FUND ACCOUNTING

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Chapter Two

• FUND ACCOUNTING

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Learning Objectives

• After studying Chapter 2, you should understand
• The nature of funds.
• The hierarchy classification of fund balances.
• The three basic fund types of a state or local
  government
• -Governmental funds,
• -Proprietary funds, and
• -Fiduciary funds
• The main components of a CAFR.
• The primary F/S issued by governments.
• The difference between the current and the
  old accounting models.

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Business

• One company
• Fund used as an informal term (multiple
  meanings).
• May refer to working capital (current net assets)
• May refer to cash or investments available
• May have other definitions
• The company is a single fiscal and accounting
  entity.
• A L E (E usually called Owners Equity)

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Governmental

• Multiple entities
• --Fund used as a formal term (single meaning)
• Fund is a fiscal and an accounting entity with a
  self-balancing set of accounts.
• Each fund is like its own entity
• --In other words, a fund is an entity with its
  own set of books (i.e., chart of accounts ,
  general journal, general ledger, trial balances,
  and financial statements)
• Fund accounting uses the equation
• Assets Liabilities Fund balance (often
  referred to as net assets)

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GASB Statement No. 54

• In February 2009, the GASB issued Statement
  No. 54, Fund Balance Reporting and Governmental
  Fund Type Definitions, to improve the usefulness,
  and understandability of governmental fund
  balance information.
• The statement is effective for years beginning
  after June 15, 2010. (i.e. June 30, 2011 year
  ends)

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Brief Summary

• Fund balances of governmental type funds are now
  to be reported based on a hierarchy in five
  different classifications
• Nonspendable
• Restricted
• Committed
• Assigned
• Unassigned

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GASB 54 -- Exhibit 1
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GASB 54Exhibit 2
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GASB 54 -- Contd

• Fund Balance should be identified between
  Nonspendable resources and Spendable resources
• Nonspendable resources include amounts that are
  not in spendable form or are required to be
  maintained intact.
• Inventories and prepaids (also includes assets
  held for sale and long-term receivables)
• Spendable resources is the remaining balance and
  is to be reported in a hierarchy of
  classification (4 categories) based on the
  extent to which the government is bound by
  restrictions/constraints on those funds
• --Restricted (most constraint)
• --Committed
• --Assigned
• --Unassigned (no constraint)

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Spendable Resources
1- Restricted (most constraint) includes amounts
constrained to specific purposes by their
providers, through constitutional provisions, or
by enabling legislation. Externally imposed
constraints by --creditors, bondholders,
--grant providers, contributors, or --imposed
by law through constitution or enabling
legislation .
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2- Committed fund balancehere the constraints
are imposed by a formal action of the
governments highest level of decision-making
authority. --These funds cannot be used for any
other purpose unless the government removes or
changes the specified use by taking the same
formal action that originally imposed the
constraint. --Committed funds include
contractual obligations for which existing
resources in the fund have been specifically
committed for use. Note In contrast to fund
balance that is restricted by enabling
legislation, amounts in the committed fund
balance can be redeployed for other purposes with
appropriate due process.
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• 3- Assigned fund balance Governments intent to
  use the funds for a specific purpose. Here
  INTENT is the key.
• --Intent can be expressed by the governing body
  itself or another body that has the delegated
  authority.
• --Fund Balance in other governmental funds
  (except General Fund) that is not restricted or
  committed is considered as Assigned FB in those
  funds. In other words it is the residual balance
  of these funds.
• -- However, the general fund should be used
  to account for and report all financial resources
  that are not accounted for or reported in another
  fund.
• Note the authority for making an assignment does
  not have to be made by the governments highest
  level of decision-making authority. Thus,
  constraints imposed on assigned amounts can be
  more easily removed or modified than those that
  are classified as committed.

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• 5- Unassigned fund balance this is the residual
  classification of the General Fund.
• --includes amounts that are available for any
  purpose.

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Not-for-profit

• NFP may use fund accounting internally to ensure
  control of funds, but they do not report these
  funds externally.
• Classifies Net Assets into 3 groups
• --Unrestricted
• --Temporarily restricted used for specific
  purpose.
• --Permanently restricted -explained further on
  later slides.
• FASB regulates NFP reporting for nongovernmental
  organizations and only requires 6 totals
• Total assets
• Total liabilities
• Total net assets
• Total unrestricted net assets
• Total temporarily restricted net assets
• Total permanently restricted net assets.

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BASIS OF ACCOUNTING AND MEASUREMENT FOCUS

• Basis of accounting determines when transactions
  and events are given accounting recognition.
• For instance, if an entity adopts the full
  accrual basis, a transaction is recognized when
  it has its substantive economic impact,
  irrespective of when cash is received or paid.
• If, on the other hand, it adopts the cash basis,
  the transaction is recognized only as the related
  cash is received or paid.
• An entitys measurement focus determines what is
  being reported uponwhich assets and liabilities
  are given accounting recognition and reported on
  the balance sheet.

