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1 Copyright © 2000 by Harcourt, Inc. All rights reserved.

29 CHAPTER 29

GOVERNMENTAL ACCOUNTING: THE SPECIAL-PURPOSE FUNDS

AND ACCOUNT GROUPS


29 FOCUS OF CHAPTER 29

The Remaining Governmental Funds The Account Groups The Proprietary Funds The Fiduciary Funds Financial Reporting to the Public:

General-Purpose Financial Statements Appendix: The GASB’s New Financial

Reporting Model (GAS 34 )


29 THE GOVERNMENTAL FUNDS: SPECIAL REVENUE FUNDS

Purpose: To account for the proceeds of specific revenue sources that are legally restricted to expenditure for specific purposes--excluding inflows for: Capital projects and Expendable trusts.

Inflows: Usually from specific taxes or nontax sources not directly related to services provided.

A General Fund “clone”--same structure.


29 THE GOVERNMENTAL FUNDS: CAPITAL PROJECTS FUNDS

Purpose: To account for the proceeds of financial resources that are to be used for the acquisition or construction of MAJOR CAPITAL FACILITIES--other than: Those financed by

Proprietary Funds and Trust Funds.


29 THE GOVERNMENTAL FUNDS: CAPITAL PROJECTS FUNDS

A temporary fund--at completion of the project: The fund is closed and The facility ’s cost is recorded as a fixed

asset in the General Fixed Asset Account Group (GFAAG).

Costs incurred during construction are charged to expenditures (outflows).

Inflows: Bond sales and transfers from GF.


29 THE GENERAL FIXED ASSET ACCOUNT GROUP (GFAAG)

Purpose: Accounts for fixed assets not accounted for in Enterprise Funds, Internal Service Funds,

or Trust Funds.Not a fund--a self-balancing set of

accounts: Debit balances of assets are offset by Credit balances describing the asset’s

source.



Categories of Assets: Land. Buildings. Improvements other than buildings. Equipment.

Construction work in progress (being performed by Capital Projects Funds).



Capitalization is optional for public domain or “infrastructure” fixed assets such as: Streets. Sidewalks. Bridges.



Recording Depreciation: OPTIONAL--May reflect Accumulated

Depreciation in the GFAAG. Depreciation Expense is never

reported in the operating statement of governmental funds.

Sales of Assets: Record proceeds as OTHER FINANCING SOURCES in General Fund.


29 THE GOVERNMENTAL FUNDS:DEBT SERVICE FUNDS

Purpose: To account for the servicing of debt initially recorded as a liability of the General Long-Term Debt Account Group (GLTDAG).

“Servicing of Debt” defined: The payment of (1) interest and (2) debt principal at maturity.

Unusual Features: Interest is not accrued until the due date. Principal payments are not recorded as

liabilities until the due date.


29 THE GENERAL LONG-TERM DEBT ACCOUNT GROUP (GLTDAG)

Purpose: To account for long-term debt thatis not properly shown in Proprietary Funds or Trust Funds. GLTD includes:DEBT issuance liabilities having a

maturity date of more than one year at the time of issuance.

NONDEBT issuance liabilities that would not “normally be liquidated with expendable available financial resources.” The second category is a problem--see slide 15.



The GLTDAG is not a fund--it is a self-balancing set of accounts: Credit balances of liabilities are offset by Debit balances that are not assets but

instead are mere balancing amounts intended solely to prevent reporting an “unbalanced” combined balance sheet.



Examples of Debt Recorded in GLTDAG: General obligation bonds (usually issued to

pay for capital projects). Claims and judgments. Compensated absences (vacation & sick pay). Unfunded pension contributions. Capital leases payable. Special assessment debt having

government commitment (explained later).



Consequences of Reporting “Nondebt Issuance Liabilities” in the GLTDAG: It enables governments to

magically conceal whetheror not they are livingwithin their means.

It results in the “operating statement” beinga “Statement of ALL of the Revenues and SOME of the Costs Incurred This Period.”



