Governmental Accounting (NCGA) issued its

Statement No 1, “Governmental Accounting

and Financial Reporting Principles” (NCGA 1)

History of Governmental Accounting

Standards Board (GASB) established

– GASB Statement No 1

• The GASB stated that all NCGA statements and interpretations

issued and in effect on that date were accepted as generally accepted accounting principles for governmental accounting

– GASB Statement 34

• Established government-wide financial statements to be prepared

on the accrual basis of accounting and an array of fund-based financial statements

History of Governmental Accounting

standards to meet the information needs of users of the financial reports of

governmental units

given the general name of fund accounting

Major Concepts of Governmental

Accounting

– Each definition uses the central focus of a

resource, which is an item having a present capacity to provide, directly or indirectly,

services for the governmental entity

Major Concepts of Governmental

Accounting

1 Assets are resources with present service capacity

that the entity presently controls

2 Liabilities are present obligations to sacrifice

resources that the entity has little or no discretion to avoid

3 A deferred outflow of resources is a consumption of

net assets that is applicable to a future reporting period

4 A deferred inflow of resources is an acquisition of net

assets that is applicable to a future reporting period

5 Net position is the residual of all other elements

presented in a statement of financial condition

Major Concepts of Governmental

Accounting

1 An outflow of resources is a consumption of

net assets that is applicable to the current reporting period

2 An inflow of resources is an acquisition of net

assets that is applicable to the current reporting period

Major Concepts of Governmental

Accounting

maintenance objectives

Major Concepts of Governmental

Accounting

– To accomplish the objectives of the

governmental unit, the unit establishes a variety of funds as fiscal and accounting entities of the governmental unit

– A fund is a separate accounting group with

accounts to record the transactions and prepare the financial statements of a defined part of the governmental entity that is

responsible for specific activities or objectives

Major Concepts of Governmental

Accounting

and liability accounts and its own revenue

and expenditures accounts

in net financial resources available under

the current financial resources

measurement focus

Major Concepts of Governmental

Accounting

– Governmental Funds:

• Used to provide basic governmental services to the public

• Each entity creates only one general fund, but it may create more

than one of each of the other types of funds

– Proprietary Funds

• The objective is to recover the unit’s costs through user charges

– Fiduciary Funds

Major Concepts of Governmental

Accounting

Major Concepts of Governmental

Accounting

Financial Reporting of Governmental

Entities

entity are presented for the reporting entity:

– The primary government

– Component units

– Other organizations that have a significant

relationship with the primary government

– Fund-based financial statements

– Government-wide financial statements

The Government Reporting Model

Financial Reporting of Governmental

Entities

– Balance sheet

– Statement of revenues, expenditures and

changes in fund balance

financial resources measurement focus

Financial Reporting of Governmental

Entities

Financial Reporting of Governmental

Entities

changes in fund balance

– Often called the operating statement of the

governmental funds

Measurement Focus and Basis of

Accounting

that have a flow of current financial

resources measurement focus

– The five governmental funds have this focus

a flow of economic resources measurement focus

– Proprietary funds and fiduciary funds have

this focus

Measurement Focus and Basis of

Accounting

– Revenue is recorded in the accounting period

in which it is both measurable and available to finance expenditures made during the current fiscal period

– Expenditures are recognized in the period in

which the liabilities are both measurable and incurred and are payable out of current

financial resources

Measurement Focus and Basis of

Accounting

depends on the category:

1 Derived tax revenues, resulting from assessments on

exchange transactions

• The asset is recognized when the underlying transaction occurs

or resources are received, whichever comes first

• Revenue recognition depends on the accounting basis used to

measure the transaction

2 Imposed nonexchange revenues, resulting from assessments

on nongovernmental entities, including individuals

• The asset is recognized when the government has an

enforceable legal claim to the resources or the resources are received, whichever comes first

• Revenue recognition is made in the period when use of the

resources for current expenditures is first permitted or required, or

Measurement Focus and Basis of

Accounting

2 Imposed nonexchange revenues, resulting

from assessments on nongovernmental

entities, including individuals

• The asset is recognized when the government has an

enforceable legal claim to the resources or the resources are received, whichever comes first

