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CHAPTER 28. GOVERNMENTAL ACCOUNTING: BASIC PRINCIPLES AND THE GENERAL FUND. FOCUS OF CHAPTER 28. The Governmental Accounting Standards Board The Nature and Diversity of Activities The Objectives of Governmental Financial Reporting Measurement Focus and Basis of Accounting

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CHAPTER 28

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Chapter 28 l.jpg

CHAPTER 28

GOVERNMENTAL ACCOUNTING:

BASIC PRINCIPLES AND

THE GENERAL FUND


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FOCUS OF CHAPTER 28

  • 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 members--simple 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 ismade,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 ”

GAAFR

  • Stands for Governmental Accounting, Auditing and Financial Reporting

  • Published by the GFOA.

  • Neitherprescribesnorauthoritatively interprets GAAP for governmental units.

  • Provides detailed guidance (many examples) for applyinggovernmental 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 allresources?

      • Inflows and outflows of certainresources?


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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 booksfor certain activities.

      • Being audited by outside CPAs.

Charter

Special

Fund


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The Nature & Diversity of Governmental Activities

  • Diversity of Activities--Operations are classified as:

    • Governmental--these activities DO NOT resemble commercial activities.

    • Proprietary type--these activities DO resemble commercial activities--Can measure profitability or capital maintenance.

    • Fiduciary--holding and managing assets owned by others (e.g., pension assets).


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Use of Fund Accounting

  • Fund Accounting:

    • Accounting for certain activitiesseparately from all other operations.

    • Fund defined: A fiscal and accounting entity with a self-balancingset of accounts (like a branchor a division of a commercial entity).

    • TheGeneral Fund: The main and largest fund--records most routine transactions.


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Use of Fund Accounting

  • Fund Accounting (cont.):

    • The difference between a fund’s ASSETS and LIABILITIES is called:

Governmental and Proprietary

Fiduciary-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. 1--Financial 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 FocusAnd Basis Of Accounting (MFBOA)

  • Measurement Focus:

    • WHATflows to measure for operations.

  • Basis of Accounting:

    • WHENshould transactions and events be recognized in the financial statements.


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MFBOA: ProprietaryActivities

  • Measure flow of ALLECONOMIC RESOURCES (both reporting levels):

    • Present a Statement of REVENUES and EXPENSES--reveals 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: GovernmentalActivities

  • Measure flow of CURRENT FINANCIAL RESOURCES at the fund-based reporting level:

    • Present a Statement of Revenues and Expenditures and Changes in Fund Balance--reveals:

      • 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 Resources--Typical Items:

    • Cash, property tax receivables, prepaids, and supplies inventories.

  • Claims Against Current Financial Resources--Typical Items:

    • Wages, payroll taxes, payables to vendors, and liabilitiesexpectedto be paid in the NEAR FUTURE (typically within60 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 Services--It would:

    • Reveal the flow of alleconomic resources.

    • Be a “true” operating statement.

    • Include ALL expenses--not 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 1--Accounting & 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 2--Types of Funds

  • Governmental Funds:

    • General Fund--Accounts for all activities not required to be accounted for in another fund.

    • Special Revenue Fund--A clone of the General Fund.

    • Capital Projects Funds

    • Debt Service Funds

    • Permanent Funds


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Basic Principles: Category 2--Types of Funds & Account Groups

  • Proprietary Funds:

    • Enterprise Funds--Provides services PRIMARILY to nongovernmental users (city-owned utilities are prime example).

    • Internal Service Funds--Provides services SOLELYgovernmental departments.


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Basic Principles: Category 2--Types 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 3--Basis 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 3--Basis 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 3--Basis 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 3--Basis of Accounting

  • Pointers on Recognizing REVENUES:

    • Revenues STAND ALONE.

    • Revenues are not “earned”as in the private sector.

    • The delivery of services requiresexpenditures--but delivery doesnot “generate” revenues.


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Basic Principles: Category 3--Basis 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 3--Basis 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 Assets--Unrestricted account in the GCA-GLTL g/l--the debit balance will be reported as expenditures in a later future period.


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Basic Principles: Category 4(A)--Financial Reporting--The Basics

  • THE BALANCE SHEET--Display 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 exist--thus several types of “reservations” are used.


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Basic Principles: Category 4(A)--Financial Reporting--The Basics

  • THE OPERATING STATEMENT--Use 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, 1/1/04 Fund Balance, 12/31/04


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Basic Principles: Category 4(B)--Financial Reporting--Bond Proceeds

  • BOND PROCEEDS--For 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 Reporting--Interfund Transfers

  • INTERFUND ACTIVITIES--Report 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 Reporting--Interfund 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 Reporting--Interfund 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 Reporting--Interfund 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 Reporting--Other Financing Sources and Uses

  • OTHER FINANCING SOURCES AND USES category of the operating statement--limited 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 Reporting--The 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 Reporting--The CAFR

  • The General Purpose Financial Statements:

    • GOVERNMENT-WIDE STATEMENTS: Consists of twospecific 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 5--Long-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 6--Fixed 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 funds--at the fund-based reporting level.


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Basic Principles: Category 7--Budgets 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 7--Budgets and Budgetary Accounting

  • Encumbrances: Commitments related to unperformed (executory) contracts for goods or services.

  • Special general ledger accounts are used to record encumbrances--the 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 method--it 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 28

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