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• The two concepts are closely related the
  selection of one implies the selection of the
  other.
• Ex., if an entity adopts a cash basis of
  accounting, its measurement focus is upon cash.
  Only cash is reported on its balance sheet.
  Correspondingly, measurement focus also
  determines whether the entity reports net profit
  (the net increase in all economic resources) OR
  merely the net change in selected resource flows
  (current financial resources, e.g., cash,
  short-term receivables, and short-term
  investments).
• If an entity adopts a full accrual basis of
  accounting, its measurement focus is
  automatically upon all economic resources, and
  its balance sheet reports on all assets and
  liabilities, both current and noncurrent.

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• Because GNPs may be primarily concerned with the
  assets needed to satisfy current-year
  obligations, they may adopt a modified accrual
  basis of accounting and a measurement focus will
  be on short-term financial assets and liabilities
  for many of their funds.
• Under the modified accrual used by governments,
  revenues are recognized on a cash or near-cash
  basis expenditures are recognized on a full
  accrual basis.
• Under the modified accrual basis, because the
  measurement focus is on current financial
  resources, capital assets and long-term
  liabilities are excluded from the balance sheet,
  and net changes in short-term financial assets
  and liabilities are recognized as revenues or
  expenditures.

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Summary

• Full Accrual Revenues recognized when earned
  expenses recognized when incurred.
• Cash Revenues recognized when available
  expenses/expenditures recognized when paid.
• Modified Accrual revenues are recognized when
  measurable and available expenditures when
  incurred.

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Measurement Focus

• Economic resources measurement focus
• -Report on the determination of net income,
  financial position, and cash flows (i.e. capital
  maintenance).
• Current financial resources measurement focus
• -Report on the inflows and outflows of current
  financial resources (i.e. cash or other items
  expected to be converted into cash during the
  current period).
• -

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Activities of Government

• Most general purpose governments engage in three
  broad categories of activities
• Governmental activities are those financed
  predominantly through taxes and intergovernmental
  grants.
• Business-type activities are those financed
  predominantly through user charges.
• Fiduciary activities are those for which the
  government acts as a trustee or agent for
  individuals, external organizations, or other
  governments.

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Types of Funds

• Governments classify funds into three broad
  categories
• Governmental Funds (5)
• General Fund
• Special Revenue Funds
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds
• Proprietary Funds (2)
• Internal Service Funds
• Enterprise Funds
• Fiduciary Funds (2)
• Agency Funds
• Trust Funds
• Pension (and other employee benefit)
• Investment Trust Funds
• Private purpose Trust Funds

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Definition of Fund Types

• Governmental Funds
• A generic classification used by GASB to refer to
  all funds other than proprietary or fiduciary.
• No guarantee that the funds will be reimbursed
  for services rendered.
• Proprietary Funds
• Government generally makes initial contribution
  but thereafter the fund is expected to pay its
  own way through fees for services rendered. Also
  referred to as business-like or commercial-type
  funds.
• Fiduciary Funds
• Any fund held by a government in a fiduciary
  capacity.
• Simply, the govt. holds someone elses money
• in trust and acts as a custodian. Since it is
  not the governments money, it is not expendable
  for the
• governments own programs.

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Governmental Funds

• Basis of Accounting
• --Modified Accrual
• Measurement Focus
• --Current Financial Resources
• Other names financial flow focus or spending
  focus.
• Only current assets and liabilities are generally
  included on their balance sheet (i.e. Capital
  assets and long-term liabilities are not
  included).
• Reports expenditures (not expenses) of
  appropriations.
• Fund Balance (net current assets) measures
  available spendable resources
• Fund Balance Current Assets Current
  Liabilities.
• Increased by revenues and other financing
  sources.
• Decreased by expenditures and other financing
  uses.
• Governmental fund operating statements present
  these increases and decreases in net current
  assets.

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(1) - General Fund (GF)

• The general fund should be used to account for
  and report all financial resources that are not
  accounted for or reported in another fund.
• in essence, it accounts for all unassigned
  resources.
• Only one per government and is the most
  significant single fund.
• General Activities of city government (ex. Fire,
  police, street maintenance, sanitation, and
  administration)

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(2) - Special Revenue Funds (SRF)

• To account for and report the proceeds of
  specific revenue sources that are restricted or
  committed for specified purposes other than debt
  service or capital projects (e.g., gas tax
  revenues required to be used for road repairs,
  private donations that must be used to maintain
  parks).
• Ex. City of Houston maintains over 17 SRF
• -Examples include
• Public Safety Special Fund (9-1-1 Emergency
  Network)
• Public Works Special Fund
• Health and Housing Special Fund
• Parks and Recreation Special Fund
• Other Special Revenue Fund (Cable Television)

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(3) - Capital Projects Funds (CPF)

• Accounts for financial resources that are
  restricted, committed, or assigned to expenditure
  for capital outlays, including the acquisition or
  construction of capital facilities and other
  capital assets, such as buildings, highways, and
  equipment.
• Governments often issue bonds to finance a
  specific project. The resources received must be
  placed in a capital projects fund and expended
  for that project.

