The Government and NotforProfit Environment

1
Chapter 1

• The Government and Not-for-Profit Environment

2
Basics

• Describing governments nonprofits
• Governmental characteristics
• Nonprofit characteristics
• Standard-setting GASB FASB
• Financial Reporting
• Users

3
Describing Governments Nonprofits

• US governments federal, state local
• Branches legislative, executive judicial
• Constitution federal vs. state jurisdiction
• Nonprofits over 1.5 million organizations, 1.3
  trillion in assets
• Nonprofits colleges universities, hospitals,
  voluntary health welfare organizations, other
• Nonprofits importance of IRS tax-exempt status

4
Characteristics of Governments Nonprofits

• No profit motive
• Ownership interests are nontransferable (
  usually not defined)
• Fund accounting recommended
• Differential GAAP
• Emphasis of accountability of resources flow of
  these resources
• Unique revenue sources
• Often lack of direct cost/benefit relationships
• Importance of budgeting

5
Government Characteristics

• Federal Government Broad jurisdiction, 2000
  receipts 1,958 billion 2000 outlays 1,781
  billion
• 50 states jurisdiction defined in Constitution,
  establishes legal roles of local governments
• 87,453 local governments 3,043 counties 36,001
  cities 13,726 school districts 34,683 special
  districts

6
Other Governmental Financial Characteristics

• Ability of governments to levy taxes
• Use of modified accrual revenues expenditures
  budget entries
• Financial operations may be restrictedone reason
  for fund accounting
• Power to issue tax-exempt debt (e.g, municipal
  bonds)
• Intergovernmental financial relationships
  (importance of intergovernmental revenues)
• Overlapping jurisdictions overlapping debt
• GASB 34 addition of government-wide statements
  (full accrual) other reporting requirements

7
Nonprofit Characteristics

• Importance of IRS tax-exempt status
• Nonprofits must file for tax-exempt status
  charities are recognized as 501(c)(3)
  organizations, based on filing Form 1023
• Annual report, Form 990, must be followed using
  IRS format
• Other nonprofit categories also exist
• See www.irs.ustreas.gov/

8
Purpose of Financial Reporting

• Assess financial condition (operating results
  financial resources)
• Compare actual results with the budget
• Legal compliance
• Evaluate performance (especially efficiency and
  effectiveness service effort accomplishment)

9
Governmental Financial Reports

• Comprehensive Annual Financial Report (CAFR)--two
  levels of reporting (1) government-wide (full
  accrual), (2) fund accounting (modified accrual
  for governmental funds)
• Annual Operating Budget(s)
• Other documents for citizens or media
  specialized reports, etc.
• Most governments have well-developed web pages
• Note importance of interperiod equity

10
Users of Governmental Financial Reports

• Executives employees
• Governing Boards (legislative function)
• Investors Creditors (importance of municipal
  bonds credit-rating agencies)
• Taxpayers voters
• Regulatory agencies (e.g., Texas Education Agency
  for Texas ISDs)

11
Standard Setting
12
Standard Setting History

• Government GAAP initially established by National
  Council of Governmental Accounting (NCGA) GASB
  established in 1984
• Nonprofit GAAP initially established by
  industry (1) colleges universities, (2) NP
  hospitals, (3) otherAICPA would write two audit
  guides (voluntary health welfare organizations
  other) FASB took over jurisdiction in the
  1980s.
• Federal government establishes its own standards,
  through the Federal Accounting Standards Advisory
  Board (FASAB)

13
Chapter 2

• Fund Accounting

14
Fund Accounting

• What is a Fund? The government or nonprofit is
  the economic entity. The fund is the fiscal
  accounting entity. Each organization usually has
  several funds. Each fund is a separate
  self-balancing set of accounts. A major reason
  for funds is control purposes, both legal fiscal

15
Funds Used by State Local Governments

• Governmental Funds also called source
  disposition funds or expendable funds. Most
  governmental activities are financed through
  these funds.
• Proprietary Funds also called business-type
  funds, which handle most activities financed
  through user charges.
• Fiduciary Funds or trust agency funds, where
  government acts as trustee or agent

16
Governmental Funds

• General Fund primary operating fund by
  definition it accounts for all activities not
  required for another fund. The General Fund is
  used for unrestricted operations.
• Special Revenue Fund specific revenue source
  used for a specific purpose. This is an
  operating fund.
• Capital Projects Fund Used specifically for the
  acquisition construction of capital assets.
• Debt Service Fund Used for funding payment of
  interest principal on long-term debt.
• Permanent Fund New-required by GASB 34Trust
  Funds to support government programs.

17
Proprietary Funds

• Enterprise Funds provide services to the public
  on a user-fee basis. The most common category is
  government-owned utilities also, mass transit,
  airport, housing authorities, government-owned
  hospitals, etc.
• Internal Service Fund provide services to other
  departments in the same government, such as motor
  pool, data processing, or supplies purchasing.

18
Fiduciary Funds

• Pension Trust Funds provide retirement benefits
  to governmental employees
• Permanent private-purpose trust funds endowments
  to benefit other organizations or individuals
  e.g., student scholarships
• Agency Funds temporary accounting for assets
  held for other governments or organizations, tax
  collected for other governments

19
Financial Reports

• The complete annual report is the Comprehensive
  Annual Financial Report (CAFR).
• The three sections are Introductory Section,
  Financial Section, Statistical Section.
• Governments also prepare annual operating budgets
  may have capital budgets other statements.
  

20
CAFR (Old Format)

• Introductory Section includes transmittal letter
  may include Certificate of Achievement,
  organization chart, table of contents, etc.
• Financial Section includes Auditors Report
  Combined Financial Statements, Notes
  statements by fund category.
• Statistical Section various tables other
  information on economic, demographic
  supplementary fiscal data.

21
CAFR (GASB 34 Format)

• Same basic format with the following additions
• Management Discussion Analysis (MDA) added to
  Introductory Section.
• Government-wide Financial Statements added, based
  on full accrual accounting(1) statement of net
  assets (2) statement of activities.

