FOCUS OF CHAPTER 24
• The Governmental Accounting
Standards Board
• The Nature and Diversity of Activities
• The Objectives of Governmental
Financial Reporting
• Measurement Focus and Basis of
Accounting
• Basic Principles of the GASB
Codification
• The General Fund

The Governmental Accounting
Standards Board (GASB)
• GASB:
– Created in 1984.
– A sister organization to the FASB.
– Establishes GAAP for state and local units.
–
–
No authority to establish GAAP for the federal government.
Seven members —simple majority vote needed (4 votes).

Jurisdictional Arrangement
Between GASB and FASB
• GASB has primary responsibility for state and local governmental units.
• State and local governmental units:
– Must follow FASB rules if GASB says so.
– May elect to follow a FASB rule if
GASB has not addressed a specific issue.
• If election is made, must use ALL such rules.

The Government Finance Officers
Association (GFOA):
• GFOA:
– The equivalent of the AICPA for the private sector.
– Publishes or provides the following to enhance and promote professional management of governmental units:
• Books, periodicals, monthly newsletter.
• Services to members.
• Software.

GAAFR: “ The Blue Book ”
• Stands for Governmental Accounting,
Auditing, and Financial Reporting.
• Published by the GFOA.
• Neither prescribes nor authoritatively interprets GAAP for governmental units.
• Provides detailed guidance (many examples) for applying governmental
GAAP .
• Widely used by governmental units.

The Nature & Diversity of Governmental Activities
• Absence of a Profit Motive:
– What to measure?
• Revenues & costs of providing services?
• Inflows and outflows of all resources?
• Inflows and outflows of certain resources ?

The Nature & Diversity of Governmental Activities
• Extensive Legal Requirements:
– Constitutions, charters, and statutes regulate governmental units.
– Some legal provisions pertain to accounting and financial reporting matters :
• Keeping separate books for certain activities.
• Being audited by outside CPAs.

The Nature & Diversity of Governmental Activities
• Diversity of Activities —Operations are classified as:
– Governmental —these activities DO NOT resemble commercial activities .
–
–
Proprietary type —these activities DO resemble commercial activities — Can measure profitability or capital maintenance.
Fiduciary —holding and managing assets owned by others (e.g., pension assets).

Use of Fund Accounting
• Fund Accounting:
– Accounting for certain activities separately from all other operations.
– Fund defined: A fiscal and accounting entity with a self-balancing set of accounts (like a branch or a division of a commercial entity).
– The General Fund: The main and largest fund —records most routine transactions.

Use of Fund Accounting
• Fund Accounting (cont.):
– The difference between a fund’s
ASSETS and LIABILITIES is called:
Governmental and Proprietary
Fiduciary-Type Funds Funds
FUND BALANCE Net Assets

Use of Fund Accounting
• Specific General Ledger Accounts Used:
Governmental and Proprietary
Fiduciary-Type Funds Funds
Fund Balance: Net Assets:
Reserved for encumbrances Invested in capital
Unreserved assets, net of related debt
Restricted
Unrestricted

The Objectives of Governmental
Financial Reporting
• GASB Concepts Statement No. 1 —
Financial Reporting should:
– Assist in fulfilling accountability and enabling users to assess accountability.
– Assist users in evaluating operating results.
• How has the financial condition changed?
– Assist users in assessing service level capabilities and ability to meet obligations as they become due.

Measurement Focus And Basis
Of Accounting (MFBOA)
• Measurement Focus:
– WHAT flows to measure for operations.
• Basis of Accounting:
– WHEN should transactions and events be recognized in the financial statements.

MFBOA: Proprietary
Activities
• Measure flow of ALL ECONOMIC
RESOURCES (both reporting levels):
– Present a Statement of REVENUES and EXPENSES —reveals the CHANGE
IN THE ECONOMIC CONDITION .
– Use accrual basis of accounting (needed in order to report ALL revenues & expenses).
– Also present a Statement of Cash Flows .

MFBOA: Governmental
Activities
• Measure flow of CURRENT FINANCIAL
RESOURCES at the fund-based reporting level:
– Present a Statement of Revenues and
Expenditures and Changes in Fund
Balance — reveals:
• Financial resources received and spent .
• Change in net financial resources available for spending in the near future .
– Use modified accrual basis of accounting.

MFBOA: Current Financial
Resources
• Current Financial Resources — Typical Items:
– Cash, property tax receivables, prepaids, and supplies inventories.
• Claims Against Current Financial Resources
— Typical Items:
– Wages, payroll taxes, payables to vendors, and liabilities expected to be paid in the
NEAR FUTURE (typically within 60 days after the year-end).

