Presented by
Diane Reichard, CPA, CGMA, CGFO, CPFO
Agenda
Review Government Fund Accounting
 Various Accounting Issues

◦ Investments
◦ Fixed assets and depreciation
◦ Long-term liabilities
◦ Fund equity
Financial Reporting
 Grant Accounting


Taxpayers

Citizens

Oversight & legislative bodies

Investors & creditors

Management

Self-balancing set of accounts
◦ Cash and financial resources
◦ Liabilities
◦ Residual equity/balances
◦ Changes in net assets
 At
least one = General fund
 More

funds = more complexities
Minimum number of funds
◦ Sound financial management
◦ Meet legal requirements
◦ Based on accounting objectives

New accounting standard

Change in state constitution

Grant required

New activity

Level of financial control

Management

Governmental funds
◦ General operations
◦ Financial resources

Proprietary funds
◦ Business type operations
◦ Economic resources

Fiduciary funds
◦ Trust agreement
◦ Agency relationship
◦ Resources held for others

Governmental funds
◦ General
◦ Public Safety

Proprietary funds
◦ Economic Environment - Utilities
◦ Transportation – air, land, sea

Fiduciary funds
◦ Agency
◦ Pension Trust

General Fund

Special Revenue Funds

Debt Service Funds

Capital Projects Funds

Permanent
Financial resources measurement focus
 Modified accrual basis of accounting
 Account for expenditures of financial
resources (not expenses)
 Capital assets recorded as expenditures
 Long-term liabilities are expenditures
and NOT recorded in governmental
funds


Enterprise
◦ Fees charged to external users
◦ Operating net income

Internal Service
◦ Reimbursement from:
 Primary government users
 Component units
 Other governments
Economic resources measurement
focus
 Full accrual basis of accounting
 Account for expenses of economic
resources


Capital assets & long-term liabilities
ARE recorded in proprietary funds on
the Balance Sheet
 Depreciation expense on capital
assets recorded

Agency

Investment Trust

Private-Purpose Trust

Pension and OPEB Trust

Full accrual accounting

Economic resources measurement
focus
◦ Capital assets & long-term liabilities ARE
recorded

“Additions ” and “Deductions”
◦ Not “revenues” or “expenses”

GAAP = generally accepted accounting
principles

GASB = Government Accounting
Standards Board
◦ Established 1984
◦ Standards for State and Local Governments
 Financial accounting
 Financial reporting

Statutory requirement to use GAAP
WHAT is measured - Economic Resources
◦ Change in economic position
◦ Inflows and outflows of economic resources
◦ Current and noncurrent
 Capital assets and long-term debt
◦ Focuses on operational accountability
 Whether management efficiently uses
resources in providing services
WHAT is measured - Financial Resources
◦ Change in spendable resources
◦ Inflows and outflows of current financial
resources
 Cash & other liquid assets
 Payables from cash and other liquid assets
◦ Focuses on fiscal accountability
 Whether managers have met budgetary
and other legal financial requirements
WHEN to measure
◦ When transaction/event recognized
◦ Accrual
◦ Modified accrual
 Measurable and available
◦ Trust Funds
 Expendable or non expendable
 WHEN
to measure
◦ Revenues recognized when earned
◦ Expenses recognized when incurred

WHEN to measure
◦ Revenues recognized when measurable &
available
 60 day criteria
◦ Expenditures recognized when incurred
 Expected to be liquidated with current
financial resources
Measurement
Focus
Basis of
Accounting
Economic
resources
Accrual
Current financial
resources
Modified accrual
Proprietary fund
statements
Economic
resources
Accrual
Fiduciary fund
statements
Economic
resources
Accrual
Government-wide
statements
Governmental fund
statements

Public process = “representation”
◦ Legal contract
◦ Estimated revenues and appropriations

Statutory requirements
◦ Not required for all funds
◦ On GAAP basis

Should be tied to strategic plan

Operations guide

Communication device

Financial plan

Policy document

Legal standing
◦ Legal level of control
◦ Administrative level of control

Budgetary basis of accounting
 Timing
 Perspective
 Entity

Preparation

Approval

Execution

Evaluation
Date
Reference
Vendor
Description
Appropriations
Encumbrances
Expenditures
1/1/08
2008 Budget
1/15/08
PO #100
1/20/08
Inv 200
Acme
Invoice for PO 100
1/21/08
Inv 250
Office Depot
1/31/08
PR Journal
2/1/08
PO #101
Home Depot
PVC pipe
10,000
2/10/08
Inv 300
Home Depot
Partial shipment
(5,000)
5,000
888,900
2/20/08
Inv 350
Home Depot
Shipped in full
(4,500)
4,500
888,900
2/22/08
PO #101
Home Depot
Close PO
5/31/08
Budget cut
1,000,000
Copper tubing
Available
1,000,000
1,000
(1,000)
999,000
1,000
999,000
Office supplies
100
998,900
January payroll
100,000
898,900
(500)
(100,000)
888,900
889,400
789,400