22
Chapter 3

• Issues of Budgeting Control

23
Budgeting

• The Current Operating Budget (also called an
  appropriation budget) a plan of financial
  operations for the period. The annual budget
  authorizes, and provides the basis for control
  of, financial operations during the year (NCGA
  Statement 1).
• The Budget is a formal expression of public
  policy on objectives priorities how the
  resources will be provided to meet them (NCGA
  Statement 1).

24
Functions of Budgets

• Planning type, quantity quality of services to
  be provided how to pay for these services.
• Control budgets insure that resources are
  available are used to monitor compliance with
  legislative spending authority.
• Review budgets can be compared to actual results
  to evaluate whether legislative other legal
  mandates were carried out, as well as
  effectiveness efficiency.

25
Types of Annual Operating Budgets

• Traditional Budget classifies spending by line
  item (object classification), which focuses on
  control. Appropriations specifically limits
  spending on each line item.
• Performance Budget use measurable units of SEA.
• Program Budgets budgets are defined by
  programs, based on specific objectives for each
  identified program.

26
The Budget Cycle

• Budget Preparation (several months before the
  start of the fiscal year)
• Legislative Approval (before the start of the
  fiscal year)
• Fiscal Year Operations (Budget Execution)
• Feedback Review (after the end of the fiscal
  year)

27
Budget Preparation

• Chief financial officer (CFO) accumulates budget
  requests based on chief executive officer (CEO)
  City Council objectives, along with revenue
  forecasts to develop a proposed budget.
• Inputs revenue forecasts, expenditure requests
  priorities
• Outcome proposed (executive) budget

28
Legislative Approval

• Legislature must approve the budget before taxes
  can be levied appropriations spent.
• Considerations tax levy(ies), bond ( other
  borrowing) initiatives, budget authorization
  mandate
• Outcome annual operating budget (this process
  the budget is publicly available)

29
Fiscal Year Operations (Execution)

• Budget journal entries begin the new fiscal year
  accounting operations depend on these budget
  entries.
• Actual revenues expenditures
• Budget revisions transfers
• Adjusting closing process

30
Feedback Review

• Reporting auditing financial reports are
  prepared audited
• CAFR is issued
• Other analysis conducted budget to actual
  comparisons, service effort accomplishment, etc.

31
Budget Entries

• Revenue-related Debit estimated revenues
  Credit fund balance.
• Expenditure-related Debit fund balance credit
  Appropriations.
• Operations revenues are credited when
  measurable available expenditure debited
  when corresponding liability is recorded.
• Both budget actual entries are closed out at
  year-end.
  

32
Encumbrances

• Encumbrances are journal entries used to
  recognize future commitments (such as purchase
  orders) earmark these funds for control
  purposes.
• When commitments are recognized (e.g., for
  approved purchase orders) debit encumbrances
  credit fund balance reserved for encumbrances.
• Encumbrances are reversed when expenditures are
  recognized for the commitments.

33
Chapter 4

• Recognizing Revenues in Governmental Funds

34
Revenues

• Basis of Accounting when transactions/events are
  recognized Modified Accrual Accounting in the
  Governmental Funds.
• Measurement Focus what is being measured
  Current (expendable) financial resources.
• Revenues are recognized when measurable
  available.

35
Revenue Recognition

• Revenue must be measurable available.
• Measurable amount is known or can be reasonably
  estimated.
• Available physically available collected in
  cash during the fiscal year or shortly thereafter
  (60 day rule for property tax) legally
  available (e.g., levied or can can be spent based
  on contract or regulation).
• Note importance of nonexchange revenues (pp.
  123-4).

36
Resource Inflows

• Revenues are recorded by source Property
  Taxes Sales Taxes Licenses
  permits Fines Forfeitures Intergovernmen
  tal Grants Other
• Other Financing Sources are resource inflows that
  include transfers in, bond proceeds, etc.

37
Nonexchange Revenues

• Imposed nonexchange revenues assessment on
  individuals or businesses e.g., property taxes
  fines.
• Derived tax revenues taxes derived from exchange
  transactions, such as sales income taxes.
• Government-mandated, such as a state requiring a
  city to use resources for specific purposes.
• Voluntary contractual agreements such as
  contributions from donors.
• Note time purpose limitations (these usually
  must be met before revenues are recognized).

38
Simplified Budgeting Strategy (Local Governments)

• Estimate spending needs.
• Forecast all revenues except property tax.
• The difference is the amount that has to be
  collected from property taxes.
• Calculate property tax rates (based on net
  assessed value collection estimates) total
  tax levy.

39
Budget Strategy Example (1)Property Tax

• Anticipated spending needs 800,000 forecasted
  revenue, all sources except property tax
  200,000 then revenue collected from property
  tax 600,000.
• Assuming that 92 of property tax is collected
  (assume no delinquent tax collection) then tax
  levy 600,000/.92 652,174 for a balanced
  budget.

40
Budget Strategy Example (2)Property Tax

• Net assessed value assume total assessed value
  of property is 2.3 billion less property
  exemptions of 300 millionnet assessed value
  2 billion.
• Tax rate property tax required / (collection
  rate x net assessed value/100) 600,000 / (.92 x
  2 billion) 0.3261 per 100 NAV.
• Tax levy 2 billion/100 x 0.326087 652,174.

41
Budget Strategy Example (3)Journal Entries

• Budget entry (balanced budget) Estimated
  Revenues 800,000 Fund Balance 800,000
• Tax Levy Taxes Receivable Current
  652,174 Revenues-Property Tax
  600,000 Allowance for Uncoll. Tax 52,174

42
Budget Strategy Example (4)Closing Entries

• Fund Balance 800,000 Estimated
  Revenues 800,000 Revenue-Property Tax
  600,000 Fund Balance 600,000

43
Other Revenues

• Fines (pp. 129-130)
• Sales Taxes (pp. 130-3)
• Income Taxes (pp. 133-5)
• Grants (pp. 135-142) Unrestricted
  Grants Restricted Grants (designated
  purposes) Contingent Grants (based on specific
  actions or occurrences) Entitlements
  (entitled by formula) Shared Revenues (on a
  predetermined basis) Payments in Lieu of Taxes
  (replaces property taxes)
• Sale of capital assets (pp. 142-3)
• Investment Income investments recorded at fair
  value investment income includes changes in
  fair value (pp. 143-7).