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(4) - Debt Service Funds (DSF)

• Accounts for financial resources that are
  restricted, committed, or assigned for the
  payment of interest and principal on long-term
  debt.

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(5) - Permanent Funds

• Accounts for resources provided that are legally
  restricted, so that only earnings, not principal,
  may be used to support the governments programs.
  

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Proprietary Funds

• Basis of Accounting
• Full Accrual
• Operated like a normal for-profit business.
• --ex. City of Houston operates its Airports
  under a Proprietary fund.
• Measurement Focus
• Economic Resources
• All assets and liabilities (both current and
  noncurrent) are included in the balance sheet
• Accounts for expenses (not expenditures)
• --Depreciation expense is reported.
• Fund Equity (Total Net Assets)
• Net Assets Assets Liabilities.
• Increased by revenues and other financing
  sources.
• Decreased by expenses and other financing
  sources.

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Required Financial Statements

• Similar to those of for-profit entities
• Statement of Net Assets
• Statement of Revenues, Expenses, and Changes in
  Net Assets (i.e. operating statement)
• Statement of Cash Flows

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(1) - Internal Service Funds (ISF)

• Internal service funds account for the provision
  of goods or services to other departments within
  the same government (or, occasionally, to other
  governments).
• They bill the receiving departments at rates
  intended to cover the cost of the goods or
  services. The following are examples
• A maintenance and repair service for the cars and
  trucks of the police department, fire department,
  sanitation department, etc.
• A store that sells office supplies to the other
  government departments.
• A print shop that provides government-wide
  printing services.

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(2) - Enterprise Funds (EF)

• Accounts for activities in which goods or
  services are provided to the general public for a
  charge.
• Reported as business-type activities in the
  government-wide financial statements.
• Examples include electric and water utilities,
  airports, parking garages, transportation systems.

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Fiduciary Funds - Agency Funds

• Accounts for financial resources in which the
  government is acting in an agency capacity
• Agent - Government holds assets on behalf of
  another government
• Accounting is simple assets liabilities.
• No revenue and expense to accrue
• Examples are tax agency funds, certain special
  assessment funds, and pass-through agency funds.

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• Both Trust funds and Agency funds account for
  assets held by the City in a trustee capacity or
  as an agent for individuals, private
  organizations, other governments.
• Therefore, the government cannot include these
  funds in the government-wide statements.
• Basis of Accounting
• Full Accrual
• Measurement Focus
• Economic Resources

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Required Financial Statements

• Statement of Fiduciary net assets
• Statement of Changes in Fiduciary net assets

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Trust Funds

• Each trust is classified for accounting
  measurement purposes as either a governmental
  fund or a proprietary fund (ex. Houston
  Firefighters Relief and Retirement and Police
  Officers Funds).
• Funds can be either expendable or nonexpendable.
• Three types of trust funds
• (i) Pension (and other employee benefits)Trust
  Funds (one or more)
• (ii) Investment Trust Funds
• (iii) Private Purpose Trust Funds

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(i) Pension (and other employee benefits) Trust
Fund

• Accounts for financial resources in which the
  government (or other designated trustee) is
  acting in a trustee capacity for the employees of
  the government to provide retirement benefits.
• Uses business-type accounting practices.

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(ii) Investment Trust Funds

• Accounts for external investment pools in which
  the assets are held for other (external)
  governments, along with funds of the sponsoring
  government.

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(iii) Private-purpose Trust Funds

• Includes all trust funds other than pension and
  investment trust funds.
• To account for and report resources held for
  individuals or external organizations (e.g., a
  scholarship fund for employees children, funded
  by a donation from a citizen).

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Measurement Focus and Basis of Accounting
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GASB Statement No. 34

• Government-wide Statements
• 1)Statement of Net Assets
• 2)Statement of Activities
• Address questions that have not been easily
  answered by fund accounting
• What do government services really cost, e.g.,
  public safety or recreation?
• How much debt for current services are we
  shifting to the next generation?
• How much of the cost of government is borne by
  citizens in the form of general revenues?

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Comprehensive Annual Financial Report - CAFR

• Review from Ch. 1
• The CAFR is the recommended annual report of a
  governmental unit. It has 3 sections.
• Introduction section
• Financial section
• Statistical section
• The minimum requirements for general purpose
  external reporting include
• MDA
• Basic financial statements
• RSI other than MDA

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Summary

• Fund financial statements for governmental funds
  utilize the modified accrual basis of accounting
  and a current financial resources measurement
  focus.
• GASB Std. 34 requires both government-wide
  financial statements and fund financial
  statements.
• Government-wide financial statements and fund
  financial statements for proprietary and
  fiduciary funds follow the full accrual basis of
  accounting and the economic resources measurement
  focus (similar to commercial accounting).