• Revenue recognition is made in the period when use of the

resources for current expenditures is first permitted or required, or

at the time the asset is recorded if no time restriction on the fund’s use of the resources exists

Measurement Focus and Basis of

resources for a specific purpose

4 Voluntary nonexchange transactions, resulting

from legislative or contractual agreements, other than exchanges

Budgetary Aspects of Governmental

Operations

– Used in governmental accounting to assist in

management control and to provide the legal authority to levy taxes, collect revenue, and make expenditures in accordance with the budget

– Types of budgets:

• Operating budgets

• Capital budgets

Budgetary Aspects of Governmental

Operations

Assume that at January 1, 20X1, the first day of the new fiscal period, the city council of Barb City approves the operating budget for the general fund, providing for $900,000 in revenue and $850,000 in expenditures Approval of the budget provides the legal authority to levy the local property taxes and to appropriate resources for the expenditures The entry made in the general fund’s accounting records on this date is as follows:

Budgetary Aspects of Governmental

– The excess of estimated revenues over anticipated

expenditures is the budget surplus and is recorded to BUDGETARY FUND BALANCE—UNRESERVED

– Some approved budgets have budget deficits in which

expected expenditures exceed anticipated revenue

• These budgets are recorded with a debit to BUDGETARY

FUND BALANCE—UNRESERVED

Accounting for Expenditures

– Step 1 Appropriation

• The budget provides the appropriating authority to make

future expenditures

– Step 2 Encumbrance

• An encumbrance is a reservation of part of the budgetary

appropriation and is recognized at the time an order is placed for goods or services

– Step 3 Expenditure

• An expenditure and a corresponding liability are recorded

when the governmental entity receives the goods or services ordered in step 2

– Step 4 Disbursement

Accounting for Expenditures

and accounts

– Expenditures should be classified by fund,

character, function (or program), organizational unit, activity, and principal classes of objects

the fiscal period:

– May be allowed to lapse

– May be carried over as nonlapsing spending

authority

Accounting for Expenditures

– Determining the method to account for the

expenditure of inventories:

• Purchase method: Recognizes the entire expenditure for

inventory in the period the supplies are acquired

• Consumption method: Recognizes expenditures for only the

amount of inventory used in the period

– The specific method to follow depends on the

governing unit’s policy and how inventory expenditures are included in the budget

Accounting for Expenditures

– Immaterial inventories need not be shown on

the balance sheet– If the inventory is material, it is presented as

an asset on the balance sheet

• An amount equal to the inventory also should be shown as a

reservation of the fund balance, indicating that that amount is no longer expendable

Accounting for Expenditures

Accounting for Expenditures

– Governmental funds: Recognized as an

expenditure in the year the asset is acquired– Proprietary funds: Account for acquisitions of

capital assets in the same manner as commercial entities

– For the purposes of government-wide

financial statements, governments should capitalize these assets at their historical costs

at acquisition or at their fair values at the date

Accounting for Expenditures

– The governmental funds record the proceeds

from a bond issue as a debit to Cash and a credit to Bond Issue Proceeds, an other-

financing source– Bond issue proceeds are not revenue

because the bonds must be repaid– Bonds are not reported on the governmental

funds’ balance sheets but only on the government-wide financial statements– Capital leases are accounted for in a manner

Accounting for Expenditures

– GASB 31 established a general rule of fair

market valuation for investments held by a government entity

– Changes in the fair value of investments

should be recognized as an element of investment income in the operating statement (or statement of activities) of each fund

– GASB 40 requires footnote disclosures of the

policies and the profiles of the government’s

Interfund Activities

between fund entities

Interfund Activities

Overview of Accounting and Financial

Reporting for the General Fund

Overview of Accounting and Financial

Reporting for the General Fund

Additional Considerations

exposure draft (ED) of a proposed

statement entitled “Fund Balance Reporting and Governmental Fund Type Definitions”

– The proposed statement applies only to the

five governmental fund types