Governmental Accounting Made Easy pdf

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For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800- 762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data: Ruppel, Warren. Governmental accounting made easy / Warren Ruppel. p. cm. Includes index. ISBN 0-471-64868-X (cloth) 1. Public finance—United States—Accounting. I. Title. HJ9801.R86 2004 657'.835' 00973—dc22 2004005513 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Contents Preface vii Chapter 1 Introduction and Background 1 What Are Generally Accepted Accounting Principles? 1 Who Sets Generally Accepted Accounting Principles for Governments? 5 Do Governments Need to Comply with Generally Accepted Accounting Principles? 9 Why Is Governmental Accounting and Financial Reporting Different from Commercial and Not-for- Profit Accounting and Financial Reporting? 11 To What Entities Do Governmental Generally Accepted Accounting Principles Apply? 16 Chapter 2 Basic Governmental Accounting Concepts 19 Understanding the Different Bases of Accounting 20 Understanding What Measurement Focuses Are Used by Governments 26 Defining and Understanding the Nature of Assets 29 Defining and Understanding the Nature of Liabilities 43 Defining and Understanding the Nature of Net Assets 49 Chapter 3 Understanding Fund Accounting 53 Fund Fundamentals 54 Governmental Funds 57 Proprietary Funds 74 Fiduciary Funds 81 Chapter 4 Basics of Governmental Financial Statements 86 General-Purpose Financial Statements 87 Management’s Discussion and Analysis 87 The Basic Financial Statements 91 Required Supplementary Information 132 Comprehensive Annual Financial Report 134 Chapter 5 Understanding the Reporting Entity 143 Background 144 Accountability Focus 145 Financial Reporting Entity Defined 146 Display of Component Units 157 Chapter 6 Revenues from Nonexchange Transactions 165 Classes of Nonexchange Transactions 166 Accounting Requirements 168 Property Taxes 171 Income and Sales Taxes, and Other Derived Tax Revenues 173 Adjustments for the Accrual Basis of Accounting 176 Grants and Other Financial Assistance 178 Chapter 7 Capital Assets 183 Where Are Capital Assets Recorded in the Financial Statements? 184 Recording and Valuing Capital Assets 185 Understanding Depreciation 190 Using the Modified Approach in Lieu of Depreciating Infrastructure Assets 194 The Basics of Capitalized Interest 198 Capital Assets Resulting from Capital Lease Transactions 203 Impairments of Capital Assets 212 Chapter 8 Accounting for Pensions 219 GASBS 27 Requirements for Defined Benefit Plans 221 Calculation of the ARC 224 Parameters for Actuarial Calculations, Including the ARC 225 Net Pension Obligation 234 Recording Pension-Related Assets, Liabilities, and Expenditures/Expenses 234 Pension Disclosures 236 Employers with Defined Contribution Plans 236 Chapter 9 Sundry Accounting Topics 238 Accounting for Investments 238 Reporting Unrealized Gains or Losses 241 Investment and Deposit Disclosures 242 Compensated Absence Accruals 243 Landfill Closure and Postclosure Care Costs 251 Derivatives, Including Interest Rate Swaps 254 Securities Lending Transactions 260 Chapter 10 Upcoming Developments in Governmental Accounting 265 Other Postemployment Benefits 266 Economic Condition Reporting—Statistical Section 267 Derivatives and Hedging 269 Pollution Remediation Obligations 269 Net Asset and Fund Balance Reporting 270 Service Efforts and Accomplishments (SEA) Reporting 270 Index 271 Preface When I first began discussing the concept of a book on governmental ac- counting for nonaccountants, the publisher, John Wiley & Sons, Inc., asked a good question: “Who would be interested in a book on governmental accounting who is not an accountant?” The quick answers were obvious—bond underwriters and investors, lawyers, elected officials, financial and other managers working in government, labor unions, and so forth. On second thought, anyone who is im- pacted by a state or local government (this includes virtually everyone in the United States) might have an interest in understanding what at times seems like the overly complex and confusing world of governmental accounting. Being able to more intelligently read and understand the financial statements prepared by governments and understanding some of the key accounting concepts that under- lie those financial statements can help nonaccountants better understand the fi- nancial affairs of governments. The goal of this book is to provide a broad range of information about gov- ernmental accounting and financial reporting that will be useful to people who either have no (or very little) accounting background or have some accounting knowledge in the commercial or not-for-profit accounting areas, but do not un- derstand governmental accounting. Over the past few years governments have been implementing a new financial reporting model that has resulted in a radical change in the way that governmental financial statements are presented. Frankly, there are very few people who actually understand what these new financial statements are trying to communicate. This book addresses only financial state- ments prepared under the new “GASB 34 reporting model,” which will be de- scribed in considerable detail. The information in this book is presented in as simple and as understandable a format as possible. This book will not make a governmental accountant out of you, nor will it give you all of the information that you would need to prepare a set of financial statements for a government. If you want to be a governmental accountant or prepare financial statements for a government, you might be inter- ested in the current year’s edition of GAAP for Governments, also published by John Wiley & Sons, Inc. and written by me. The sequence of chapters in the book is designed to gradually build an un- derstanding of governmental accounting and financial statements. Chapter 1 de- scribes what is meant by governmental accounting and to what types of entities it applies. Chapter 2 discusses some basic accounting concepts underlying all gov- ernmental accounting and financial reporting, while Chapter 3 discusses fund accounting. Chapter 4 describes the basic financial statements prepared by gov- ernments under the new financial reporting model mentioned above, including the government-wide financial statements and the fund financial statements. Chapters 5 through 9 examine some of the more specific and complicated accounting is- sues often found in governmental financial statements such as defining the re- porting entity and accounting for revenues, capital assets, and pensions. Finally, Chapter 10 discusses some of the upcoming changes that are expected