BAD NEWS:Many governmental units have tons of nondebt issuance liabilities that will have to bepaid by future generations (which may find it quite burdensome or impossibleto pay).



GOOD NEWS:GASB issued GAS 34 in 6/99. It requires financial statementsthat measure the flow of economic resources on the accrual basis.Such statements reveal:(1) the cost of providing services.(2) the change in the financial condition.



GOOD NEWS:

GAS 34 becomes effective for years beginning after 6/15/01.

See Chapter Appendix for details.



Liquidation of GLTD: Debt Issuance Liabilities: At the

maturity date , the liability is transferred to a Debt Service Fund.

Nondebt Issuance Liabilities: At the payment date , the liability is transferred to the General Fund.

Note that GLTD is not removed from the GLTDAG whenit becomes a current liability (due within 12 months).


29 SPECIAL ASSESSMENTS

Special Assessments: Assessments made against properties that directly benefit from improvements: Examples: Sidewalks, street lighting.

Special Assessment Bonds are usually issued to pay for the improvements. All construction activity takes place in a

Capital Projects Fund.


29 SPECIAL ASSESSMENTS Bond Repayment: Assessees pay taxes over

several years to pay off the bond issue. Special Assessment Debt may or may not

have the backing of the governmental unit in the event of default.

Special Assessment Debt (SAD) Categories: SADs With Government Commitment.

(This is the usual situation.) SADs Without Government Commitment.


29 SPECIAL ASSESSMENTS

SADs With Government Commitment: A Debt Service Fund is used to account for :

All collections from assessees. All payments to bondholders.

The bond liability is recorded in the GLTDAG. Unique Item: The entire tax assessment is

recorded as Property Tax Receivables--the noncurrent portion is Deferred Revenues.


29 SPECIAL ASSESSMENTS SADs Without Government Commitment:

An Agency Fund is used to account for: All collections of property taxes

from assessees. All payments to bond holders. No liability is recorded in the GLTDAG.

The governmental unit is viewed merely as an agent for the assessees and the bondholders.


29 THE PROPRIETARY FUNDS: INTERNAL SERVICE FUNDS

Purpose: To account for activities that provide services solely to other departments.

Manner of accounting parallels that of commercial businesses (accrual basis & measurement of flow of economic resources). Balance sheet reports Long-Term Debt.


29 THE PROPRIETARY FUNDS: ENTERPRISE FUNDS

Purpose: To account for activitiesthat provide services primarily to the public.

Examples: Gas, electric, water utilities. Manner of accounting parallels that of

commercial businesses (accrual basis & measurement of flow of economic resources). Balance sheet reports Long-Term Debt.


29 THE FIDUCIARY FUNDS:AGENCY FUNDS

Purpose: To serve as conduits for the transfer of money--purely custodial in nature.

ASSETS ALWAYS EQUAL LIABILITIES.

The following items do not exist: A fund balance/equity. An operating statement.

A = L


29 THE FIDUCIARY FUNDS:TRUST FUNDS

Purpose: To account for the investing and using of money in accordance with stipulated provisions of trust indenture agreements or statutes.

Nonexpendable Trust Funds: Principal must be preserved intact. Accounted for in essentially the same

manner as proprietary funds.


29 THE FIDUCIARY FUNDS:TRUST FUNDS

Expendable Trust Funds: Principal may be spent. Accounted for in essentially the same

manner as governmental funds.


29 FINANCIAL REPORTING TO THE PUBLIC: The CAFR

The Comprehensive Annual Financial Report (CAFR): Uses a “reporting pyramid” concept.


29 FINANCIAL REPORTING TO THE PUBLIC: The CAFR

CAFR (continued): Four levels of financial information--the

lower the level the more detailed the information provided:

Level 1: Combined financial statements. Level 2: Combining financial statements. Level 3: Individual fund and account

group statements. Level 4: Schedules.


29 FINANCIAL REPORTING TO THE PUBLIC: GENERAL PURPOSE F/S

Level 1: Combined Financial Statements: Contains 6 specified statements that present the governmental unit’soverall financial position andoperating results as a whole. Called the General-Purpose Financial

Statements. Similar in concept to consolidated

statements for commercial enterprises.