44
Other Financing Sources

• Resource inflows that include transfers in bond
  proceeds.
• They are operating inflows, but not considered
  revenues.
• Monies are often transferred from one fund to
  another e.g., the General Fund transfers 10,000
  to the Debt Service Fund for an interest payment
  this is an other financing sources to the DSF.
• Bond proceeds (usually to a Capital Project Fund)
  also are other financing sources (the money has
  to be paid back).

45
Government-wide Statements

• In addition to fund accounting, state local
  governments prepare government-wide statements
  based on full accrual accounting.
• Generally, the government keeps its books using
  fund accounting, then makes an additional set of
  adjusting entries to arrive at the information to
  prepare government-wide statements.
• Therefore, revenues are recognized on a different
  basis, similar to commercial accounting.
• Generally, the major difference is that
  available is not a criteria for revenue
  recognition.

46
Chapter 5

• Recognizing Expenditures in Governmental Funds

47
Expenditures

• Expenditures are associated with the acquisition
  of goods services (usually recognized when the
  liability is recorded). Expenditures are
  decreases in net financial resources.
• Expenses are associated with the consumption of
  goods services. Expenses are decreases in net
  economic resources.
• Expenditures are used instead of expenses in the
  governmental funds. Expenses are used for
  government-wide statements.
• The acquisition of equipment for 10,000 cash in
  a general fund would be
• Expenditures-Capital Asset 10,000 Cash
  10,000

48
Resource Outflows

• Expenditures are usually cross-classified by (1)
  department or program (e.g., public works, public
  safety, parks recreation) (2) object of
  expenditures (e.g., salaries, supplies,
  maintenance, etc.).
• Other financing uses are resource outflows, with
  transfers out being the most common.

49
Expenditure Characteristics

• Mainly associated with exchange transactions
  e.g., employee compensation, acquisition (or use)
  of supplies.
• Examples Wages Salaries (pp.
  164-171) Supplies (pp. 173-5) purchase or
  consumption methods allowed Capital assets
  (pp. 176-180) Non-exchange transactions (pp.
  183-4)

50
Spending Entries (1) Budget

• Spending needs salaries, 650,000 supplies,
  150,000.
• Budget entry Fund Balance 800,000 Appro
  priations 800,000

51
Spending Journal Entries--Salaries

• Salaries Expenditures-Salaries 642,000 Sa
  laries Payable 642,000
• Year-end accruals at year-end, expenditures are
  recognized for the days works for which they
  havent been paid. Expenditures-Salaries
  8,000 Accrued Salaries 8,000

52
Other Salary Considerations

• Vacation Pay recorded in year vacation actually
  taken accrued for government-wide reporting.
• Sick Leave recorded in year sick leave taken
  accrued for government-wide reporting.
• Pension contributions generally recorded when
  cash payment made to a pension trust fund
  recorded as expenses based on calculated amount
  for government-wide reporting

53
Spending Journal Entries--Supplies

• Supplies (Purchase method) Encumbrances
  150,000 Reserve for Encumbrances 150,000
• Reserve for Encumbrances 150,000
  Encumbrances 150,000
• Expenditures-Supplies 150,000 Vouchers
  Payable 150,000 Note supplies on hand
  at year-end total 10,000.

54
Spending Closing Entries

• Appropriations 800,000 Fund Balance 800,000
• Fund Balance 800,000 Expenditures-Salaries 650
  ,000 Expenditures-Supplies 150,000
• Inventory-Supplies 10,000 Fund Balance
  Reserved for Supplies 10,000

55
Supplies-Consumption Method

• Encumbrances, same as above.
• Supplies Inventory 150,000 Vouchers
  Payable 150,000
• Expenditures-Supplies 140,000 Supplies
  Inventory 140,000
• Fund Balance 10,000 Fund Balance
  Reserved for Supplies 10,000

56
Prepayments

• Prepayments are common for insurance certain
  other spending items General Fund ( other
  governmental funds) can use the purchase or
  consumption method.
• Purchase method Expenditures-Insurance 10,00
  0 Vouchers Payable 10,000

57
Prepayments-Consumption Method

• Prepaid Insurance 10,000 Vouchers
  Payable 10,000
• Usage (usually by month)
• Expenditures-Insurance 3,000 Prepaid
  Insurance 3,000

58
Capital Assets

• Expenditures-Capital Assets
  20,000 Contracts Payable 20,000
• If the money is on a long-term note Cash
  20,000 Other Financing Sources-
  Note proceeds
  20,000 Expenditures-Capital Assets
  20,000 Contracts Payable
  20,000
• Capital Lease Expenditures-Capital Assets
  20,000 Other Financing
  Sources- Capital Lease
  20,000
• Note long-term liabilities are serviced in a
  debt service fund.

59
Multiple-fund Transactions

• Many transactions involve more than one fund
  therefore, journal entries are required in two or
  more funds.
• A common example in interfund transfers
  (classified as other financing sources uses).
  Other examples of financing sources uses
  include proceeds from long-term debt proceeds
  from the sales of capital assets.
• Note that charges for services would be recorded
  as revenue expenditures (or expenses).

60
Interfund Transfer

• The General Funds sends 20,000 in cash to the
  Debt Service Fund for a future interest payment
  on long-term notes General Fund
  Transfers Out 20,000 Cash 20,000 Debt
  Service Fund Cash 20,000 Transfers
  In 20,000

61
Chapter 6

• Accounting for Capital Projects Debt Service

62
Fund Purpose

• Capital project debt service funds are
  governmental funds used for specific purposes.
• The purpose of capital project funds is to
  acquire use the resources dedicated to acquire
  or build specific capital projects (e.g.,
  buildings, roads, etc.).
• Debt service funds are used to acquire use
  financial resources to pay interest principal
  on long-term debt associated with the
  governmental funds.
• Both funds use modified accrual accounting.

63
Characteristics of Capital Project Funds (CPFs)

• Capital projects are generally funded using
  long-term municipal (tax exempt) debt to fund
  capital projects.
• Debt covenants usually require resources to be
  used exclusively for the specific capital
  projects funded.
• Capital projects usually are budgeted through
  capital budgets may not require annual budget
  entries (this varies from one government to
  another). The primary reason for budget entries
  is for control.