MFBOA:
• A Statement of Revenues and Costs of
Providing Services —It would :
–
–
–
Reveal the flow of all economic resources.
Be a “true” operating statement.
Include ALL expenses — not just those actually paid and expected to be paid in the near future .
– Reveal the change in economic condition.

Basic Principles of the GASB
Codification:
• Accounting & Reporting Capabilities
• Types of Funds
• Basis of Accounting
• Financial Reporting
• Long-Term Liabilities
• Capital Assets
• Budgets and Budgetary Accounting

Basic Principles: Category 1
—
Accounting & Reporting Capabilities
• Present financial statements on a GAAP basis.
• When conflicts exist between GAAP
BASIS and LEGAL REQUIREMENTS:
– Demonstrate legal compliance by
either:
• Additional schedules and narrative explanations or
• A separate legal basis report.

Basic Principles:
—
• Governmental Funds:
–
–
General Fund —Accounts for all activities not required to be accounted for in another fund.
Special Revenue Fund —A clone of the
General Fund.
– Capital Projects Funds
– Debt Service Funds
– Permanent Funds

Basic Principles:
—
• Proprietary Funds:
– Enterprise Funds —Provides services
PRIMARILY to nongovernmental users
(city-owned utilities are prime example).
– Internal Service Funds —Provides services SOLELY governmental departments.

Basic Principles:
—
• Fiduciary Funds:
– Trust Funds:
• Pension (and similar) Trust Funds
• Investment Trust Funds
• Private-Purpose Trust Funds
(these activities do not benefit the government unit)
– Agency Funds

Basic Principles: Category
3 — Basis of Accounting
• Accrual Basis Funds:
– Proprietary funds —
• Enterprise Funds
• Internal Service Funds
– Fiduciary funds (3 Trust & 1 Agency)
• The two propriety funds and the three trust funds have either a profitability or capital maintenance orientation.

Basic Principles: Category
3 — Basis of Accounting
• Modified Accrual Basis Funds:
– Governmental funds —
• General Fund
• Special Revenues Fund
• Capital Projects Funds
• Debt Service Funds
• Permanent Funds

Basic Principles: Category
3 — Basis of Accounting
• Modified Accrual Basis Defined:
– REVENUES: Recognize in period in which they become available and measurable.
• Available means : Collectible within the current period or soon enough thereafter to be used to pay current period liabilities.

Basic Principles: Category
3 — Basis of Accounting
• Pointers on Recognizing REVENUES:
–
–
Revenues STAND ALONE.
Revenues are not “earned” as in the private sector.
– The delivery of services requires expenditures — but delivery does not
“generate” revenues.

Basic Principles: Category
3 — Basis of Accounting
• Modified Accrual Basis Defined:
– EXPENDITURES: Recognize in the accounting period in which the fund liability is incurred .
• One exception exists for interest on general long-term liabilities.

Basic Principles: Category
3 — Basis of Accounting
• Pointers on recognizing EXPENDITURES:
– Liabilities are recorded when they are incurred.
– The offsetting debit will usually be to:
• Expenditures (and thus reported in the current operating statement) OR
• The Net Assets—Unrestricted account in the GCA-GLTL g/l —the debit balance will be reported as expenditures in a later future period .

Basic Principles:
—
—
• THE BALANCE SHEET —Display restrictions of the fund balance in the following manner:
–
Fund Balance:
Reserved for encumbrances.... $ 33,000
Unreserved................................. 417,000
Total Fund Balance.............. $450,000
Numerous types of restrictions can exist — thus several types of “reservations” are used.

Basic Principles:
—
—
• THE OPERATING STATEMENT —Use the “allinclusive” format that includes the analysis of the fund balance ( modified accrual basis funds ) or net assets ( accrual basis funds ) for the period:
– Revenues (inflows)
Expenditures (outflows)
Excess of Revenues over Expenditures
Fund Balance, 1/1/06
Fund Balance, 12/31/06

Basic Principles:
—
—
• BOND PROCEEDS —For governmental funds, report in a special category in the operating statement as follows:
Revenues (inflows)
Expenditures (outflows)
Other Financing Sources and Uses:
Bond proceeds (an inflow)

Basic Principles:
—
—
• INTERFUND ACTIVITIES —Report in one of the following four categories (A and B are reciprocal in nature; C & D are nonreciprocal in nature):
– (A) Interfund loans.
– (B) Interfund services provided and used.
–
–
(C) Reimbursements.
(D) Transfers (“ the last resort”).

Basic Principles: Category 4(B) — Financial
Reporting — Interfund Transfers
• (B) INTERFUND SERVICES PROVIDED
AND USED:
– Transactions in which one fund provides a service to another fund .
– Such service would be provided by an outside company if not provided internally.
Service provider reports REVENUES.
Service recipient reports EXPENDITURES
(or expenses if an accrual basis fund).