29 FINANCIAL REPORTING TO THE PUBLIC: GENERAL PURPOSE F/S

Level 1: Combined Financial Statements--The 6 Types of Required Statements: 1 Balance Sheet (all fund types & A/Gs). 3 Operating Statements:

One for governmental type funds. One for proprietary type funds. One budgetary comparison statement.

1 Cash Flow Statement for Proprietary Type Funds.

1 special statement for fiduciary trust funds.


29 End of Chapter 29 (Appendix material follows)

Time to Clear Things Up--Any Questions?


29 Appendix: GASB’s New Financial Reporting Model (GAS 34) (issued in June 1999) [effective for years beginning after 6/15/01-- earlier application is encouraged.]


29 Appendix:Government-Wide Statements

Requires two major new statements that: Are presented on the accrual basis. Measure the flow of economic resources (same measurement flowas in commercial accounting ).

Are called the “government-wide” statements.


29 Appendix: Government-Wide Statements

The two new statements are the: Statement of Net Assets (includes all

GFA and GLTD). Statement of Activities (includes

depreciation expense). These two new statements are presentedin addition to the Fund-Based Financial Statements (7 of them).



These two government-wide statements enable assessment of whether: Current-year citizens paid

for the services they received in the current year, or ifthe costs of services wereshifted to future-year citizens

#1

FREE RIDE



A government’s financial position has improved or deteriorated as a result ofthe year’s operations.

#2



Each of the two government-wide statements must distinguish between: Governmental activities and business-

type activities of the primary government.

The total primary government and its discretely presented component units by reporting each in separate columns.

#2

#1



Fiduciary activities are:Excluded from the

government-wide statements if their resources are NOT available to finance the government’s programs.


29 Appendix: Government-Wide Statements

IMPORTANT FEATURES of the government-wide Statement of Net Assets: Reports all “general capital assets”--including infrastructure.

Reports all debt--including GLTD.

#1

#2



IMPORTANT FEATURES of the government-wide Statement of Net Assets (cont.): Reports net assets in 3 categories:

Invested in capital assets, net of related debt.

Restricted. Unrestricted.

#3

#2

#3

#1



IMPORTANT FEATURES of the government-wide Statement of Net Assets (cont.): In general, interfund balances (loans, advances, and due to and due from accounts) are eliminated.

#4

#1



IMPORTANT FEATURES of the government-wide Statement of Activities: Presented in at least the same level of

detail provided in the governmental fund statements (generally, expenses and program revenues by function--e.g., public safety, public health, and recreation).

#1



IMPORTANT FEATURES of the government-wide Statement of Activities: Format must report expenses reduced

by program revenues---results in a measurement of “net (expense) revenue” for each of the government’s functions.

#2



IMPORTANT FEATURES of the government-wide Statement of Activities (cont.): Program expenses include all direct expenses.

Depreciation expense thatcan specifically be identified with a function is reported as a direct expense.

Allocated overhead and other indirect expenses to individual programs arepresented in a separate column.

#3



IMPORTANT FEATURES of the government-wide Statement of Activities (cont.): Reports extraordinary items (items

beyond control of mgt.) separately. Reports special items (items within

the control of mgt.) separately.

#4

#5



IMPORTANT FEATURES of the government-wide Statement of Activities (cont.): In general, interfund activity is eliminated: Interfund services provided and used. Interfund transfers. Other interfund activity.

#6


29 Appendix:Fund-Based Statements--What’s OLD?

SOS (same old stuff) insofar as: Measurement basis--

Flow of current financial resources. (generally cash and assets that can easily be converted to cash)

Basis of accounting-- Modified accrual basis.


29 Appendix:Fund-Based Statements--What’s OLD?

Purpose of fund-based statements: These statements show the short-

term performance of individual funds using the same measures that governments use to manage their money.


29 Appendix:Fund-Based Statements--What’s NEW

A SHARPENED FOCUS: Now must report information

about the mostimportant funds--the “major funds” (including the General Fund).