64
Basic Journal EntriesCapital Project Funds

• Budget entry (if necessary), 50,000 from bonds
  for construction Estimated Bond Proceeds
  50,000 Appropriations 50,000
• Issuance of Bond Cash 50,000 Bond
  Proceeds (other financing sources) 50,000

65
Basic Journal EntriesCapital Project Funds (2)

• Signing of construction contract for
  50,000 Encumbrances 50,000 Reserve for
  Encumbrances 50,000
• Construction is completed contractor paid
  50,000 Reserve for Encumbrances
  50,000 Encumbrances 50,000 ExpendituresCons
  truction 50,000 Cash 50,000

66
Basic Journal EntriesCapital Project Funds (3)

• Closing entries Appropriations 50,000 Es
  timated Bond Proceeds 50,000 Bond
  Proceeds 50,000 Expenditures-Construction
  50,000

67
Other CPF Issues

• Bond Premiums Discounts issue costs.
• Bond premiums are usually recorded as other
  financing sources transferred to debt service
  funds (note a multiple fund entry).
• Other sources of funding including grants,
  transfers from other funds, investment earnings.

68
Characteristics of Debt Service Funds (DSFs)

• Debt service funds primarily service the
  long-term debt associated with acquiring capital
  assets in CPFs.
• Cash is usually transferred in from the general
  fund (or other fund). Other possible resources
  include taxes payable specifically to the DSF
  investment earnings,
• Interest is most often paid semi-annually
• Many of the bonds are serial bonds, where some
  amount of principal is repaid annually.
• Also, long-term notes capital leases.
• Interest principal are recognized as current
  liabilities in the DSF in the period they must be
  paid.

69
Basic Journal EntriesDebt Service Funds

• Nonreciprocal transfer from the general fund
  (note a multi-fund transaction) for the payment
  of interest, 10,000 Cash 10,000 Transfe
  rs In (other financing
  sources) 10,000
• Payment of interest, 10,000
• Expenditures-Interest 10,000 Matured
  Interest Payable 10,000 Matured Interest
  Payable 10,000 Cash 10,000
• Closing entry Transfers In 10,000 Exp
  enditures-Interest 10,000

70
Basic Journal EntriesDebt Service Funds (2)

• Nonreciprocal transfer from the general fund
  (note a multi-fund transaction) for the payment
  of interest, 10,000, principal,
  160,000 Cash 170,000 Transfers In
  (other financing sources) 170,000
• Payment of interest principal,
  170,000 Expenditures-Interest
  10,000 Expenditures-Principal 160,000 Mature
  d Interest Payable 10,000 Matured Bonds
  Payable 160,000 Matured Interest Payable
  10,000 Matured Bonds Payable 160,000
  Cash 170,000
• Closing entry Transfers In 170,000 Ex
  penditures-Interest 10,000 Expenditures-Prin
  cipal 160,000

71
Other DSF Issues

• Budget entries can be used.
• Transfer in of premium on bonds from a DSF (an
  other financing source recorded as a
  nonreciprocal transfer).
• Investing cash in investments recognizing
  revenues from investments.
• Recognizing tax revenues (the same process as
  with the General Fund).

72
Government-wide Statements

• Full accrual includes all assets liabilities
• Construction costs are accumulated as
  construction in progress capitalized in the
  financial statements.
• Debt Service principal payments reduce
  liabilities interest is an expense ( is
  accrued).

73
Special Assessments

• This is usually associated with construction
  projects associated with specific property owners
  (e.g., to build sidewalks), with construction
  costs charged to these property owners as special
  assessments (either with one lump payment or over
  time).
• The construction activity would be accounted for
  in a CPF.
• If the government is obligated for the debt
  (which is usually the case), the debt is paid
  through a DSF. If the government is not
  obligated (that is, the property owners are
  obligated), the debt is serviced in an agency
  fund.

74
Debt Refunding

• Governments can retire debt before maturity
  (e.g., using callable bonds).
• When governments retire debt early replace it
  with new debt, this is called bond refunding.
  Major reasons include lower interest rates on new
  debt, changing the maturity structure,
  eliminating certain restrictive covenants.
• In-substance defeasance an advance refunding
  when the borrowing satisfies the obligations
  economically, but not legally (e.g., placing
  required funding in trust or escrow). Costs
  benefits would normally be recorded in a DSF.

75
Chapter 7

• Long-lived Assets Investments in Marketable
  Securities

76
General Capital Assets

• General capital assets (essentially property,
  plant equipment) are not-financial associated
  with the government as a whole.
• Since they are non-financial, they are not
  accounted for in specific funds (which have a
  financial resources focus).
• Capital assets include land, buildings,
  equipment, improvements other than buildings,
  construction in progress infrastructure assets
  (e.g., roads bridges).

77
Accounting for General Capital Assets

• Acquisition or construction of capital assets is
  recorded as an expenditures in a governmental
  fund (e.g., capital projects fund). The asset is
  not capitalized. Trade-in transactions are
  reported as expenditures at their net of
  trade-in cost.
• Governments must maintain records of capital
  assets.
• Government-wide reporting reported at historical
  costs less accumulated depreciation, plus notes
  with additional information.

78
Should Governments Report on Infrastructure
Assets?

• Controversial issue historically, governments
  could choose whether or not to accounting for
  infrastructure assets. GASB emphasizes the
  importance of cost of services.
• Traditional approach (GASB 34) expenditures in
  governmental funds capitalize the costs record
  depreciation in the government-wide statements.
• Modified approach (government-wide statements)
  capitalize but do not record depreciation
  instead, expense preservation costs (which extend
  the useful life of the assets).
• Importance of maintenance governments must
  disclose maintenance costs for a 5-year period
  comparisons of required maintenance to maintain a
  specific condition.

79
Impairment of Capital Assets

• An asset is impaired if its service utility has
  declined significantly.
• Governments should test for impairment (GASB 42),
  using one of three methods 1. Restoration
  cost approach (cost to restore asset
  utility). 2. Service-units approach (
  decline in service units). 3.
  Deflated depreciation replacement cost
  approach (estimate new carry value).

