Advanced financial accounting by baker chapter 17

17 Governmental Entities: Introduction and General Fund Accounting McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc All rights reserved Overview • Governmental entities have operating objectives different from those of commercial entities; therefore, governmental accounting is different from accounting for commercial enterprises 17-2 Overview • Nature of governmental entities: Collect resources and make expenditures to fulfill 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 17-3 Overview • Nature of governmental entities: Control mechanism - Use of comprehensive budgetary accounting 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 17-4 Overview • Nature of governmental entities: Many fund entities not record fixed assets or long-term debt in their funds An important objective of governmental financial reporting is accountability 17-5 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 17-6 History of Governmental Accounting – 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) 17-7 History of Governmental Accounting • 1984 – Governmental Accounting Standards Board (GASB) established – GASB Statement No • 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 34 • Established government-wide financial statements to be prepared on the accrual basis of accounting and an array of fund-based financial statements 17-8 History of Governmental Accounting • • 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 17-9 Major Concepts of Governmental Accounting • Elements of financial statements – Each definition uses the central focus of a resource, which is an item having a present capacity to provide, directly or indirectly, services for the governmental entity 17-10 Budgetary Aspects of Governmental Operations – – – – The ESTIMATED REVENUES CONTROL account is an anticipatory asset The APPROPRIATIONS CONTROL account is an anticipatory liability The excess of estimated revenues over anticipated expenditures is the budget surplus and is recorded to BUDGETARY FUND BALANCE—UNRESERVED Some approved budgets have budget deficits in which expected expenditures exceed anticipated revenue • These budgets are recorded with a debit to BUDGETARY FUND BALANCE—UNRESERVED 17-31 Accounting for Expenditures • The Expenditure Process – Step Appropriation • – Step Encumbrance • – An encumbrance is a reservation of part of the budgetary appropriation and is recognized at the time an order is placed for goods or services Step Expenditure • – The budget provides the appropriating authority to make future expenditures An expenditure and a corresponding liability are recorded when the governmental entity receives the goods or services ordered in step Step Disbursement • A disbursement is the payment of cash for expenditures 17-32 Accounting for Expenditures • Classification of expenditure transactions and accounts – Expenditures should be classified by fund, character, function (or program), organizational unit, activity, and principal classes of objects • Outstanding encumbrances at the end of the fiscal period: – May be allowed to lapse – May be carried over as nonlapsing spending authority 17-33 17-34 Accounting for Expenditures • Expenditures for inventory – Determining the method to account for the expenditure of inventories: • • Purchase method: Recognizes the entire expenditure for inventory in the period the supplies are acquired Consumption method: Recognizes expenditures for only the amount of inventory used in the period – The specific method to follow depends on the governing unit’s policy and how inventory expenditures are included in the budget 17-35 Accounting for Expenditures • Expenditures for inventory – Immaterial inventories need not be shown on the balance sheet – If the inventory is material, it is presented as an asset on the balance sheet • An amount equal to the inventory also should be shown as a reservation of the fund balance, indicating that that amount is no longer expendable 17-36 Accounting for Expenditures 17-37 Accounting for Expenditures • Accounting for fixed assets – Governmental funds: Recognized as an expenditure in the year the asset is acquired – Proprietary funds: Account for acquisitions of capital assets in the same manner as commercial entities • Works of art and historical treasures – For the purposes of government-wide financial statements, governments should capitalize these assets at their historical costs at acquisition or at their fair values at the date of the contribution 17-38 Accounting for Expenditures • Long-term debt and capital leases – The governmental funds record the proceeds from a bond issue as a debit to Cash and a credit to Bond Issue Proceeds, an otherfinancing source – Bond issue proceeds are not revenue because the bonds must be repaid – Bonds are not reported on the governmental funds’ balance sheets but only on the government-wide financial statements – Capital leases are accounted for in a manner similar to long-term debt 17-39 Accounting for Expenditures • Investments – GASB 31 established a general rule of fair market valuation for investments held by a government entity – Changes in the fair value of investments should be recognized as an element of investment income in the operating statement (or statement of activities) of each fund – GASB 40 requires footnote disclosures of the policies and the profiles of the government’s investment portfolios 17-40 Interfund Activities • • Interfund activities are resource flows between fund entities GASB 34 established four types of interfund activities: – – – – Interfund loans Interfund services provided and used Interfund transfers Interfund reimbursements 17-41 Interfund Activities 17-42 Overview of Accounting and Financial Reporting for the General Fund 17-43 Overview of Accounting and Financial Reporting for the General Fund 17-44 Additional Considerations • In February 2008, the GASB published an exposure draft (ED) of a proposed statement entitled “Fund Balance Reporting and Governmental Fund Type Definitions” – The proposed statement applies only to the five governmental fund types 17-45 ... charges – Fiduciary Funds 17- 16 Major Concepts of Governmental Accounting 17- 17 Major Concepts of Governmental Accounting 17- 18 Financial Reporting of Governmental Entities • The financial statements... Fund-based financial statements – Government-wide financial statements 17- 19 The Government Reporting Model 17- 20 Financial Reporting of Governmental Entities • Governmental funds – financial. .. accounting principles” – March 1979 – The National Council on Governmental Accounting (NCGA) issued its Statement No 1, “Governmental Accounting and Financial Reporting Principles” (NCGA 1) 17- 7