Chapter Seventeen Accounting for State and Local Governments (Part II) Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Learning Objective 17-1 Account for lease contracts where the state or local government finds itself as either lessor or lessee 17-2 Accounting for Leases For accounting purposes, leases must be identified as either Capital or Operating GASB has adopted the same four criteria applied by FASB to identify a capital lease The lease transfers ownership at the end of the lease term The lease has a bargain purchase option The lease term ≥75% of the asset’s estimated useful life The minimum lease payments > 90% of the PV of the asset 17-3 Learning Objective 17-2 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill 17-4 Solid Waste Landfill The operation of a solid waste landfill creates long-term liabilities The EPA imposes requirements that will require large outlays of resources to close a landfill in the future and to deal with such post closure activities as groundwater monitoring 17-5 Solid Waste Landfill Government-Wide Financial Statements Record a portion of the expected closing costs, pro-rated as a percentage of capacity used, each year as an expense and a liability 17-6 Solid Waste Landfill Fund Financial Statements Make no entry to record a liability Record cash payments made to fund the future obligation as “expenditures” 17-7 Learning Objective 17-3 Explain the reporting of a net pension liability resulting from a defined benefit pension plan provided to employees by a state or local government 17-8 Defined Benefit Pension Plans Retirees are usually entitled to future benefits based on a contractually set formula Future pension obligations of both companies and state governments collectively amount to trillions of dollars Obligations can be measured individually in billions of dollars 17-9 Learning Objective 17-4 Record the donation and acquisition of works of art and historical treasures 17-10 Learning Objective 17-7 Explain the makeup of a primary government and its relationship to component units and related organizations as well as the combination of governments 17-19 Primary Government and Component Units Reporting units start with a primary government unit (town, city, county or state) Primary government must include all funds, activities, organizations, agencies, offices and departments that are not legally separate from it May be difficult to determine whether certain activities should be included Any unit legally separate from the primary government, but where financial accountability still exists, must be included Legally separate activities closely connected to the primary government must be included if omission from the financial statements would be misleading 17-20 Special Purpose Governments Special purpose governments carry out only a single function or a limited number of functions for the public Common examples include: - public school districts - colleges and universities - water utilities - hospitals - transit authorities - library services 17-21 Mergers, Acquisitions, and Transfers of Operations Combinations and realignment transactions are common GASB views a combination as a merger if two legally separate entities are brought together to form a new entity and no significant consideration is exchanged A merger also exists if one of the entities ceases to exist while the other continues In a merger, net carrying values for all assets, deferred outflows of resources, liabilities and deferred inflows of resources are combined 17-22 Learning Objective 17-8 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements 17-23 General Purpose Financial Statements General purpose statements are made up of governmentwide statements that present financial information for both governmental and business-type activities and fund financial statements created for governmental, proprietary, and fiduciary funds Government-wide statements measure economic resources and use accrual accounting Governmental funds use the current financial resources measurement focus and modified accrual accounting The proprietary and fiduciary funds use accrual accounting to report all economic resources 17-24 Government-Wide Statements Statement of Net Position Designed to report the economic resources controlled by the government Include all assets, capital assets, and liabilities (current and long-term) Capital assets other than land, inexhaustible works of art, and construction in progress are reported net of accumulated depreciation In the Net Position section, several amounts are restricted Restrictions are reported if usage of the resources has been specified 17-25 Government-Wide Statements Statement of Activities The statement of activities presents information about various functions of state or local government Expenses are shown by function Interest on general long-term debt is normally an indirect expense, frequently shown as a separate function Related program revenues should be shown for each function Show the net revenue figure for each function General revenues are shown at the bottom of the statement 17-26 Balance Sheet—Governmental Funds —Fund Financial Statements Reports only current financial resources and uses modified accrual accounting Does not include proprietary funds, component units, or fiduciary funds Separate columns for the General Fund and each major fund In the Fund Balance section, identify both the “restricted” and “committed” amounts 17-27 Statement of Revenues, Expenditures, & Other Changes in Fund Balances Net revenues are not identified for specific functions Report ‘expenditures,’ not expenses Other financing sources and uses are shown to reflect long-term debt, sale of property, and transfers between funds Reconcile the ending fund balance and the ending change in net assets 17-28 Fund Financial Statements Proprietary Funds Statement of Net Position Shows individual information about major enterprise funds and all internal service funds A single column for the summation of all other enterprise funds Provides a combined total for all of the enterprise funds Statement of Revenues, Expenses, & Other Changes in Fund Net Assets Shows information about the same funds Revenues, expenses, nonoperating items, and transfers reported here 17-29 Fund Financial Statements Proprietary Funds A proprietary fund operates similarly to a for-profit business, and information about cash flows is considered just as vital However, the physical structure is not entirely the same Statement of Cash Flows Four sections… 1) Cash flows from operating activities 2) Cash flows from noncapital financing activities 3) Cash flows from capital and related financing activities 4) Cash flows from investing activities Note that the Direct Method is required for presentation 17-30 Learning Objective 17-9 Understand the presentation of financial statements for a public college or university 17-31 Public Colleges and Universities Public and private schools educate students, charge tuition and other fees, conduct scholarly research, maintain libraries and sports teams, operate cafeterias, and museums, etc Differences in measurement basis and form of financial statements for private and public colleges or universities: Private colleges and universities follow FASB Accounting Standards Codification Public colleges and universities follow the same guidelines as state and local governments 17-32 Public Colleges and Universities A large amount of funding for public schools comes from governments, lessening reliance on tuition and fees With public funding, public schools often raise and accumulate a smaller amount of endowment funds than private colleges and universities Public universities may operate similarly to businesses but they are special purpose governments and accountable to the citizenry Most public schools only need to prepare a single set of statements equivalent to those of an enterprise fund 17-33 ... and use accrual accounting Governmental funds use the current financial resources measurement focus and modified accrual accounting The proprietary and fiduciary funds use accrual accounting to... contracts where the state or local government finds itself as either lessor or lessee 17-2 Accounting for Leases For accounting purposes, leases must be identified as either Capital or Operating GASB... —Fund Financial Statements Reports only current financial resources and uses modified accrual accounting Does not include proprietary funds, component units, or fiduciary funds Separate