Introduction to Governmental and NotforProfit Accounting 7 e

Introduction to Governmental and Not-for-Profit Accounting, 7 e Chapter 2: The Use of Funds in Governmental Accounting Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -1

Types of Government Activities • Governmental-type – Day-to-day services of general-purpose governments (states, counties, and cities) • Police and fire protection • Sanitation • Parks and recreation – Financed primarily by tax revenues, intergovernmental grants, and general fees – Controlled by legally adopted budget Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -2

Types of Government Activities • Business-type – Specific services • Mass transit • Water utility • Electric utility – Financed primarily by user fees or charges that cover both operating and capital costs Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -3

Types of Government Activities • Fiduciary-type – Used when government provides fiduciarytype services • Holding segregated resources for others • Examples – Tax collection services for other governments – Pension trust funds Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -4

Fund Accounting • Funds: Building blocks of governmental reporting • Government divided into entities, a. k. a. funds • Each fund has its own: – Assets, liabilities, net position – Inflows and outflows of resources • 3 categories: Governmental, proprietary, fiduciary Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -5

Formal Fund Definition …a fiscal and accounting entity with a selfbalancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -6

Why Are Funds Used? • Fund accounting facilitates compliance with laws • Helps ensure that dedicated funds are used as intended • Legislature may dedicate specific revenues for specific purposes Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -7

Fund Accounting: Governmental Funds • • Basic day-to-day public services Inflows: Taxes, intergovernmental grants Outflows: Police, education, sanitation Acquisition/construction of general governmental capital assets • Resources legally earmarked for specific purpose • Controlled by legally adopted budgets Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -8

Fund Accounting: Proprietary Funds • Activities are run like private business – Charge fees for services – Measure whether revenues cover costs • Hospitals, utilities, mass transit, lotteries • Cover costs OR provide net revenues – OR get subsidized by parent unit Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -9

Fund Accounting: Fiduciary Funds • Resources held in trust (for others) – Cannot be used to support government’s own programs • Individuals, other governments, or private organizations • Pension assets, investment pools • Taxes collected on behalf of other governments – Example: sales taxes Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -10

Fund Accounting: Financial Reporting • Fund Financial Statements – Each major fund gets a column – Separate set of statements for each fund type • Government-Wide Financial Statements – Governmental and business-type only – Adjustment to accrual basis Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -11

Measurement Focus and Basis of Accounting • Measurement focus – Which resources are being measured • All assets (financial and capital resources) are reported in proprietary-type funds, but only financial resources available for spending are reported in governmental-type funds. • Basis of accounting – When resources are being measured • When is an asset or liability recognized in the financial statements? Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -12

Measurement Focus and Basis of Accounting: Proprietary and Fiduciary • Economic resources measurement focus – All transactions affecting financial/capital resources • Accrual basis of accounting – Revenues when earned, expenses when incurred – Regardless of cash – Depreciate capital assets, interest accrued Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -13

Measurement Focus and Basis of Accounting: Governmental • Current financial resources measurement focus – Financial resources available for spending (budget focused) – Capital assets/long-term debt not recorded – Records inflows and outflows of liquid assets Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -14

Measurement Focus and Basis of Accounting: Governmental • Modified accrual basis of accounting – Only accruals that affect near-term financial resource inflows and outflows – Revenue recognition • Measurable and • Available – Resources must be collectible within current period or soon enough thereafter to pay current bills. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -15

Measurement Focus and Basis of Accounting: Governmental • Modified accrual basis of accounting – Expenditures—decreases in financial resources – 3 types of expenditures • Operating—record when liability incurred • Capital outlay—record when financial assets are used to acquire capital assets • Debt service—record when long-term debt principal or interest is due for payment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -16

Governmental Funds: 5 Types • • • General Fund Special Revenue Funds Debt Service Funds Capital Projects Funds Permanent Funds Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -17

Governmental Funds: Financial Statements Fund level: • Balance Sheet • Statement of Revenues, Expenditures, and Changes in Fund Balance – a. k. a. Operating Statement Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -18

Governmental Funds: Operating Statement Format Revenues - Expenditures = Excess of revenues over expenditures +/- Other financing sources and uses +/- Special and extraordinary items = Net change in fund balance + Fund balance at beginning of period = Fund balance at end of period Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -19

Governmental Funds: General Fund • Every general-purpose government has one • Used for most basic day-to-day operations • Residual fund – Used to account for financial resources not accounted for in another governmental fund – Law/contract/manager may require use of another fund Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -20

Governmental Funds: General Fund • Inflows from: – Taxes on real property, sales, and personal or corporate income – Intergovernmental grants – Licenses, fees, forfeitures, and fines Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -21