Major funds are those whose revenues, expenditures/expenses, assets, or liabilities are at least: 10% of the total for their fund category

or type (governmental or enterprise) and

5% of the aggregate amount for all governmental and enterprise funds.



Nonmajor funds are:Aggregated andReported in a separate column (labeled “all other funds”).



IMPORTANT FEATURES of the fund-based statements: Must present two summary reconciliations that show the interplay between the two types of statements. Both types of statements together

constitute “an integrated set of statements.”

#1



IMPORTANT FEATURES of the fund-based statements (cont.): In general, interfund activity will be reported separately: Interfund services provided and used. Interfund transfers. Other interfund activity Interfund open balances.

#2



IMPORTANT FEATURES of the fund-based statements (cont.):Internal Service Funds

are aggregated and presented in a separate column on the proprietary fund statements.

#3



IMPORTANT FEATURES of the fund-based statements (cont.): Governmental Funds (no substantive

changes): Balance Sheet.

Displays fund balances by reserved and unreserved categories.

Statement of Revenues, Expenses, and Changes in Fund Balances

#4



IMPORTANT FEATURES of the fund-based statements (cont.): Proprietary Funds:

Statement of Net Assets (or Balance Sheet):Displays net assets using the same

categories used in government-wide statements.

Distinguishes between restricted and unrestricted assets.

#5



IMPORTANT FEATURES of the fund-based statements (cont.): Proprietary Funds (cont.):

Statement of Revenues, Expenses, and Changes in Fund Net Assets (or Equity):Must distinguish between operating and nonoperating revenues and expenses.

#6



IMPORTANT FEATURES of the fund-based statements (cont.): Proprietary Funds (cont.):

The all-inclusive change in fund net assets includes (1) capital contributions; (2) contributions to term and permanent endowments, (3) special items, (4) extraordinary items, and (5) transfers.

Cash flow statement must use the direct method.

#7


29 Appendix:Reporting Capital Assets

Capital assets (which are reported at historical cost) must now include:Infrastructure assets.


29 Appendix:Reporting Infrastructure Assets

Infrastructure Assets: Long-lived capital assets that normally

are (1) stationary in nature and (2) normally can be preserved for a significantly greater number of years than most capital assets.

Examples: Roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems.


29 Appendix:Infrastructure Assets--Depreciation

Noneligible Infrastructure Assets :Must be depreciated.

(See following slideregarding eligibleinfrastructure assets.)


29 Appendix:Infrastructure Assets--Depreciation

Eligible Infrastructure Assets : Need not be depreciated. Defined: Assets being (1) managed using

an asset management system having certain characteristics (described in GAS 34 ) and (2) preserved approximately at or above an established and disclosed condition level. Condition assessments must be

performed at least every 3 years.


29 Appendix: Revised Fund Structure--Permanent Funds Created

Permanent Funds--A new governmentalfund-type: Accounts for endowment-type situations in

which: Only the endowment’s earnings can be

used for purposes that support the reporting government’s programs.

Benefits the reporting government or its citizenry.


29 Appendix: Revised Fund Structure--Private-Purpose Trust Funds Created

Private-Purpose Trust Funds--A new fiduciary fund-type: Accounts for property held under trust

arrangements in which: Both the principal and income

benefit:Individuals,Private organizations, orOther governments.


29 Appendix: Revised Fund Structure--Certain Fund-types Deleted

No longer have Expendable and Nonexpendable Trust funds.

The only fiduciary funds that now exist are: Pension (and other employee benefit) Trust

Funds. Investment Trust Funds (created by

GAS 31 ). Private-Purpose Trust Funds. Agency Funds.


29 Appendix: Required Supplementary Information (RSI)

RSI includes: Budgetary comparison statements for

the General Fund and each major Special Revenue Fund. Use both original budget and Any amended budget..

Management’s discussion and analysis (the MD&A).


29 End of Chapter 29 Appendix

Time to Clear Things Up--Any Questions?

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flow ofeconomic

internal service

accrual basisamp

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combined financial