Fraud prevention

Detection

Deterrence programs

A process effected by an entity’s
board of directors, management &
other personnel, designed to provide
reasonable assurance regarding the
achievement of objectives.
◦ Effectiveness & efficiency of operations
◦ Reliability of financial reporting
◦ Compliance with applicable laws &
regulations

Control environment

Risk assessment

Control activities

Information and communication

Monitoring
Fund Classification Exercise
Fund Exercise – Part II
Budget Exercise
Internal Control Exercise
The Financial Reporting Entity


Consists of the primary government
(PG) and all component units (CU) for
which the primary government is
financially accountable
Component units are reported by
◦ Discrete (separate column) presentation
for each major CUs
◦ Blended presentation - CU’s financial
information included with appropriate
fund columns of the PG

Statute

Separately elected governing body

Special purpose governments
◦ Legally separate elected governing body
◦ Ultimately accountable to its electorate
◦ Fiscally independent

A state government

General purpose local government
◦ City, town, or county

Special purpose government
◦ Legally separate elected governing body
◦ Fiscally independent of other state/local
governments
◦ School districts, special districts, etc.

Appoint voting majority of board

Modify/approve rate/fee changes or budget

Remove appointed governing body members
at will

Veto, overrule or modify other types of
decisions

Appoint, hire, reassign or dismiss
management

Create financial benefit or burden

Ability to access CU resources

Obligation to finance deficits



Responsible in some manner for CU
debts
CU provides financial benefit or is
financial burden
Omission is misleading to financial
statement users

Relationship & significance

Meet all three tests
◦ Separate economic resources benefit PG
◦ PG can access separate economic
resources
◦ Economic resources significant to PG

Also consider those closely related to
or financially integrated with PG
Component Unit Examples

Governmental component units
◦
◦
◦
◦

Dependent special districts
Port authorities
Universities
Hospitals
Not-for-profit component units
◦ Volunteer fire departments
◦ Libraries and Museums
◦ Hospitals

Different FS format
◦ 501 (c) (3) entities
◦ CUs with GTAs & BTAs

Differing fiscal year ends
◦ FYE within PG Fiscal Year
◦ CU FYE 1st quarter of PG Fiscal Year

Inter-agency transactions

Role in MD&A - focus is PG

Florida law
◦ Florida Statutes 218.415 and 280
◦ Allowable securities
◦ Security maturity
◦ Credit quality

Bank deposits
◦ FDIC insurance
◦ Collateralization
42

Investment Policy Basics

Financial Institutions

State/local laws

Safekeeping

Scope

Internal controls

Risks

Investment instruments

Objectives

Investment limitations

Standards of Care

Reporting

Investment Committee

Policy approval
43

Goals: safety, liquidity, yield

Portfolio management policy
◦ Evaluate credit risk
◦ Structure maturities based on cash flow
◦ Identify portfolio segmentation
 Liquidity - money market, SBA
 Enhanced cash - 90 days to 18 months
 Reserves - longer term 18 months to 5 years
44

Fund type
◦ General
◦ Enterprise
◦ Trust funds

Exclusions - Debt service reserve funds

Adopted by governing body
◦ Periodic review of policy
◦ Periodic investment reports
45

Safety of principal
◦ Security type
◦ Bank deposits
◦ Local government pools

Liquidity
◦ Money market funds, bank, pools

Yield
◦ Market influenced
◦ Watch credit risk
46

Prudent investor rule
◦ Investments shall be made with judgment and
care, under circumstances then prevailing, which
persons of prudence, discretion and intelligence
exercise in the management of their own affairs,
not for speculation, but for investment,
considering the probable safety of their capital as
well as the probable income to be derived.”
Ethics policy
 Conflicts of interest
 Delegation of authority

47

Source of security investments

Primary /regional dealers
◦ Capital strength, references, audited
financial statements

Banks
◦ Capital, assets, management, credit rating
48

List allowable investments
Define terms
◦ Credit criteria (Moody’s, S&P)
◦ Maturity restrictions - may vary by fund
◦ Security list
◦





Treasuries
Agencies
Money market funds
Repurchase agreements
Securities lending





Callable/puttable securities
Commercial paper
Mutual funds
Bank deposits
CDs
49

Diversification
◦ Maturity
◦ Credit
◦ Issuer

Competitive bids for securities
◦ Bloomberg

Fund type
◦ Strategy may differ based on purpose of fund
50



Third party custody/safekeeping is
essential
Securities should be held in an
acceptable custody/safekeeping
arrangement
Ownership of securities should be
evidenced by a safekeeping receipt or
securities should be held in a trust
custody account
51


Investment officer is responsible for
maintaining internal control structure
Key issues:
◦ Collusion
◦ Separation of activities
◦ Security safekeeping
◦ Wire transfer authority
◦ Transaction confirmations
◦ Review and monitoring
52
Separate record keeping/transaction
 Custodial safekeeping
 Written confirmations
 Procedures for transactions

