Chapter Sixteen Accounting for State and Local Governments, Part I Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Learning Objective 16-1 Explain the history of and the reasons for the unique characteristics of the financial statements produced by state and local governments 16-2 Importance of Governmental Accounting Why is it different than “for profit” businesses? Allocation of limited resources to unlimited causes Absence of profit motive primary purpose is to provide services in accordance with public policy goals Serves a broader group of stakeholders Exist longer and are not typically subject to dissolution 16-3 Governmental Accounting Governmental Accounting Standards Board (GASB), created in 1984, serves as the public sector counterpart of FASB In Concepts Statement No 1, GASB identified three basic groups of users of governmental accounting information: Citizenry Legislative and oversight bodies Investors and creditors Requires two sets of financial statements 16-4 Learning Objective 16-2 Differentiate between the two sets of financial statements produced by state and local governments 16-5 Two Sets of Financial Statements GASB requires two distinct sets of statements by state and local governments, each with its own unique principles and objectives Fund Financial Statements Government-wide Financial Statements Show restrictions on the use of resources, Report all revenues and costs with a long and report current revenues and term focus Of interest to creditors, to assess expenditures from certain activities the likelihood of being paid 16-6 Fund Financial Statements Report on individual government activities during the current year Primary measurement focus is current financial resources especially cash and receivables Assess fiscal accountability in raising and utilizing money The timing of recognition, in most cases, is based on modified-accrual accounting 16-7 Government-wide Financial Statements Report on financial affairs as a whole Assess operational accountability Help users evaluate government’s financial decisions and long-term stability Permits stakeholders to: • • • • Determine the government’s overall financial position Understand cost of services See how programs are financed See extent government has invested in capital assets Focus on all economic resources Utilizes accrual accounting 16-8 Two Sets of Financial Statements Comparison of the two sets of financial statements required by GASB 16-9 Learning Objective 16-3 Understand the reason that fund accounting has traditionally been a prominent factor in the internal recording of state and local governments 16-10 Statement of Revenues, Expenditures, & Changes in Fund Balances Governmental accounting does not require a stockholders’ equity section on the balance sheet The term “fund balance” is used to report the amount of the net current financial resources at that time for each fund These fund balances are reported within five categories: Fund-Balance—Nonspendable Fund-Balance—Restricted Fund-Balance—Committed Fund-Balance—Assigned Fund-Balance—Unassigned 16-35 Learning Objective 16-6 Record the passage of a budget as well as subsequent encumbrances and expenditures 16-36 Procedures - Importance of Budgets The budget serves several purposes: – Expresses public policy – Expresses financial intent – Provides control by establishing spending limits – Compares actual results to the budget as a means of evaluating performance – Indicates whether there is sufficient revenue to pay for expenditures 16-37 Procedures – Recording Budgetary Entries Example A town enacts a motel excise tax to promote tourism and conventions For 2015, the tax is expected to generate $490,000 in Special Revenues The city council authorizes expenditures of $420,000 including $200,000 for salaries, $30,000 for utilities, $110,000 for supplies, and $80,000 for advertising 16-38 Procedures – Encumbrances In a governmental unit, purchase commitments and contracts are recorded, even though they may not yet represent liabilities A recorded commitment or contract is an “encumbrance.” When the purchased item is received, the expenditure account is recognized and the encumbrance account is removed Budget Encumbrance Expenditure 16-39 Procedures for Encumbrances Compared For Fund-Based Financial Statements: An entry is required to record the encumbrance An entry is required when the item is received At the end of the fiscal period, remaining commitments are removed by reversing the original journal entry For Government-Wide Financial Statements: No entry is required to record the encumbrance An entry is required when the order is filled 16-40 Learning Objective 16-7 Understand the reporting of capital assets, supplies, and prepaid expenses by a state or local government 16-41 Procedures – Fixed Assets Virtually no assets are recorded within the fund statements for governmental funds The expenditure for capital assets is recorded at acquisition and closed out at the end of the fiscal period Fund financial statements report the amount expended each period by the governmental funds for capital assets and infrastructure items 16-42 Learning Objective 16-8 Determine the proper timing for the recognition of revenues from various types of nonexchange transactions 16-43 Procedures – Recognition of Revenues Revenue for governmental organizations differs from revenue for business Governmental revenue is not true revenue for which an earnings process exists The revenue is derived from “nonexchange transactions” for which the government does not provide a direct and equal benefit for the amount received Nonexchange Transactions Classifications Derived Tax Revenues Imposed Nonexchange Revenues Government-mandated Nonexchange Transactions Voluntary Nonexchange Transactions 16-44 Learning Objective 16-9 Account for the issuance of long-term bonds and the reporting of special assessment projects 16-45 Procedures – Issuance of Bonds Bond proceeds are not revenue, but the proceeds serve as a major source of financing for many sate and local governments The proceeds must be repaid, so the government recognizes no revenue Government-wide financial statements recognize cash received and debt incurred Fund financial statements recognizes the cash received, but does not record the debt as a claim on current financial resources 16-46 Special Assessments - Accounting Governments may provide improvements or services that benefit particular properties They may assess the costs, in total or in part, to the property owners for paving and constructing: – Streets – Curbs – Sidewalks – Sewers and drains – Water lines Usually financed by debt issuance and liens on the benefited property (to ensure reimbursement) 16-47 Learning Objective 16-10 Record the various types of monetary transfers that occur within the funds maintained by a state or local government 16-48 Interfund Transactions Commonly used, particularly monetary transfers from the General Fund Normally reported as “other financing source” and “other financing use” within the fund-based financial records Intra-activity transactions between two government or two enterprise funds are not reported in the government-wide financial statements because they create no net impact Interactivity transactions occur between governmental and enterprise funds and are reported on government-wide financial statements 16-49 ... Fund Accounting Classification All funds fall into one of three broad classifications Governmental Funds Proprietary Funds Fiduciary Funds Accounting for activities Accounting for business- Accounting. .. accrual accounting 16-8 Two Sets of Financial Statements Comparison of the two sets of financial statements required by GASB 16-9 Learning Objective 16-3 Understand the reason that fund accounting. .. Fund Accounting Governmental units report a diverse array of activities financed from numerous resources Governments operate through many relatively independent departments and functions Accounting