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Introduction to Internal Service Funds. Internal Service Funds (ISFs). Instructions for this power point presentation. This button appears throughout the presentation. Click to obtain additional data. Clicking on underlined text will provide links to additional information. .

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internal service funds isfs
Internal Service Funds (ISFs)
  • Instructions for this power point presentation.
    • This button appears throughout the presentation. Click to obtain additional data.
    • Clicking on underlined text will provide links to additional information.
isfs continued
ISFs . . . continued
  • Established to avoid duplication of effort.
  • Bill clients for service.
  • Are self supporting.
  • Provide services more conveniently or at a lower cost.
isfs continued1
ISFs . . . continued
  • Reflect major capital items as assets.
  • Record depreciation to determine all costs of operating the activity.
  • Measure the full cost of the goods or services.
  • Operate as a business.
journal entries
Journal Entries
  • Various journal entries record the establishment and operational activities of an Internal Service Fund.
  • See slides 6 through 9 for these journal entries.
journal entries continued
Journal Entries . . . continued
  • Establish an equity transfer:
    • Debit: Cash
      • Credit: Contributed capital from General Fund
journal entries continued1
Journal Entries . . . continued
  • Acquisition of IT equipment
    • Debit: IT equipment
      • Credit: Cash
  • Supplies for the operation
    • Debit: Computer supplies expense
      • Credit: Cash
journal entries continued2
Journal Entries . . . continued
  • Billings for services rendered
    • Debit: Due from State department
      • Credit: Revenues
  • Payment of billings
    • Debit: Cash
      • Credit: Due from State department
journal entries continued3
Journal Entries . . . continued
  • Depreciation
    • Debit: Depreciation expense
      • Credit: Accumulated depreciation
end of the year
End of the Year
  • Internal Service Funds prepare various financial statements:
    • Trial Balance
    • Closing Entries
    • Balance Sheet
    • Revenue and Expense Statement
    • Cash Flow Statement
internal service funds isfs1
Internal Service Funds (ISFs)
  • From here on, this presentation is on the State of California’s Internal Service Funds.
  • How does California establish an Internal Service Fund?
establishing isfs
Establishing ISFs
  • First, an Internal Service Fund is:
    • Created
    • Classified
isfs created
ISFs Created

Legislation

Administratively (Government Code Section 13306)

Electorate Initiative

isfs classified
ISFs Classified
  • Funding source/appropriation to finance program activities must:
    • Identify the resources.
    • Specify the legal authority to expend.
isfs classified continued
ISFs Classified . . . continued
  • Fund Codes
    • Alphabetical
    • Numerical
    • Fund structure
    • Generally Accepted Accounting Principles (GAAP)
    • Legal basis
uniform codes manual ucm
Uniform Codes Manual (UCM)
  • Provides the source for coding the ISF.
  • Provides a uniform coding system.
  • Provides a chart of accounts for budgetary, accounting, and reporting purposes.
ucm continued
UCM. . . continued

Comprehensive listing of

  • Accounts
  • Funds
  • Objects of expenditures
  • Receipts
slide18

In California,

Internal Service Funds

are used to:

internal service funds isfs2
Internal Service Funds (ISFs)
  • Account for State of California activities, which provide:
    • Goods and services to other State departments.
    • Reimbursement of costs.
isfs continued2
ISFs . . . continued
  • California has established over 20 ISFs.
  • Not all of these ISFs are active.
  • See slides 21 through 27 for some examples of California’s ISFs.
examples of internal service funds isfs continued
Examples of Internal Service Funds (ISFs) . . . continued
  • Water Resources Revolving Fund
    • Accounts for charges for administrative services related to water delivery provided by the Department of Water Resources to federal, State, and local entities.
examples of isfs continued
Examples of ISFs . . . continued
  • Equipment Service Fund
    • Accounts for the purchase, maintenance, and administrative costs of equipment used by the Department of Transportation.
examples of isfs continued1
Examples of ISFs . . . continued
  • Service Revolving Fund
    • Accounts for printing and procurement charges for services rendered by the Department of General Services for State departments and other public entities.
examples of isfs continued2
Examples of ISFs . . . continued
  • Stephen P. Teale Data Center Revolving Fund (TDC)
    • Accounts for charges of IT services performed for various State departments by the TDC.
examples of isfs continued3
Examples of ISFs . . . continued
  • Prison Industries Revolving Fund
    • Accounts for charges for goods produced by inmates in State prisons that are sold to State departments and other entities.
examples of isfs continued4
Examples of ISFs . . . continued
  • Health and Human Services Agency Data Center Revolving Fund (HHSDC)
    • Accounts for charges of IT services performed for various State departments by the HHSDC.
examples of isfs continued5
Examples of ISFs . . . continued
  • Other Internal Service Funds
    • Account for all other goods or services provided to other agencys, departments, or governments on a cost reimbursement basis.
examples of isfs continued6
Examples of ISFs . . . continued
  • Let’s look more closely at the Health and Human Services Agency Data Center (HHSADC), an Internal Service Fund.
health and human services agency data center hhsadc
Health and Human Services Agency Data Center (HHSADC)
  • Created in 1972.
  • Provides centralized IT services for State departments.
  • Centralizes IT at reduced costs.
  • Eliminates of duplication of work.
  • Ensures optimum capacity.
hhsadc continued
HHSADC . . . continued
  • Self supporting.
  • No General Fund appropriation.
  • Costs recovered through user charges.
  • User charges set at the beginning of each fiscal year.
  • Goal is to break even.
  • Uneven demand for services makes it difficult to predict billing rates. Shortages or surpluses often occur.
hhsadc continued1
HHSADC . . . continued
  • Uses a standard costing system.
  • Costs are categorized under separate group or cost pools related to an activity.
  • Cost centers represent a billable service.
  • Expenses are assigned a cost center.
  • Expenses are totaled at the end of year to determine the cost for each service.
hhsadc continued2
HHSADC . . . continued