80
Investments in Marketable Securities

• Governments invest in stocks, bonds other
  marketable securities, primarily because they can
  accumulate large amounts of cashtax collections,
  bond proceeds before construction is completed
  paid for, etc. Pensions endowments will be
  discussed later.
• Investments can include repurchase agreements
  (usually with broker-dealers derivatives.
  Governments can use resource pools (e.g., managed
  by the state).
• Investments are recorded at fair value
  investment
• income includes changes in fair value.
• According to GASB 40, governments must disclose
  information on risks credit risks of investments
  (e.g., bond ratings), investments concentration
  (greater than 5 of total investments), interest
  rate risks, foreign currency risks.

81
Chapter 8

• Long-term Obligations

82
Information on Long-term Debt

• Financial information should provide information
  on resources obligation.
• Key issues are credit risk fiscal stress.
• Governments rarely go bankrupt, but essential
  services must go onfiscal stress may make
  providing adequate services problematic.
• General long-term debt includes bonds, notes
  special assessments.
• General obligation (GO) debt is backed by the
  full faith credit of the government ( its
  taxing powers).

83
Accounting for Long-term Debt

• Long-term debt is not included in governmental
  fund statements.
• However, governments must maintain a schedule of
  long-term debt.
• Long-term debt is included in government-wide
  statements, similar to commercial accounting.

84
Government-wide Journal Entries

• GO bonds issued at par
• Cash 500,000 Bonds Payable 500,000
  
• Interest is paid on Bonds
  Interest Expense 15,000 Cash
  15,000
• Interest principal is paid on debt
• Interest Expense 15,000 Bonds Payable
  50,000 Cash 65,000
• Premiums discounts would be amortized over the
  live of the debt (i.e., present value is used).

85
Other Types of Debt

• Demand bonds permit the investor to demand
  redemption early are classified as long-term
  debt (if an appropriate take-out agreements
  exists)
• Bond Anticipation Notes (BANs) short-term notes
  issued will be shortly replaced with long-term
  debt. Usually classified as long-term debt
  (appropriate legal steps for refinancing must
  take place).
• Tax anticipation notes (TANs) revenue
  anticipation notes (RANs) are classified as
  short-term.
• Revenue bonds are backed by specific future
  revenues usually issued by Enterprise Funds.

86
Capital Leases

• Governments can issued both capital operating
  leases (same definitions as commercial
  accounting).
• When issued for governmental purposes Expenditure
  s-capital asset Other Financial Sources-CL
• The interest principal payment in
  DSF Expenditures-Interest Expenditures-Princ
  ipal Cash

87
Capital LeaseGovernment-wide Statements

• Recognize capital lease Capital Asset (Under
  CL Obligation) Capital Lease Obligation
• Lease payment Capital Lease
  Obligation Interest Expense Cash
• Annual depreciation Depreciation
  Expense Accumulated Depreciation

88
Industrial Development

• Local governments (including Bryan College
  Station) make substantial efforts to encourage
  new business to locate in the local area.
  Incentives can include tax abatements,
  government-funded land and/or buildings, etc.
• Governments can issue debt for the benefit of
  non-governments, called conduit debt. This would
  have the lower interest rate of government debt,
  but be serviced by the non-governmental entity.
  Long-term bonds for this purpose are called
  industrial development bonds.

89
Overlapping Debt Debt Margin

• Specific local governments have overlapping
  geographic jurisdictions with other governments
  a city is located within a county, there may be a
  school district any number of special
  districts.
• Particularly important is overlapping debt the
  obligations of property owners for a share of the
  debt of all these governments.
• Most government prepare a schedule of direct (the
  debt of that government) a share of the debt
  of overlapping governments (see pp. 290-1).
• Governments may be limited for the amount of
  long-term debt they can incur, called debt
  margin. This is usually calculated as a of net
  assessed value. If the debt margin is 5 of NAV
  NAV is 315 million, then debt margin is 5 x 315
  million 15.75 million.

90
Bond Ratings

• Ratings of Moodys Standard Poors are the
  most common. Moodys ratings
• AAA is the highest rating BAA-AAA are
  investment grade ratings BA-C are below
  investment grade (junk bonds). It is difficult
  for governments to issue junk bonds
• Interest rates depend on bond ratings ( other
  factors), with interest rates the lowest for the
  highest rated bonds.
• Bond issuers can buy bond insurance from
  Municipal Bond Insurance Association (MBIA)
  other insurers. The premium can be large (up to
  2 of principal interest) for governments with
  high credit risk, but the result is a AAA bond
  rating by Moodys likely lower interest rates.

91
Chapter 9

• Business-type Activities

92
Proprietary Funds

• Most business-type activities of state local
  governments are recorded in Proprietary Funds.
• Enterprise Funds provide goods services for to
  public charge for these services. Examples
  include electric, water, sewage, trash
  utilities certain airport services, land fills,
  etc.
• Internal Service Funds provide goods services
  to other governmental departments charge for
  these services. Typical services include
  computer services, motor pool maintenance,
  copying, etc.

93
Accounting Model

• Proprietary Funds use full accrual accounting
  revenue is recognized when earned expenses are
  used matched to revenue capital assets are
  capitalized depreciated long-term debt is
  recorded. Categories operating revenues (esp.
  charges for services), operating expenses,
  non-operating revenues expenses (e.g.,
  interest).
• Why those activities involve exchange
  transactions, primarily direct charges for goods
  servicesthe basic focus of full accrual.

94
Financial Reporting

• Fund Accounting statement of net assets
  statement of revenues, expenses changes in fund
  net assets statement of cash flows.
• Government-wide statements Proprietary Fund
  amounts are recorded in a separate columns for
  the statement of net assets statement of
  activities.