to impact governmental accounting and financial reporting in the near future as a result of the issuance of new accounting standards and pronouncements. I would like to thank John DeRemigis of John Wiley & Sons, Inc. for his steady direction of the project, as well as Judy Howarth for her editorial as- sistance. As always, I am truly lucky to have a supportive family—my wife, Marie, and sons Christopher and Gregory. Warren Ruppel New York, New York September 2004 About the Author Warren Ruppel, CPA, has over 20 years of expertise in governmental and not-for-profit accounting. He currently is the assistant comptroller for accounting of the City of New York, where he is responsible for all aspects of the city’s accounting and financial reporting. He began his career at KPMG Peat Marwick after graduating from St. John’s University, New York. He later joined Deloitte & Touche to specialize in audits of not-for-profit organizations and governments. Mr. Ruppel has also served as the chief fi- nancial officer of an international not-for-profit organization and as a partner in a small CPA practice. Mr. Ruppel has served as instructor for many training courses, including specialized governmental and not-for-profit programs and seminars. He has also been an adjunct lecturer of accounting at the Bernard M. Baruch College of the City University of New York. He is the author of four other books, OMB Circular A-133 Audits, Not-for-Profit Organization Audits, GAAP for Governments, and Not-for-Profit Accounting Made Easy. Mr. Ruppel is a member of the American Institute of Certified Public Accountants as well as the New York State Society of Certified Public Ac- countants, where he serves on the Governmental Accounting and Auditing and Not-for-Profit Organizations Committees. He is a past president of the New York Chapter of the Institute of Management Accountants. Mr. Ruppel is a member of the Government Finance Officers Association and serves on its Special Review Committee. [...]... understanding governmental accounting by explaining some of the important concepts that comprise the framework of governmental accounting and financial reporting Specifically, this chapter will discuss the following: • What are generally accepted accounting principles? • Who sets generally accepted accounting principles? • Do governments need to comply with generally accepted accounting principles? • Why is governmental. .. find an accounting rule that results in that specific accounting principle On the opposite side of the spectrum, accounting rule makers (discussed in the next section) issue accounting standards that specify accounting treatments for specific types of transactions In between these two extremes are various authoritative accounting resources that provide interpretations and analyses of existing accounting. .. might lend some confusion as to what organization sets the accounting rules for governments and governmental entities The National Council on Governmental Accounting (NCGA) was the name of the organization that set accounting principles for governments prior to the creation of the GASB Some of its accounting principles resulting from its “municipal accounting standards” and other standards are still in... financial information is presented using what- Why is Governmental Accounting Different? 11 ever accounting basis is used to prepare the budget, meaning that there is no accounting requirement that this information be prepared in accordance with GAAP WHY IS GOVERNMENTAL ACCOUNTING AND FINANCIAL REPORTING DIFFERENT FROM COMMERCIAL AND NOTFOR-PROFIT ACCOUNTING AND FINANCIAL REPORTING? This is an important... recognized In comparing governmental accounting to nongovernmental entities, the reader should know that the accrual basis of accounting is the only accounting basis that is acceptable for commercial enterprises and not-for-profit organizations in preparing those organizations’ financial statements in accordance with generally accepted accounting principles Modified Accrual Basis of Accounting As we will... depreciation Both of these methods are acceptable under GAAP As accounting rule makers address more and more accounting issues, the existence of more than one acceptable method of accounting for the same transaction is gradually, but steadily, declining Often accounting rule makers select accounting areas to address because there is a diversity of accounting treatments for the same type of transaction In... to eliminate the diversity of accounting treatments for similar transactions Accordingly, once an accounting area is addressed by an accounting rule maker, usually only one acceptable method of accounting for this area results However, the reader should not be surprised by the remaining flexibility in some accounting treatments when trying to understand and compare the accounting for the same transaction... equity is reflected in many of the accounting requirements established by the GASB since its creation 16 Introduction and Background TO WHAT ENTITIES DO GOVERNMENTAL GENERALLY ACCEPTED ACCOUNTING PRINCIPLES APPLY? Throughout this chapter there have been a number of references to accounting principles followed by governments and governmental entities compared to accounting principles applied to commercial... Internal Revenue Code However, these organizations are usually considered governmental not-for-profit organizations that should follow governmental generally accepted accounting principles The AICPA Audit and Accounting Guide Not-for-Profit Organizations (the AICPA Guide) defines governmental organizations (i.e., ones that should follow accounting principles for governments) as “public corporations and bodies... ACCEPTED ACCOUNTING PRINCIPLES FOR GOVERNMENTS? Generally accepted accounting principles for governments are basically set by the Governmental Accounting Standards Board, or as it is commonly called, the GASB The GASB is a private organization that is financially controlled by the Financial Accounting Foundation (FAF), which is a not-for-profit organization Readers with some familiarity with commercial accounting . Cataloging-in-Publication Data: Ruppel, Warren. Governmental accounting made easy / Warren Ruppel. p. cm. Includes index. ISBN 0-471-64868-X (cloth) 1. Public finance—United States Accounting. I. Title. HJ9801.R86. of governmental accounting and financial statements. Chapter 1 de- scribes what is meant by governmental accounting and to what types of entities it applies. Chapter 2 discusses some basic accounting. accepted accounting principles? • Who sets generally accepted accounting principles? • Do governments need to comply with generally accepted accounting principles? • Why is governmental accounting