Example of some cost centers at HHSADC :

hhsadc continued3
HHSADC. . . continued

Each cost center has a billing rate:

Projected Annual Cost

Billing Rate = -----------------------

Projected Annual Usage

hhsadc continued4
HHSADC . . . continued
  • Utility system records the usage for each client. Calculates a bill based on actual usage of each services.
  • Monthly an invoice is sent to the client listing service usage multiplied by the billing rate.
  • Client pays invoice.
hhsadc continued5
HHSADC . . . continued
  • Analysis of Costs
    • Quarterly review of rates.
    • Annual adjustments.
    • Invoice adjustment for refunds.
    • Financing impacts rates charged to clients.
    • Click on button to see types of financing.
hhsadc continued6
HHSADC . . . continued
  • Clients receiving federal funds bill the federal government for these charges.
  • Over/under collections result in over/under billings to the federal government.
hhsadc continued7
HHSADC . . . continued
  • Why should anyone care if the federal government is over or under charged?
  • Or any other fund, State department, entity?
  • Let’s look at some items for background to this issue.
cost plans
Cost Plans
  • Statewide Cost Allocation Plan (SWCAP) recovers central service costs from federal funds.
  • SWCAP plan has two sections.
cost plans continued
Cost Plans . . . continued
  • Both Section I and Section II of the SWCAP follow the regulations and guidelines of . . .
    • Office of Management and Budget, Federal Circular A-87 “Cost Principles for State and Local Governments”.
    • Department of Health and Human Services guideline ASMB C-10.
cost plans continued1
Cost Plans . . . continued
  • SWCAP Section I is the allocated central service costs distributed to State departments.
  • State departments transfer SWCAP recoveries to the General Fund from reimbursements received from the federal government.
cost plans continued2
Cost Plans . . . continued
  • SWCAP Section II includes data for each ISF with an operating budget over $5 million, including:
    • Rates
    • Billings
    • Policies
    • Refunds
cost plans continued3
Cost Plans . . . continued
  • SWCAP Section II
    • Costs for operating the ISF are included in billings by the State department (indirect cost rate proposals, cost allocation plans) to the federal government.
    • Yearly, the federal government reviews these ISFs.
cost plans continued4
Cost Plans . . . continued
  • For each ISF, SWCAP Section II includes:
    • Description of Service
    • Balance Sheet
    • Revenue and Expense Statement
    • Cost recovery and billing methodology
    • Cost center billing rates
    • Other information
state requirements
State Requirements
  • State’s requirements are:
    • Full Cost Recovery
      • Government Code 11010
    • Government Code specific to an ISF
      • HHSDC Fund Balance billing rate Government Code 11755
    • State Administrative Manual
    • Rates reviewed by audit groups
federal requirements
Federal Requirements
  • Federal requirements are:
    • Rates reviewed annually.
    • Allowable A-87 retained earnings.
    • Include only reasonable costs as defined in A-87 and ASMB C-10.
federal requirements continued
Federal Requirements . . . continued
  • After issuance of the Comprehensive Annual Financial Report (CAFR) each ISF in the SWCAP prepares a Reconciliation of Retained Earnings Balance to Federal Guidelines .
  • SCO website for CAFR:

California Comprehensive Annual Financial Report

federal requirements continued1
Federal Requirements . . . continued
  • Retained earning reconciliation determines the excess retained earnings. A portion is owed to the federal government, based upon the federal financial participation of the clients.
state and federal differences
StateandFederalDifferences
  • State and federal government differ on the calculation of working capital.
  • Differences are shown on the next slides.
state and federal differences continued