95
Cash Flow Statement

• Based on GASB Statement 9 somewhat different
  than for commercial firms.
• Cash Flows from Operating Activities
• Cash Flows from Noncapital Financial Activities
• Cash Flows from Capital Related Financing
  Activities
• Cash Flows from Investing Activities

96
Internal Service FundsTypical Entries

• Data processing ISF
• 1. ISF is established from a cash transfer
  (equity/nonreciprocal) from the General Fund,
  100,000. Cash 100,000 Equity
  Transfer In 100,000
• 2. Computer is purchased for cash,
  95,000. Equipment 95,000 Cash
  95,000

97
Internal Service FundsTypical Entries (2)

• Salaries are 35,000 less withholding of 3,800
  Social Security of 2,7000 (due to Federal
  Government). Operating Expenses-Salaries
  35,000 Due to Federal Govern.
  6,500 Salaries Payable 28,500
• General Fund is billed 41,000 Enterprise Fund,
  19,000. Due From General Fund
  41,000 Due From Enterprise Fund
  19,000 Operating Revenues- Charges for
  Services 60,000

98
Internal Service FundsTypical Entries (3)

• Depreciation is recorded for 9,500. Operating
  Expenses- Depreciation 9,500 Accumulate
  d Depreciation 9,500
• Closing Entryequity transfer usually closed to
  invested capital. Equity Transfers
  In 100,000 Ops. Rev.-Char. For Serv.
  60,000 Ops. Exp.-Salaries 35,000 Ops.
  Exp.-Depr. 9,500 Invested in Capital
  Assets 100,000 Net Assets-Unrestricted 21,500

99
Self-Insurance

• A government can self-insure through an Internal
  Service Fund.
• Generally, premiums would be paid from the
  General other Funds, based on actual losses or
  an actuarial method or historical cost method.
  Premiums would be recorded as a credit to
  operating revenues (expenditure in the General
  Fund).
• Claims (losses) would be recorded an asset has
  been impaired or a liability incurred the
  amount can be reasonably estimated. The amount
  would be charged as a debit to Operating
  Expenses-Claims.

100
When to Use an Enterprise Fund

• Governments can use an Enterprise Fund when it
  charges fees to external users for goods
  services.
• An Enterprise Fund is required when it is
  financed solely by revenue debt (plus other
  criteria).
• Example a citys pool complex is funded by both
  charges for services specific taxes. It could
  possibly be accounted for in an Enterprise Fund
  or a Special Revenue Fund. The city can use an
  Enterprise Fund, but must use it if the
  construction was funded exclusively by revenue
  bonds.

101
Typical Entriesa Utility Fund

• Charges for service to non-municipal customers of
  950,000 the General Fund of 10,000 Accounts
  Receivable 950,000 Due From General Fund
  10,000 Operating Revenues 960,000 (Charges
  for Services)
• Provision for Uncollectible accounts was
  increased by 2,000. Operating Expenses-Bad
  Debts 2,000 Allow. For Uncollect. AR 2,000
• Salaries payable of 85,000 are
  recorded. Operating Expenses-Salaries
  85,000 Salaries Payable 85,000

102
Typical Entriesa Utility Fund (2)

• Customer deposits of 8,400 were collected.
  Note there are other methods. Cash-Restr
  icted 8,400 Customer Deposits 8,400
• Interest on revenue bonds of 18,000 was
  paid. Non-operating Expense-Interest
  18,000 Cash 18,000
• Liabilities were recognized for purchase of
  supplies, 14,000 and construction in progress
  for plant assets, 56,000. Supplies
  Inventory 14,000 Construction in
  Progress 56,000 Accounts Payable 14,000 Co
  ntracts Payable 56,000

103
Capital Contributions

• The primary source of capital is an equity
  (non-reciprocal) transfer from the General Fund
  (called Invested in Capital Assets or
  Contributed Capital).
• Other sources of capital may be from contribution
  from other governments contributions from
  developers others. For example, developers may
  put in streets, sidewalks, etc. then
  contribute these assets to the government.
• Note that all transfers or contributions
  would be first recorded in the operating
  statement (statement of revenues, expenses
  changes in net assets).
• Other capital contributions include tap fees
  (charges to customers to hook up to the utility
  system (e.g., water or electricity).
• Net accumulated earnings (Retained Earnings)
  are generally recorded as Unrestricted Net
  Assets.

104
Restricted Assets

• Unlike commercial firms, utilities ( other
  proprietary funds) may have a considerable number
  of restricted assets.
• Cash for customer deposits is usually restricted.
• Revenue bonds may include a number of asset (
  other) restrictions, including use of bond
  proceeds cash set-asides for the repayment of
  principal and/or interest.

105
Landfill Accounting

• Government-owned landfills are usually accounted
  for in an Enterprise Fund (assuming that the
  primary funding if from user charges).
• Operating costs must include the future costs for
  closing the landfill required monitoring. The
  journal entry for this is Landfill
  Expense Liability for Landfill
  Closure (see pp. 322-325).

106
Combined vs. Consolidated Financial Statements

• Fund accounting statement are combined that is,
  the accounting is by fund which included double
  accounting for various transfers, charges for
  services, etc.
• Government-wide statements are consolidated that
  is, the double counting is eliminated.
• Note also that Internal Service Fund activity is
  normally included in the government-wide
  statements under Governmental Activities.

107
Chapter 10

• Fiduciary Funds Permanent Funds

108
Fiduciary Funds

• Fiduciary funds account for assets held by the
  government in a trustee capacity or as an agent
  for other individuals or entities.
• Endowments (non-expendable trust funds)
  principal must remain intact earnings are to be
  used for the purpose designated by the donor.
• Extendable trust funds similar to endowments,
  but principal can be used for the purpose
  designated by the donor.
• Pension Trust Funds defined benefit retirement
  funds for the benefit of government employees
• Agency Funds custodian or clearing accounts
  where cash related resources are held for other
  organizations.

109
Permanent Funds

• Permanent Funds are endowments or other
  nonexpendable trust funds where the donor
  specifies that the earnings ( perhaps principal)
  are to be used to benefit the government for
  example, to buy library books for the city
  library or support a government-owned museum.
• These are governmental funds, using modified
  accrual accounting.
• Earnings are often transferred to a Special
  Revenue Fund.