Governmental Funds: Basic Accounting Equation Financial Assets* = Matured Short-Term Liabilities** + Fund Balance*** *Some governments may have deferred outflows of resources, which should be added to assets in the accounting equation. **Some governments may have deferred inflows of resources, which should be added to liabilities in the accounting equation. ***GASB S 54 classifies Fund Balance by degree of constraint on use of resources. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -22

Governmental Funds: Basic Accounting Equation • Financial Assets – Cash, investments, and receivables • Matured Short-Term Liabilities – Short-term has a shorter time frame than “current” in business accounting, which means payable in a year. • Accounts payable, salaries payable, and amounts payable to other funds • Matured liabilities due for payment and expected to be paid shortly after the accounting period ends Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -23

Governmental Funds: Special Revenue Funds • Used to account for proceeds of specific revenue sources that are restricted or committed to spending for specific purposes (other than debt service or capital projects) – Specific revenue sources must be a substantial portion of fund’s resources. • Revenue from dedicated source, such as a special tax, grant, or fee – Specific-purpose federal grant proceeds Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -24

Governmental Funds: Special Revenue Funds • Accounting same as general fund • May have more than one special revenue fund Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -25

Governmental Funds: Capital Projects Funds • Used to account for financial resources restricted or otherwise limited to spending for capital outlays – Acquisition or construction of capital facilities or other capital assets • NOT for assets of a(n): – Enterprise fund, internal service fund, trust fund Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -26

Governmental Funds: Capital Projects Funds • Required to use CPF if capital outlays financed from general obligation bond proceeds – Many capital assets are acquired through the General Fund when general obligations bonds are not issued • Separate fund per project or bond • No long-term assets or debt reported in CPF Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -27

Governmental Funds: Debt Service Funds • Used to account for financial resources that are restricted or otherwise limited to spending for principal and interest on general long-term debt – Proprietary fund debt not included • Resources in debt service funds – Transfers from other funds – Investment earnings – Taxes specifically assessed for debt service Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -28

Governmental Funds: Debt Service Funds • Required when – Legally mandated – Financial resources being accumulated for principal and interest payments that come due in future years Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -29

Governmental Funds: Permanent Funds • Only earnings may be used – Not principal • • To support government or citizens Doesn’t include private-purpose trust funds Examples: Library endowment, cemetery Same accounting as general fund Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -30

Proprietary Funds: Types and Statements • Enterprise Funds • Internal Service Funds • Statement of Net Position • Statement of Revenues, Expenses, and Changes in Net Position • Statement of Cash Flows Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -31

Proprietary Type Funds: Measurement Focus • Economic resources measurement focus • Accrual basis of accounting – Provides accurate measure of revenues and expenses to help determine user charges Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -32

Proprietary Funds: Operating Statement Format Operating revenues - Operating expenses = Operating income (loss) +/- Non-operating revenues and expenses = Income before other revenues, expenses, gains, losses, and transfers + Capital contributions +/- Special and extraordinary items +/- Transfers = Increase (decrease) in net position Reconciliation + Net position at beginning of period = Net position at end of period Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -33

Proprietary Funds: Enterprise Funds • • For products/services sold for a fee Primarily to external users Typically, separate fund for each activity Examples – Municipal airport – Municipal electric utility – Municipal water and sewer utilities – Toll roads – Lotteries Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -34

Proprietary Funds: Enterprise Funds • Enterprise funds required if – Pricing intended to cover costs – Law requires costs of providing services be recovered through fees and charges, OR – Debt secured only by net revenues of activity (revenue bonds) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -35

Proprietary Funds: Internal Service Funds • For products/services sold for a fee – Fee designed to recover cost • To internal users or other governments – Reporting government must be predominant participant • Established for cost savings – To consolidate support activities performed by several agencies – To obtain bulk discounts Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -36

Proprietary Funds: Internal Service Funds • Separate fund for each activity • Bill other funds for products/services – Revenue to Internal Service Fund – Expenditure/expense to fund receiving products/services • Examples – Motor pool operations – Data processing – Printing services Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -37

Fiduciary Funds • Assets held by government in a trust or agency capacity for others – Cannot be used to support government’s own programs • Economic resources measurement focus • Accrual basis of accounting Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -38

Fiduciary Funds: Types and Statements • Pension (and other employee benefit) Trust Funds • Investment Trust Funds • Private-Purpose Trust Funds • Agency Funds • Statement of Fiduciary Net Position • Statement of Changes in Fiduciary Net Position* *Not used by agency funds Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -39

Fiduciary Funds • Pension (and other employee benefit) Trust Funds – Hold restricted resources – For pensions, health care, etc. • Investment Trust Funds – For investment pools – External portion only Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -40

Fiduciary Funds • Private-Purpose Trust Funds – For all other trust arrangements – Example: escheat property • Agency Funds – For custody arrangements, example: sales tax collections for other governments – No “net assets” Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 2 -41