◦ Criteria for selection
◦ Who to call
◦ Required forms
◦ Competitive bids
◦ Transfer funds
53


Credit (default risk) – issuer will be
unable to redeem the investment at
maturity
Evaluate and make decisions
◦ Develop investment policies
◦ Develop administrative systems and
internal controls

Know investments
54

Compile list of pre-approved issuers
◦ Establish minimum credit rating
 AI/PI
 Long-term debt rating of at least A
◦ Limit purchases to issuers with $500 million
in total assets
◦ Monitor trends in financial condition
www.fitchibca.com
www.moodys.com
www.standardandpoors.com
55


Interest rate risk – changes in financial
market will reduce value of debt
Interest rate risk can be minimized
◦ Limit investments in portfolio to rapid market
swings
◦ Diversify maturities in portfolio
◦ Structure portfolio – securities mature to meet cash
flow requirements
56

Evaluate results
◦ Compare to previous year
◦ Annual Revenue-Important to budget
◦ Determine how to modify

Keep current with market
◦ Read available information/daily reports
◦ Wall Street journal
◦ Consult with Investment Manager

Reporting Requirements
◦ GASB 31
◦ Financial Statements
◦ Commission and City Manger

Internal checks and balances
◦ Vacation for employee
◦ Segregation of duties
◦ Provide custodial agreements
◦ Evaluate annually

Custodial credit risk
◦ Party holding security will fail to return
principal

Market risk
◦ Investment/collateral value declines
◦ Government risk most often results from
interest rate shifts

Fair value

Historical cost

Amortized cost
◦ Price willing buyer would pay seller in
arm’s length transaction
◦ Changes in FV = investment income
◦ Principal dollars invested in security
◦ Historical cost + amortization of
discount/premium
◦ Amortization = investment income
◦ Sales prior to maturity = gain/loss

All debt and equity securities

Open-end mutual funds


Participating interest earning
investment contracts
External investment pools

Non participating interest earning
investment contracts
◦ Nonnegotiable CDs
◦ Repurchase agreements
◦ 2a7-like eternal investment pools Not SEC registered but acts as if it is,
NAV not at $1 use FV

Participating interest earning
investment contracts and certain
money markets with maturity of one
year or less at time of purchase
 Commercial paper
 Banker acceptances
 US Treasury, agency, and
instrumentality securities


Master repurchase agreement – Documents,
transactions and ownership interests
Government transfers excess cash to brokerdealer to earn additional investment income
◦ Broker-dealer provides securities as collateral to
government and agrees to repay cash and
interest in exchange for same securities at later
date

Most considered nonparticipating interest
earning investment contracts - Valued at
historical cost

Overnight repurchase agreement
◦ Fixed interest rate
◦ Mature next day

Term repurchase agreement
◦ Fixed maturity date and interest rate

Open repurchase agreement
◦ No defined maturity date
◦ Either party may terminate daily
◦ Interest rate set daily

Opposite of repurchase agreement
◦ Government, seller-borrower, transfers specific
securities to broker-dealer/ financial institution in
return for cash
◦ Government agrees to repay cash and interest in
exchange for return of same securities at later
date
 Addresses temporary cash needs without liquidating
investments
◦ Collateral securities remain on balance sheet
◦ Exposure risk if interest rates shift and securities
must be liquidated at loss to return cash to
broker/dealer

Internal investment pool
◦ Commingles funds of reporting entity
◦ Values investments as if held by individual
participating funds

External investment pool
◦ Commingles funds of legally separate
entities
 Internal portion = “Equity in Pooled Cash &
Investments”
 External portion = separate fiduciary fund
(Investment Trust Fund)

Assets

Liabilities

Revenues - gains

Expenses/expenditures - losses

Other sources and uses

Inventory

Accounts Receivable

Prepaid expenses

Property, plant and equipment
◦ Valuation and impairment
◦ Capitalization and depreciation

Restricted assets

Purchase (financial resources)
Expenditures – Supplies, etc.
Cash/AP

Consumption (economic resources)
Inventory – Supplies, etc.
Cash/AP

Current financial resources
Expenditures
Cash/AP

Non current financial resources
Prepaid expenses
Cash/AP






Land
Buildings
Improvements Other than Buildings
Machinery and Equipment
Construction Work in Progress
Infrastructure (roads, streets, bridges)
◦ Networks - assets for a particular service
◦ Subsystems of networks - assets that
make up a segment of the network
 Long-lived
assets used by activities
reported in governmental funds
 NOT
capital assets that are specifically
associated with activities reported in
proprietary and fiduciary funds



Capitalized as governmental
activities accounts in the GWS
Depreciated in the GWS
Debited to expenditures in the
appropriate governmental fund

Purchased capital assets
◦ Invoice or historical cost
◦ Estimated cost if actual cost is unknown

Donated assets
◦ Estimated fair value at time of gift
◦ Use book value if coming from another fund

Intangible assets
◦ Historical cost if purchased
◦ Different GAAP for self developed