110
Journal Entries for a Permanent Fund

• Individual establishes an endowment of 900,000
  in cash to buy library books for the city
  library. Cash 900,000 Endowment
  Contributions 900,000
• Equity investments are bought, 900,000. Common
  Stock 900,000 Cash 900,000

111
Journal Entries for a Permanent Fund (2)

• Cash dividends are received, 18,000. Cash 18,0
  00 Revenue-Dividends 18,000
• Stock increase in value 12,000. Common
  Stocks 12,000 Revenue-Investments 12,000

112
Journal Entries for a Permanent Fund (3)

• Fund is closed out at year-end earnings
  transferred to a Special Revenue
  Fund. Revenue-Dividends
  18,000 Revenue-Investments
  12,000 Earnings Available to SRF
  30,000 Transfer Out 30,000 Cash
  30,000 Endowment Contributions
  900,000 Earnings Available to SRF
  30,000 Transfer Out 30,000 Fund
  Balance-Endowment 900,000

113
Earnings Issues with Permanent Funds

• A percentage of earnings may be maintained in the
  endowment to compensate for inflation, usually
  calculated as an annual percentage (see pp.
  366-7).
• An alternative to distributing earnings is a
  fixed return approach, distributing a fixed
  percentage based on expected long-term return
  (see pp 363-4).

114
Should All Investment Gains Losses be
Distributed?

• There is no definitive answer based on GAAP.
• This may be specified in the trust agreement or a
  specific requirement by the government holding
  the endowment.

115
Trust Fund Accounting Issues

• Endowments ( expendable trust funds) where the
  earnings benefit other individuals or groups are
  accounted for as Trust Funds.
• Trust Funds use full accrual accounting
  generally, the accounting is similar to the
  Permanent Funds.
• There are some differences relative to Permanent
  Funds, such as accruing interest before its
  received in cash depreciating any capital
  assets used for the fund.

116
Types of Pensions

• Defined contribution plans employers /or
  employees make tax deductible cash (or stock)
  contributions to the employees retirement
  planthe government has no further obligations.
• Defined benefit plans employer agrees to fund
  the employees retirement, usually based on final
  salary length of service the government has
  complete responsibility for the obligation
  substantial accounting is required.

117
Pension Accounting Issues

• Governments may account for their defined benefit
  pension plans (often Public Employee Retirement
  System or PERS).
• The pensions of local governments are often run
  by the state as a separate system, such as
  CalPERS.
• The accounting is different than for commercial
  accounting (GASB 25 27 vs. FASB 35, 87
  others).

118
Pension Accounting Issues (2)

• The two major components are (1) the plan assets
  which are invested in stock, bonds other
  earnings assets (using fair value) and (2) the
  pension obligations associated with current
  future retirement-related payments.
• The difference between the assets liabilities
  is the net assets availablewhether the plan is
  over- or under-funded is a key factor for analysis

119
Pension Contributions

• A major issue is the amount of pension
  contributions calculated each year, based on
  actuarial assumptions other issues. The
  calculation includes normal cost plus a provision
  for amortizing the unfunded actuarial accrued
  liability.
• Normal cost is the portion of the present value
  of pension plan benefits allocated to this fiscal
  year by some actuarial method (6 methods are
  alloweddetermined by actuaries, not the
  accountants). Unfunded actuarial accrued
  liability includes transitional losses, actuarial
  losses, improvements in pension benefits,
  special termination benefits (see p. 375).

120
Reporting Pension Costs

• During the fiscal year the government will
  contribute some amount of cash to the pension
  fund, which may or may not be the same as the
  actuarial calculated annual pension cost. Assume
  a fund contributed 90,000 in cash, but the
  actuarially determined amount is 98,000. How
  this is accounted for depends on the fund making
  the entry.

121
Reporting Pension Costs (2)

• Journal entryGeneral Fund Expenditures-Pension
  90,000 Cash 90,000
• Journal entryEnterprise Fund Operating
  Expense-Pension 98,000 Cash
  90,000 Net Pension Obligation 8,000
• Governmental funds recognize only the cash
  contribution note that the net pension
  obligation is included in the Government-wide
  statements Proprietary Fund record the entire
  obligation.

122
Post-employment Benefits

• In addition to pensions, government often pay for
  health care other insurance costs, as well as
  other benefits to former employees
• These are considered obligations called
  post-employment benefits.
• Final GASB pronouncements have not been issued
  however, accounting is expected to be similar to
  pensions.

123
Agency Funds

• Agency funds are custodial, where the government
  acts as an agent for other funds or governments
  thus, serving as a conduit for cash other
  financial assets.
• Agency funds are commonly used when one
  government collects the taxes for all governments
  within its jurisdiction remits the funds to
  those governments (e.g., a county maintains the
  property tax records for all local governments in
  the county).
• Pass-through grants are commonly allocated
  through Agency Funds.

124
Agency Fund Accounting

• Only current assets liabilities are usedthere
  are no operating entries recorded.
• Assume a county collect 5,000 in cash for the
  city 3,000 for the school district in cash for
  property tax. The entry would be Cash
  8,000 Due to City 5,000 Due to
  ISD 3,000
• When remitted in cash Due to
  City 5,000 Due to ISD 3,000 Cash 8,0
  00

125
Chapter 11

• Reporting, Disclosure Financial Analysis

126
Reporting Issues

• The Reporting Entity what must be included in
  the CAFR?
• Financial Reporting what information is included
  in the CAFR?
• Financial Analysis what information is useful
  to evaluate the government? Issues include
  relative efficiency, services provided vs. taxes,
  fiscal stress.

127
Primary Government

• Primary government government unit that is
  issuing a CAFR.
• It is legally separate fiscally independent
  from other governmental units. Fiscally
  independent means it has the authority to
  determine its budget, levy taxes set rates,
  issue bonds

128
Component Unit

• Component unit a legally separate government,
  but the elected officials of a primary government
  are financially accountable can impose their
  will or the component unit can provide special
  benefits or impose specific financial burdens on
  the primary government.
• Key criteria primary government appoints a
  voting majority of the units governing board or
  a majority of the units governing body is
  composed of primary government officials.

129
Financially Accountable Component Unit (CU)

• Primary government can impose its will e.g., it
  can remove appointed CU members modify or
  approve the CU budget veto, overrule or modify
  CU decisions hire the CUs managers.
• CU benefits or specific financial burdens (the CU
  is fiscally dependent) primary government is
  entitled to the CUs financial resources legally
  obligated for the CU deficits, operations or debt
  obligations.