2001-02

State of California

Federal government

Current Assets

60 days worth of cash expenses,

minus Current

a portion of retained earnings

Definition

Liabilities

that functions as a reserve

Authority

FASB and AICPA

OMB Circular A-87

Complies with GAAP

Yes

No

Excess RE balance

$0

$0

StateandFederalDifferences. . . continued

Working Capital

other differences
Other Differences
  • Different statements
  • Governmental funds
    • Only current assets and current liabilities are accounted and reported.
  • ISF funds
    • All assets and liabilities are accounted and reported.
other differences continued
Other Differences . . . continued
  • Governmental funds
    • Modified accrual basis
    • Expenditures
    • No gain or loss
    • Spending
  • ISFs funds
    • Full accrual
    • Expenses
    • Gain or loss recognized
    • Income determination
state s working capital
State’sWorkingCapital
  • Definedin Accounting Research Bulletin No. 43 issued by the AICPA.
federal working capital calculation
FederalWorkingCapitalCalculation
  • Total Expenses per audited financial statements.
  • Less Non-cash expenses such as depreciation.
  • Equals total cash expenses for year.
  • Calculation continued on next slide.
federal working capital calculation continued
FederalWorkingCapitalCalculation. . . continued
  • Divide by 360 days equals total average cash expenses per day.
  • Multiply by 60 equals 60 days worth of cash expenses.
  • Deduct from retained earnings to arrive at the excess level of retained earnings.
working capital impact comparison
WorkingCapitalImpactComparison
  • State and federal working capital comparison is shown in the following spreadsheet.
    • Re.xls
state controller s office reports
StateController’sOfficeReports
  • SCO presents financial data on activities similar to the private sector.
  • Per GASB (Governmental Accounting Standards Board) statement number 20, the State applies all applicable GASB and FASB (Financial Accounting Standards Board) pronouncements issued on or before November 30, 1989, with one exception.
exception
Exception
  • Prison Industry Authority, an ISF, follows FASB pronouncements issued after November 30, 1989, unless they conflict with or contradict GASB pronouncements.
auditors review of isfs
AuditorsreviewofISFs
  • Some points auditors look at when reviewing ISFs:
    • Users billed at the same rate for the same service.
    • Identification of outside users, such as other governmental entities (local governments).
    • Treatment of past profit/loss.
auditor s review of isfs continued
Auditor’sreviewofISFs. . . continued
  • Some points auditors look at when reviewing ISFs: . . . continued
    • Procedures followed for billings that exceed original amounts.
    • Review of rate base to determine equal distribution of costs for services.
    • In the future, selectively reviewed.
reconciling budgetary basis with generally accepted accounting principles gaap
Reconciling Budgetary Basis with Generally Accepted Accounting Principles (GAAP)
  • Perspective difference
    • Fund classification
reconciling budgetary basis with gaap continued
Reconciling Budgetary Basis with GAAP . . . continued
  • Perspective difference - continued
  • State basis
    • Governmental
      • General Fund and other governmental cost fund.
reconciling budgetary basis with gaap continued1
Reconciling Budgetary Basis with GAAP . . . continued
  • Perspective difference . . . continued
  • State basis
    • Non-governmental
    • Not subject to annual appropriation
    • Monies other than General Fund and special taxes, fees, etc.
reconciling budgetary basis with gaap continued2
Reconciling Budgetary Basis with GAAP . . . continued
  • Perspective difference . . . continued
  • GAAP
    • Classified as governmental, proprietary, or fiduciary funds.
reconciling budgetary basis with gaap continued3
Reconciling Budgetary Basis with GAAP . . . continued
  • Basis difference
    • Advances and Loans
      • Budgetary basis -- recorded as expenditures
      • GAAP -- recorded as assets
reconciling budgetary basis with gaap continued4
Reconciling Budgetary Basis with GAAP . . . continued
  • Basis difference . . . continued
    • Encumbrances
      • Budgetary basis -- not recorded
      • GAAP -- recorded
reconciling budgetary basis with gaap continued5
Reconciling Budgetary Basis with GAAP . . . continued
  • Basis difference . . . continued
    • Contributed capital
      • Budgetary basis -- not recorded
      • GAAP -- recorded
additional information
Additional Information
  • http://www.dof.ca.gov/fisa/fisa.htm
    • Provides information or links to a variety of items:
      • UCM
      • CALSTARS
      • Budgets
      • Pro Rata and SWCAP
      • State Administrative Manual
      • Federal websites
establish funds administratively
Establish Funds Administratively
  • Necessary to . . .
    • Properly manage the State’s assets
    • Account for the financial activities
    • Deposit resources of the State
establish funds administratively continued
Establish Funds Administratively . . . continued
  • Comply with legal requirements
  • “Generally Accepted Accounting Principles”
  • Effective financial administration
financing
Financing
  • ISF must find ways to buy new equipment or other assets.
  • How?
    • General Fund appropriations
    • Capital contributions
    • Debt financing