Additions or improvements that extend
the useful life
No specific threshold specified by GAAP
◦ GFOA recommends $5,000
◦ May have different levels for different types
of assets
◦ Include all necessary and reasonable costs to
place asset into use – exclude cash discounts
and financing charges

Capital assets are depreciated over
their estimated useful lives
◦ Exceptions




Land
Construction in progress
Certain collections
Infrastructure reported using the modified
approach


Straight line is the most common
Depreciate at an annual rate over the
estimated useful life
◦ Composite – for dissimilar assets
◦ Group – for similar assets

Report depreciation expense in GWS
◦ Disclose depreciation expense charged to
functions in notes

May use for certain infrastructure assets
instead of depreciation if certain
requirements are met
◦ Maintain asset management system
 Condition assessment on current inventory
 Estimated cost to maintain at adopted level
◦ Document the condition level
 Complete assessment every three years
 Disclose results
Costs Incurred After Acquisition

Additions/improvements vs.
replacements/maintenance
◦ Capitalize costs of additions and
improvements
◦ Don't capitalize replacements and
maintenance expenditures
◦ Replacements that are partly additions or
improvements
 Capitalize as appropriate
 Remove cost of old asset
◦ Requires judgment to determine whether
an asset has been enhanced
General Fund paid $50,000 cash for office
equipment for the Mayor’s office.
General Fund:
Expenditures – Capital Outlay
Cash
50,000
50,000
Governmental Activities:
Equipment
Cash
50,000
50,000
Disposition of Capital Assets

Government-wide and fund level
(proprietary and fiduciary)
◦ Remove original cost of assets being
disposed
◦ Only part is disposed
 Remove pro-rata share of cost and related
accumulated depreciation

Governmental fund level
◦ Record proceeds received as revenue
Sold fully depreciated machine for $500.
Originally purchased for $8,000 using GF
revenues.
General Fund:
Cash
Revenues—Misc. (or OFS)
Governmental Activities:
Cash
Accumulated Depreciation
Equipment
Gain on Sale of Equipment
500
500
8,000
500
8,000
500
Disposition of Capital Assets
A fully depreciated building with an original
cost of $100,000 (from tax-supported bonds)
is demolished; cost of demolition was $5,000.
General Fund:
Expenditures
Cash
5,000
5,000
Governmental Activities:
Loss on Disposal of Building
Accumulated Depreciation
Buildings
Cash
5,000
100,000
100,000
5,000
Project-life rather than annual focus
 Long-lived assets

◦ Buildings, roads & bridges, etc.

Usually
◦ A construction project
◦ Have in-depth construction estimate and
timeline
◦ Require long-range planning and
significant financing
Project authorization/preconstruction
phase
 Usually included in multiyear CIP
several years before start of project
 Usually requires long-term financing

◦ Voter approval required for general
obligation (property tax-supported) bonds
or special sales taxes for capital projects
◦ Apply for and obtain other long-term
financing or grants
Capital Asset Financing Sources

Long-term bonds
◦ AVT-supported bonds (GOBs)
◦ Revenue-supported bonds (PIRBs)




Long-term loans/mortgages
Government grants (federal or state)
Transfers from other funds
Gifts from individuals/organizations
Capital Asset Financing Sources
(continued)

Capital leases

Certificates of participation (COPs)

Special development districts
◦ Tax increment financing
◦ Transportation development districts