Basic Principles:
—
—
• (C) REIMBURSEMENTS:
– Occur when a fund that is ultimately responsible for a particular expenditure or expense repays (or agrees to repay) some other fund that
initially paid for the item on its behalf.
– Results in getting the expenditure or expense recorded in the proper general ledger.

Basic Principles: Category 4(B) — Financial
Reporting — Interfund Transfers
• (D) TRANSFERS:
– The default category: For transfers that cannot be classified into one of the other three categories (A, B, and C).
Report in the OTHER FINANCING SOURCES
AND USES section of the operating statement for governmental funds.

Basic Principles:
—
—
• OTHER FINANCING SOURCES AND USES category of the operating statement —limited to the following types of transactions:
– Bond proceeds
– Transfers in
– Transfers out
– Proceeds from sale of general capital assets
– Proceeds from capital lease

Basic Principles:
• Comprehensive Annual Financial
Report (CAFR):
– Includes 2 types of financial statements:
• #1: Government-wide statements
(show the “big picture”)
• #2: Fund-based statements.

Basic Principles:
• The General Purpose Financial
Statements:
– GOVERNMENT-WIDE STATEMENTS:
Consists of two specific financial statements designed to present an
OVERVIEW of financial position and operations.
– FUND-BASED STATEMENTS: Consists of seven specific financial statements
(narrow focus statements).

Basic Principles:
• Certain funds account for and report long-term liabilities.
• Long-term liabilities not accounted for in a specific fund is called General Long-Term
Liabilities:
– GLTL is accounted for in the GCA-GLTL g/l.
– GLTL is the liability of the government as a whole and not that of any specific fund.

Basic Principles:
• Certain funds account for & report capital assets.
• Fixed assets not accounted for in a specific fund are called General Capital Assets.
– They are reported in the GCA-GLTL g/l.
• Depreciation expense is not reported in the operating statement of the governmental funds — at the fund-based reporting level.

Basic Principles:
• Appropriation: The statutory authorization for spending a budgeted amount during a coming year.
• Annual Budgets for the General Fund and the Special Revenue Funds are always recorded in the general ledger for control purposes.
– Also done for Capital Projects Funds and Debt Service Funds if useful.

Basic Principles:
• Encumbrances : Commitments related to unperformed (executory) contracts for goods or services.
• Special general ledger accounts are used to record encumbrances — the purpose is to prevent spending more than has been appropriated.
• SUCH ENTRIES HAVE NO EFFECT ON
REPORTED OPERATIONS.

Inventories of Supplies:
• Consumption Method:
– The preferred method — it parallels business practice.
– The ACQUISITION of inventory is treated as the conversion of resources (debit Inventory ).
– The USE of inventory is treated as an outflow of resources (credit Inventory and debit Expenditures or Expenses ).

Inventories of Supplies:
• Purchases Method:
– The ACQUISITION of inventory is treated as an outflow of resources
(debit Expenditures or Expenses ).

The Operating Statement for
Governmental Funds:
• REVENUES:
– Always classified by source.
• EXPENDITURES:
– Always classified by character:
• Current, Capital Outlay, or Debt
Service
– And then by function (for example):
• Health, Welfare, Sanitation, Public
Safety

Measuring FLOWS: Cash
Only
STATEMENT OF CASH FLOWS
(simplified)
INFLOWS:
Property tax collections...................... $100,000
Parking meter receipts........................ 5,000
Total CASH Inflows....................... $105,000
OUTFLOWS:
Payments to employees..................... $ 90,000
Payments to services vendors........... 11,000
Total CASH Outflows................... $101,000
Net CASH Inflow...................... $ 4,000

Measuring FLOWS:
Cash & Receivables Only
STATEMENT OF FLOWS OF
CASH & RECEIVABLES
(simplified)
INFLOWS (REVENUES):
Property tax assessments, net........... $120,000
Parking meter receipts....................... 5,000
Total Inflows................................... $125,000
OUTFLOWS:..
Payments to employees.................... $ 90,000
Payments to services vendors.......... 11,000
Total Outflows.............................. $101,000
Net Inflow..............................… $ 24,000

Measuring FLOWS:
STATEMENT OF FLOWS OF CASH,
RECEIVABLES, & VOUCHERS PAYABLE
(simplified)
INFLOWS (REVENUES):
Property tax assessments, net................. $120,000
Parking meter receipts............................. 5,000
Total Inflows........................................ $125,000
OUTFLOWS (EXPENDITURES):
Employee salary costs incurred............. $ 96,000
Services provided by service vendors.. 17,000
Total Outflows.................................... $113,000
Net Inflow.....................................… $ 12,000

End of Chapter 24
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