130
Reporting Component Units

• Discrete presentation CUs are reported in one
  column of the financial statements of the primary
  government. This is the more common form of
  presentation.
• Blending combining the CUs operations as if it
  were a part of the primary government. Note that
  the General Fund of the CU would be treated as a
  Special Revenue Fund of the primary government.
• Additional disclosures on the CUs can be made in
  the government-wide statement, notes or in
  combining statements.

131
Other Types of Entities

• Joint ventures are contracts that create a new
  entity to carry out a specific activity (e.g.,
  construct an airport).
• If the funding comes from proprietary fund
  resources, the JV would be recorded in a
  proprietary fund. If the funding comes from a
  governmental fund, the JV would be recorded in a
  governmental fund.
• Related government similar to a CU, but it does
  not meet all the criteria. It is not reported as
  a CU, but the relationship is disclosed.

132
Comprehensive Annual Financial Report (CAFR)

• CAFR has 3 sections Introductory
  section Financial section Statistical
  section
• The most recent authority for the composition of
  the CAFR is GASB 34.

133
Introductory Section

• Table of Contents
• Letter of Transmittalusually from the city
  manager or CFO, usually focusing on current
  operations fiscal/economic conditions.
• Other Certificate of Achievement indicates that
  the CAFR meets the standards of the GFOA.

134
Financial Section

• Auditors Report (should be an unqualified
  opinion)
• Management discussion analysisa new section
  required by GASB 34, with potentially useful
  additional information.
• Financial statements
• Required supplementary information, including
  budget-to-actual comparisons, infrastructure
  condition pension valuation
• Combining individual statements schedules
• Statistical data

135
Financial Statements

• Government-wide statements Statement of net
  assets Statement of activities
• Governmental funds Balance
  sheet Statement of revenues, expenditures
  changes in fund balances
• Proprietary funds Statement of Net
  Assets Statement of revenues, expenses,
  changes in net assets Statement of cash flows
• Fiduciary Funds Statement of fiduciary net
  assets Statement of changes in fiduciary net
  assets

136
Statistical Section

• Financial trends, including net assets
• Revenue capacity, including tax rates, tax levies
  collections, property values
• Debt capacity, including leverage ratios,
  overlapping debt debt margin
• Demographic economic data, such as population
  per capital income
• Operating information such as number of employees

137
Public Colleges Universities

• Are under the jurisdiction of GASB
• Are allowed to report as special-purpose
  governments engaging only in business-type
  activities that is, full accrualNote this is a
  choice, not a requirement
• Using this choice, a college do not need to
  present detailed fund statements the required
  statements would be a statement of net assets
  statement of revenues and expenses a statement
  of cash flows

138
Financial Analysis

• Analysis of financial condition will the
  government be able to finance its services meet
  its obligations? Could be useful to voters
  taxpayers, as well as debt holders.
• Analysis includes detailed review of economic
  demographic information, the CAFR ( operating
  budget), plus additional calculations, trends
  ratios that provide additional insight.
• See Table 11-5 for a detailed example (pp.
  422-424).

139
Economic/Demographic Factors

• Economic conditions include population,
  population changes, average income, unemployment
  rate.
• Demographic factors include relative age
  (especially dependent populationunder 16 over
  65) education levels.
• Political factors include the government
  structure (e.g., city manager vs. mayor-council
  for cities), voting characteristics

140
Overall Financial Characteristics

• Budget information (from operating budget)
  balanced budget, changes from year-to-year for
  both revenues spending, obvious problems.
• Financial statement trends surplus or deficit
  (especially in the General Fund
  government-wide), relative fund balance/ net
  assets (especially in the General Fund
  government-wide),

141
Some Key Ratios

• Fiscal effort, such as own-source revenues
  divided by net assessed value
• Adequacy stability of revenues, such as
  property tax revenue to total operating revenues
  uncollected property tax to total tax levies.
• Spending patterns, such as expenditures for
  specific function divided by total expenditures.
• Liquidity leverage, such as current assets to
  current liabilities long-term debt divided by
  population.

142
Chapter 12

• Other Not-for-Profit Organizations

143
Not-for-Profit Organizations (NPs)

• Typical NPs Colleges universities
  (private public) NP
  Hospitals/healthcare Voluntary health
  welfare organizations All other
  churches, labor unions, industry groups, hobby
  groups, museums, etc.

144
Accounting Jurisdiction

• Historically, each NP industry developed a
  separate set of GAAP the AICPA issued audit
  guides statements of position. To some extent,
  current AICPA audit guides are authoritative.
• The GASB assumed jurisdiction for
  government-owned NPs (public colleges,
  government-owned hospitals, etc.).
• The FASB began issuing GAAP for NPs in 1987 (FASB
  93) assumed jurisdiction for all other NPs. It
  has not issued comprehensive guidance for all
  issues all NPs.

145
GAAP Adopting Issues

• Voluntary health welfare all otheraccounting
  model developed by AICPA not much different
  than commercial GAAP.
• NP hospital model developed by American Hospital
  Association, with a unique full accrual model.
  Primary revenue source is charges for services
  generally similar to commercial accounting.

146
Adopting IssuesColleges Universities (CU)

• Unique model developed by NACUBO, somewhat
  similar to governmental model used by both
  public private CUs.
• Now split jurisdiction public CUs under the
  GASB private CUs under the FASB.
• Significant issues problems adopting either a
  FASB or GASB approach. Public colleges often
  account for most activities as Proprietary Funds.

147
FASB Financial Statement Requirements

• Required statements (FASB 117) Statement of
  financial position Statement of
  activities Statement of cash flows
• Net assets classified into 3 categories Unrestri
  cted net assets Temporarily restricted net
  assets Permanently restricted net assets

148
Analysis of Net Assets

• Most operating resources are unrestricted, such
  as charges for services, tuition, unrestricted
  contributions, and so on.
• Resources restricted for a current use are
  temporarily restricted, such as a donor
  restricted gift to be used specifically for
  s