Nondepreciable until complete

Contract accounting applies
◦ Retainage accounts

Interest costs incurred during
construction
◦ NOT capitalized for governmental assets
◦ IS capitalized for business-type assets
Accounting for Capital
Projects - Grant
Federal grant approval is obtained as partial
funding for a city’s office building project.
Capital Projects Fund:*
Due from Federal Government
Revenues
100,000
100,000
Governmental Activities:
Due from Federal Government
100,000
Program Revenues—Public Works—
Capital Grants and Contributions
100,000
* In reality, grant would be recorded as revenue when received.
Accounting for Capital
Projects - Grant
Amount due from the federal government for
the previously recorded capital grant was
received in full.
Capital Projects Fund:
Cash
Due from Federal Government
Governmental Activities:
Same entry.
100,000
100,000
Accounting for Capital
Projects - Interfund
Obtained interim financing to complete
architectural and engineering design. Borrowed
$50,000 from the General Fund that will be
repaid from bond proceeds.
Capital Projects Fund:
Cash
50,000
Interfund Loans Payable—Current
Governmental Activities:
No entry needed.
50,000
Accounting for Capital
Projects - Interfund
The $50,000 due the General Fund was
repaid.
Capital Projects Fund:
Interfund Loans Payable—Current
Cash
Governmental Activities:
No entry needed.
50,000
50,000
Accounting for Capital
Projects - Bond
Bonds with a face value of $5,000,000 were
issued at 101 to finance the project.
Capital Projects Fund:
Cash
5,050,000
Other Financing Sources—Bond Proceeds 5,000,000
Due to Debt Service Fund
50,000
Governmental Activities:
Cash
Bonds Payable
Premium on Bonds Payable
5,050,000
5,000,000
50,000
Accounting for Capital Projects
A partial billing of $3,000,000 was received
from Capital Construction Company.
Capital Projects Fund:
Construction Expenditures
Contracts Payable
3,000,000
3,000,000
Governmental Activities:
Construction in Progress
Contracts Payable
3,000,000
3,000,000
Accounting for Capital Projects
The amount due Capital Construction Company
was paid, net of a 5% retained percentage,
which in conformity with the provisions of the
contract, was withheld pending final inspection.
Capital Projects Fund:
Contracts Payable
3,000,000
Contracts Payable-Retained Percentage 150,000
Cash
2,850,000
Governmental Activities:
Same entry.
Accounting for Capital Projects
Capital Construction Company completed the
building & tendered its final bill of $2,000,000.
Capital Projects Fund:
Construction Expenditures
Contracts Payable
2,000,000
2,000,000
Governmental Activities:
Construction Work in Progress
Contracts Payable
2,000,000
2,000,000
Capital Projects Fund
Transaction
The City paid the amount due Capital
Construction, except for a 5% retained
percentage
Capital Projects Fund:
Contracts Payable
2,000,000
Contracts Payable-Retained Percentage
100,000
Cash
1,900,000
Governmental Activities:
Same entry.
Accounting for Capital Projects
Upon final inspection, the City incurred costs of
$75,000 for interior rework performed by
General Fund employees. The remaining
retained percentage was paid to the contractor.
Capital Projects Fund:
Contracts Payable-Retained Percentage 250,000
Cash
250,000
($75,000 to the General Fund; balance to the contractor)
Governmental Activities:
Same entry.

Modified accrual
Expenditures – Capital Outlay
Cash/AP

Full accrual
Property, Plant & Equipment
Cash/AP
Depreciation Expense
Accumulated Depreciation
Long-term Liabilities

Bonds
◦ Tax-supported bonds
◦ Revenue bonds






Long-term notes
Capital lease obligations
Unfunded compensated absences
(vacation and sick leave)
Unfunded pension obligations
Unfunded OPEB
Long-term portion of judgments and
claims


Unearned revenues
Accruals
◦ Year end
◦ Compensated absences


Interfund debt
Long term debt
◦ Types
◦ Accounting

Liabilities paid from restricted assets


Modified accrual – not available
Full accrual – earnings process not
complete
Cash
Unearned/Deferred Revenue

General long-term liabilities
◦ Bonds, notes, compensated absences, etc.

General obligation bonds
◦ Aka “full faith and credit”



Revenue bonds
Mortgages/Loans
Litigation
Reported in GWS but not in fund financial statements

Modified accrual
Expenditures – Debt Service Principal
Expenditures – Debt Service Interest
Cash/AP

Full accrual
LT Debt Outstanding (principal)
Interest Expense
Cash/AP

Current
◦ Obligations expected to be paid/
liquidated in current fiscal period
 Year-end accruals
 Current portion of long-term debt

Noncurrent
◦ Not expected to be paid/liquidated within
current fiscal period
 Bonds/capital leases
 Pensions and OPEB
 Compensated absences, claims & judgments
Reporting Long-term Liabilities

Debt and other long-term liabilities
◦ Arise from activities of governmental
funds that are not accounted for as
liabilities of a proprietary or fiduciary
fund

Debt reported in a proprietary or
fiduciary fund with general obligation
(“full faith and credit”) backing
◦ Contingent liability should be disclosed
in the FS notes

Issued for short-term purposes
◦ Tax/bond/grant anticipation notes
◦ Record as current liabilities

Issued for long-term purpose
◦ Construction projects
 “Pay as you use”
◦ Governmental funds record other financing
use

Term
◦ Principal due in full at end of specified term
◦ Sinking funds used to obtain better rates

Serial
◦ Bonds mature over entire term of the bonds
◦ Level debt service vs. level principal

Conduit debt obligation
◦ Government issues debt for third party
◦ Third party is obligated to repay
◦ Government does not record, notes only

Demand
◦ Government issued bonds with put option
 Bondholder can require government to pay
principal and accrued interest
◦ Government must repay within 1-30 days
= CURRENT LIABILITY
 Exceptions to recording as current liability
relate to take-out agreements and related
term
Examples: Auction rate securities, Commercial paper
Accrued Interest - Bonds Sold

Cash received from investors for
interest accrued from date of bonds
issue date
◦ Government-wide level
 Recorded as credit to Accrued Interest Payable
or Interest Expense
◦ Fund level
 Might be recorded as a revenue of DSF
 In reality - usually recorded as credit to
Accrued Interest Payable or Interest Expense
Arbitrage Rebates

Interest received by investors on
bonds issued by SLGs is exempt from
federal and some state income taxes
◦ Investors willing to accept a lower interest
rate on these bonds (i.e. net of tax rate)

