Chapter 17 Governmental Entities:Introduction andGeneral FundAccounting
Learning Objective 1 Understand and explain the basic differences between governmental and private sector accounting.
Overview • Governmental entities have operating objectives different from those of commercial entities. • As a result, governmental accounting is different from accounting for commercial enterprises.
Overview • Nature of governmental entities • Collect resources and make expenditures to fulfil societal needs • Absence of profit motive except for some activities • 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 • Control mechanism – Use of comprehensive budgetary accounting
Overview • Nature of governmental entities • Accountability for the flow of financial resources is a chief objective • Typically are required to establish separate funds to carry out various missions; each fund is an independent accounting and fiscal entity • Many fund entities do not record fixed assets or long-term debt in their funds • An important objective of governmental financial reporting is accountability
History of Governmental Accounting • History • 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 • History • 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 • History • 1984 – 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 No. 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 • History • The GASB continues to issue new standards to meet the information needs of users of the financial reports of governmental units. • Accounting for governmental entities is given the general name of fund accounting.
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)
GAAFR: “The Blue Book” • “Governmental Accounting, Auditing, and Financial Reporting” • Published by the Government Finance Officers Association (GFOA). • Neither prescribes nor authoritatively interprets GAAP for governmental units. • Provides detailed guidance (many examples) for applying governmental GAAP. • Widely used by governmental units.
Practice Quiz Question #1 Which of the following statements is correct? a. The GASB is responsible to set standards for governmental units and not-for-profit entities. b. The FASB was created in 1972 and sets standards for governmental units. c. The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d. The GASB is responsible for setting standards for state and local governments but not the federal government.
Learning Objective 2 Understand and explain major concepts of governmental accounting.
Major Concepts of Governmental Accounting • Elements of a Statement of Financial Condition • Assets are resources with present service capacity that the entity presently controls. • Liabilitiesare present obligations to sacrifice resources that the entity has little or no discretion to avoid. • A deferred outflow of resources is a consumption of net assets that is applicable to a future reporting period. • A deferred inflow of resources is an acquisition of net assets that is applicable to a future reporting period. • Net position is the residual of all other elements presented in a statement of financial condition.
Major Concepts of Governmental Accounting • Elements of a the resource flows statements • An outflow of resources is a consumption of net assets that is applicable to the current reporting period • An inflow of resources is an acquisition of net assets that is applicable to the current reporting period
Major Concepts of Governmental Accounting • Expendability of resources versus capital maintenance objectives
Practice Quiz Question #2 Which of the following statements is true? Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. The balance sheets of governmental units contain long-term assets and liabilities. The balance sheets of commercial entities contain a fund balance.
Learning Objective 3 Understand and explain the differences between the various governmental fund types.
The Nature & Diversity of Governmental Activities • The operations of governmental entities are classified into three categories: • Governmental—these activities do not resemble commercial activities. • Proprietary—these activities resemble commercial activities. Can measure profitability or capital maintenance. • Fiduciary—holding and managing assets owned by others (e.g., pension assets).
Use of Fund Accounting • Fund Accounting • Accounting for certain activities separately from all other operations. • Fund definition: A fiscal and accounting entity with a self-balancing set of accounts (like a branch or a division of a commercial entity). • TheGeneral Fund: The main and largest fund—records most routine transactions. • The difference between a fund’sassetsand liabilitiesis called:
Major Concepts of Governmental Accounting • Three Types of Funds • 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 : 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
Major Concepts : Types of Funds • Proprietary Funds • Enterprise Funds: • Provides services primarily to nongovernmental users • Examples: City-owned utilities or recreational facilities • Internal Service Funds: • Provides services solely to governmental departments.
Major Concepts : Types of Funds • 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
Practice Quiz Question #3 The three major categories of governmental funds are: • Governmental, commercial, and proprietary. • Governmental, trust, and fiduciary. • Enterprise, proprietary, and fiduciary . • Governmental, proprietary, and fiduciary. • Governmental Service, proprietary, and commercial
Learning Objective 4 Understand and explain basic concepts for financial reporting in governmental accounting.