Governments could issue bonds at a low
tax-exempt rate, invest the proceeds in
high yield taxable securities, then use the
resulting spread for capital purposes
◦ Known as ARBITRAGE
Arbitrage Rebates

Federal law and IRS regulations require
arbitrage earnings, subject to certain
exemptions, be paid to the IRS as
arbitrage rebates
◦ Five year analysis
◦ Very technical field of expertise
Debt Service Funds


Financial resources set aside for principal
and interest on general long-term
liabilities only
Resources may come from
◦ Taxes
 Levied by DSF
 Levied by GF and transferred to DSF
◦ Special assessments

Hold number of funds to a minimum
◦ GASB recommends single DSF for all taxsupported debt serviced by property taxes
Accounting Debt Service

Modified accrual – principal and interest are
generally recognized in period legally due
◦ FYE exception

Budgetary accounting used
◦ Serial bonds - budget transfer revenues totaling the
amount needed that fiscal year for matured
principal and interest
◦ Term bonds – budget additional transfer revenues
to meet sinking fund requirements and the amount
needed for current year interest
◦ Sinking fund investments - reported at fair value
with the changes shown as a component of
investment earnings
Bonds issued January 2, 2009. $100,000 in
interest paid semiannually on January 1 and July
1. The fiscal year ends December 31, 2009.
Q: What amount of expenditures would be
recognized in fiscal year 2009?
A: Only the July 1, 2009 interest payment, or
$100,000, would be recognized as an expenditure
of 2009.
B: Both the July 1, 2009 and January 1, 2010
payments would be recognized as 2009
expenditures.
Serial Bond DSF Transactions
City issued $100,000 of 6% serial general
obligation (G.O.) bonds on December 1, 2008.
Interest of $3,000 is due June 1 and December
1, 2009. Amounts decrease every June 1 and
December 1 for the next 19 years. Principal
maturity of $5,000 is due June 1, 2009.
DSF or CPF
Cash
Other financing sources
Governmental Activities:
Cash
Serial Bonds Payable
100,000
100,000
100,000
100,000
Serial Bond DSF Transactions
The approved FY 2009 budget requires General
Fund to transfer $11,000 to DSF for principal
payment of $5,000 and two interest payments
totaling $6,000 ($3,000 each).
Debt Service Fund:
Due from General Fund/Cash
OFS—Interfund Transfers In
11,000
11,000
General Fund
Other financing uses
Due to DSF/Cash
11,000
11,000
Serial Bond DSF Transactions
On May 28, 2009, the transfer from General
Fund was received.
Debt Service Fund:
Cash
Due from General Fund *
General Fund
Due to DSF
Cash
3,000
3,000
3,000
3,000
* If OFS-Interfund Transfers In had not been accrued at
the time the budget was recorded, then OFS-Interfund
Transfers In would be credited here rather than Due from
General Fund.
Serial Bond DSF Transactions
The June 1, 2008, interest payment was
made on schedule
Debt Service Fund:
Expenditures—Bond Interest
Cash
3,000
3,000
Serial Bond DSF Transactions
Remaining $8,000 transfer was received from
General Fund November 29, 2009. On
December 1, the City paid principal and
interest maturing that date.
Debt Service Fund:
Cash
8,000
Due From General Fund
Expenditures—Bond Principal
Expenditures—Bond Interest
Cash
8,000
5,000
3,000
8,000
General Fund:
Due to DSF
Cash
8,000
8,000
Serial Bond DSF Transactions
Adjusting entry on December 31, 2009.
Governmental Activities:
Expenses—Interest on Long-Term Bonds
Accrued Interest Payable
475
475
Calculation: 1 month of accrued interest =
$95,000 of remaining bonds X .06 ÷ 12 = $475
Note: Interest is not accrued in debt service fund since
not appropriate under modified accrual. Will be
accrued for GWS.

Pay off existing debt before due date
◦ Current refunding
 Use cash available or bond proceeds to
immediately retire bonds
◦ Advance refunding
 Establish irrevocable trust for money set aside
to retire bonds at earliest call date
 Requires original bond indenture to have a call
provision
 Bond holders usually receive a premium for
an early call

Issue new debt
◦ Better interest rate
◦ Free up pledged revenue stream
◦ Eliminate onerous covenants

In-substance defeasance
◦ If not legally in-substance defeased, can not
remove old debt from books
◦ Irrevocable trust = in-substance defeasance
 Adequate funds and future earnings to repay old
debt at earliest call date (between then and now)

Legal or in-substance defeasance
◦ Old liability is removed from governmental
activities
◦ In-substance
 Proceeds placed in irrevocable trust and liability
removed
◦ Legal defeasance
 Debt legally satisfied based on debt instrument
even though not repaid

JEs similar to those for regular refunding
Debt Refunding Transactions
$100,000 of previously issued bonds are
refunded with new bonds with lower interest
payments. Record the new bonds issued.
Debt Service Fund:
Cash (restricted)
100,000
Other Financing Sources—
Proceeds of Refunding Bonds
100,000
If old bonds are not retired by end of fiscal year, both
issues would be reported as long-term debt in
governmental activities if no in-substance defeasance
occurs.
Debt Refunding Transactions
Assume old bonds are retired/ defeased
shortly after issue of refunding bonds.
Debt Service Fund:
Other Financing Uses—Refunded Bonds
Cash
100,000
100,000
Note: Report only the new issue as debt in
governmental activities. Disclosures required if insubstance defeasance.

Same as private sector lease accounting
◦ Follow FASB criteria to determine if
capital/operating lease
◦ Record capital assets in GWS at present
value of minimum lease payments or fair
value, if lower

Fund level statements
◦ At inception
 “Proceeds” = other financing sources
 “Expenditure” = NPV of future MLP/fair value
◦ Payments made
 “Debt service” = expenditure

Government-wide statements
◦ At inception
 “Proceeds” = LTD
 “Leased assets” = NPV of future MLP/fair value
◦ Payments made
 “Debt service” = expenditure


Liability for unused sick/vacation time
Accrue as earned if:
◦ Employee’s right to receive compensation
relates to prior service
◦ Probable employer will compensate
employee for benefits through
 Paid time off AND
 Cash at termination/retirement

Separate between current & noncurrent

Modified accrual (payable from
current financial resources)
Expenditures
Accrued Expenditures

Full accrual
Expenses
Accrued Expenditures

Liability for amounts paid in new year
for services rendered in prior year
◦
◦
◦
◦

Salaries
Overtime
Taxes
Benefits
Pro rate using number of days in prior
year/total days in pay period

Revenue and receivable for amounts
billed in new year for services
provided in prior year
◦ May need to look through billings for
entire first month of new year
◦ Receivable = “Unbilled Utility Services”
Assets – liabilities = Net Position

Governmental fund level
◦ Fund balance – Nonspendable, restricted,
unrestricted

Proprietary & fiduciary fund level
◦ Net position- Invested in capital assets net of
related debt, restricted, unrestricted

Government-wide – ALL activities
◦ Net position- Invested in capital assets net of
related debt, restricted, unrestricted

Non spendable
◦ Inventories, permanent fund corpus




Restricted
Committed
Assigned
Unassigned
Categories based on relative strength of
control constraints

Nonspendable - Can not be spent
◦
Not expected to be converted to cash
 Inventories
 Prepaids
◦ Other
 LT loans and notes receivable
 Property acquired for resale
 Legally/contractually required to remain intact
 Permanent fund corpus

Restricted
◦ External parties, constitution, enabling
legislation

Committed
◦ Government constraint using its highest
level decision-making authority (Ordinance)

Assigned
◦ Intended for specific use by government

Unassigned
◦ No constraints – general fund only
Recording Transactions
Exercise
Compliance Exercise
Government-wide Statements
Fund level Statements
Reconciling Items

Management responsibility

GPFS required
◦ Minimum acceptable
◦ “Liftable”
Management’s discussion and analysis
Government-wide
financial statements
Fund financial
statements
Notes to the financial statements
Required supplementary information
(other than MD&A)

Government-wide financial statements:
◦ Accrual basis
◦ Information about overall government
 Internal service funds “rolled up”
 Intragovernmental activities eliminated
 Fiduciary funds excluded
◦ Activities
 Governmental
 Business type


Demonstrate results of operations and
OPERATIONAL accountability
Medium and long-term effects of
current and past decisions
◦ Service levels from existing revenues
◦ Effects of current-period operations on
future service needs
◦ Financial position and condition

Economic resources and full accrual





MD&A
Statement of Net Position
Statement of Activities
Footnotes
RSI
◦
◦
◦
◦
◦
Pensions
OPEB
Infrastructure (modified approach)
Budget to actual
Investment trusts

Required columns
◦ PG governmental activities
◦ PG business activities
◦ Total for PG
◦ Component units

Optional column for total reporting
entity
Similar to balance sheet

Net position format encouraged
◦ Assets – Liabilities = Net Position

Balance sheet format allowed
◦ Assets = Liabilities + Net Position

Ordered as to relative liquidity
◦ Separate amounts due in more than one year

Minimize internal balances
◦ Not for CUs

Invested in capital assets net of
related debt
◦ Net of accumulated depreciation and
debt outstanding (OS)
Unspent proceeds – unspent and OS debt = restricted

Restricted net assets
◦ Legal constraints

Unrestricted net assets
◦ No designations on face
Similar to income statement

Government purpose = services
◦ Net expense/revenue column

Three categories of expenses
◦ Governmental activities
 At same level as fund statements
◦ Business-type activities
 Different identifiable activities
◦ Component units

Program revenues – columns
◦ Charges for services
◦ Operating grants and contributions
◦ Capital grants and contributions
 Full accrual accounting - capital assets
reported on statement of net position

General revenues –at the bottom
◦ Contributions
◦ Special and extraordinary items
◦ Transfers