Financial Reporting of Governmental Entities • Governmental funds – financial statements • Balance sheet • Statement of revenues, expenditures and changes in fund balance • The five governmental funds use the current financial resources measurement focus
Fund Accounting • Specific General Ledger Accounts Used defined by GASB 54:
Financial Reporting of Governmental Entities • Statement of revenues, expenditures, and changes in fund balance • Often called the operating statement of the governmental funds
Practice Quiz Question #4 Which of the following is true? a. The operating statements of governmental entities focus on revenues and expenses. b. The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c. The operating statements of governmental entities focus on revenues and liabilities. • The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. • All governmental fund balances are spendable.
Learning Objective 5 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting.
Measurement Focus And Basis Of Accounting (MFBA) • Measurement Focus • What flows to measure for operations. • Basis of Accounting • When should transactions and events be recognized in the financial statements.
MFBA: Governmental Activities • Measure flow: • Current financial resources • Basis of Accounting: • Modified accrual basis of accounting • Present a Statement of Revenues and • Expenditures and Changes in Fund Balance • - shows financial resources received and spent. • - shows change in net financial resources • available for spending in the near future.
MFBA: Current Financial Resources • Current financial resources: • Cash, property tax receivables, prepaids, and supplies inventories. • Claims against current financial resources: • Wages, payroll taxes, payables to vendors, and liabilities expected to be paid in the near future (typically within 60 days after the year-end).
MFBA: Proprietary and Fiduciary Activities • Measure flow: • All economic resources • Basis of Accounting: • Accrual basis of accounting • Present a Statement of Revenues and Expenses • - shows the change in the economic condition • Also present a Statement of Cash Flows
Measurement Focus and Basis of Accounting • The modified accrual basis is used in funds that have a flow of current financial resources measurement focus • The five governmental funds have this focus • The accrual basis is used in funds that have a flow of economic resources measurement focus • Proprietary funds and fiduciary funds have this focus • The government-wide financial statements are based on the accrual basis
Measurement Focus and Basis of Accounting • Modified Accrual Basis Funds • Governmental funds • General Fund • Special Revenues Fund • Capital Projects Funds • Debt Service Funds • Permanent Funds
Measurement Focus and Basis of Accounting • Accrual Basis Funds • Proprietary funds • Enterprise Funds • Internal Service Funds • Fiduciary funds • Trust Funds (3 types) • Agency Funds • The two propriety funds and the three trust funds have either a profitability or capital maintenance orientation.
Measurement Focus and Basis of Accounting • Modified Accrual Basis • Revenues:Recognize in period in which they become available and measurable. • Availablemeans: Collectible within the current period or soon enough thereafter to be used to pay current periodliabilities. • Expenditures: Recognize in the accounting period in which the liabilities are both measurable and incurred and are payable out of current financial resources. • One exception exists for interest on general long-term liabilities.
Measurement Focus and Basis of Accounting • Recognition of revenue: how revenues are recognized depends on the category • 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. • 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 Accounting • Recognition of revenue: how revenues are recognized depends on the category • 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. • Government-mandated nonexchange transactions, resulting from one governmental unit’s provision of resources to a governmental unit at another level and the requirement that the recipient use the resources for a specific purpose • Voluntary nonexchange transactions, resulting from legislative or contractual agreements, other than exchanges
Practice Quiz Question #4 The modified accrual basis of accounting: a. recognizes revenues when earned and expenditures when incurred. b. recognizes revenues when they become available and measureable and expenditures when liabilities become measurable and incurred. c. recognizes revenues when earned and expenses when incurred d. recognizes revenues when they become available and measureable and expenditures when they become available and spendable.
Learning Objective 6 Understand and explain basic budgeting concepts in governmental accounting.
Budgetary Aspects of Governmental Operations • Budgets • 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 • 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. • 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. • Budget entries have no effect on reported operations.
Introduction: Budget / Expenditure Process • Budget—Recorded in the books • CAPITAL LETTERS (legally binding) • Expenditures • Appropriation (authorization of the expenditure) • Encumbrance (set aside or reserve part of the budgetary appropriation) • Expenditure • Disbursement
Budgetary Aspects of Governmental Operations • Recording the Operating Budget 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: January 1, 20X1 (1) ESTIMATED REVENUES CONTROL 900,000 APPROPRIATIONS CONTROL 850,000 BUDGETARY FUND BALANCE—UNASSIGNED 50,000 Record general fund budget for year.