Applies only to governmental and
enterprise funds
◦ Always general fund
◦ Never internal service fund

Meet both criteria
◦ 10% of fund category or type
◦ 5% of all fund type combined

Any other selected by government
City of Example
Calculation of Major Funds
Fund
General
Assets
Liabilities
Revenues
Expenditures
Major
Expenses
Fund
1,000,000
250,000
10,000,000
9,900,000
50,000
10,000
1,500,000
1,400,000
5,000
0
500,000
495,000
Capital Projects
5,000,000
500,000
10,000,000
5,500,000
Total Governmental
6,055,000
760,000
22,000,000
17,295,000
Water Fund
10,000,000
7,000,000
5,000,000
4,500,000
Yes
Golf Fund
50,000,000
49,000,000
20,000,000
20,000,000
Yes
Total Enterprise
60,000,000
56,000,000
25,000,000
24,500,000
Total All Funds
66,055,000
56,760,000
47,000,000
41,795,000
605,500
76,000
2,200,000
1,729,500
Enterprise 10%
6,000,000
5,600,000
2,500,000
2,450,000
Total 5%
3,302,750
2,838,000
2,350,000
2,089,750
Grants
Debt Service
Governmental 10%
Always
Yes


Financial resources + modified accrual
Two statements
◦ Balance Sheet
◦ Statement of Revenues, Expenditures &
Changes in Fund Balance

Columns
◦ Major funds and aggregate non major
funds

Reconciliation to GWS required


Economic resources + full accrual
Three statements
◦ Balance Sheet or Statement of Net Position
◦ Statement of Revenues, Expenses &
Changes in Net Position
◦ Statement of Cash Flows

Columns
◦ Major funds & aggregate non major funds

Reconciliation to GWS not needed

Economic resources + full accrual

Two statements
◦ Statement of Net Position
◦ Statement of Changes in Net Position

One column for each fund type
◦ No total columns

Agency funds – external parties only

Minimum presentation
◦ Three columns for each governmental
fund reported
 Original budget
 Final budget
 Actual
◦ Variance column is OPTIONAL


Reconcile differences to Statement of
R&E
In notes - Disclose expenditures
>budget for individual funds

The auditor’s responsibility

Replacement for transmittal letter

Made up only of graphics

Focus on entire reporting entity

Place to put anything

Boilerplate discussion

Technical jargon

Management’s responsibility

Discussion of the financial statements

Focus on PG reporting entity only


Analysis of financial position and
results of operations
Explanation of significant changes

An analysis of significant variations
◦ Original and final budget
◦ Final budget and actual results
 Only General Fund (or equivalent) required

Explain why variances occurred

Description of currently known facts,
decisions, or conditions
◦ Through date
◦ No specific “title” per GASB 34
◦ Event already occurred or contracted for
 Not things that might happen
◦ Expected to have significant effect on
 Financial position (net position)
 Results of operations (revenues, expenses, and
changes in net position)

Award and acceptance of a major grant

Adjudication of a major lawsuit

Significant change in the property tax
base

An increase in the state sales tax rate

Flood causing major damage to
infrastructure
Cost Principles
Reporting
Cost Concepts
Expenditures on Federal
Grants Must Meet the
Allowable Cost Guidelines in:
OMB Circular A-21
Educational institutions
OMB Circular A-87
State & local governments
OMB Circular A-122
Not-for-profit organizations
Federal Grants-Allowable Costs
Allowable costs
Necessary and reasonable for efficient performance
of the federal award
Employee compensation, cost of materials,
depreciation, etc.
Special/unusual costs require advanced
understanding with awarding/cognizant agency
Unallowable costs
Alcoholic beverages, bad debt expense, CEO salary
(some exceptions)
Unallowable
Costs
Certain costs are specifically unallowable under the
general and special award conditions or agency
instructions. (They may include, but are not limited
to, pre-grant and post-grant costs and costs in excess
of the approved grant budget, either by category or in
total.)
Undocumented
Costs
These costs are charged to the grant, for example, to
demonstrate their relationship to the grant or the
amounts involved, but they lack adequate detailed
documentation.
Unapproved
Costs
These costs are not provided for in the approved
grant budget, or they require the awarding agency's
approval because of the grant or contract provisions
or applicable cost principles, but no evidence of such
approval can be found.
Unreasonable
Costs
These are costs incurred that may not be consistent
with the actions that a prudent person would take in
the circumstances, or in-kind contributions to which
unreasonably high valuations have been assigned.
Four parts
General
Pre-Award Requirements
Post-Award Requirements
After-Award Requirements
Small awards
o Federal awarding agencies permitted to
make exceptions & to apply less restrictive
requirements without prior OMB approval
•Award-by-award basis
•A-110 vs. statute – statute governs
Financial management system
Property standards
Procurement standards - lowest & best
Reports and records
Termination and enforcement
Appendix A of Circular
•EEO
•Anti-kickback
•Davis-Bacon
•Contract Work Hours & Safety Standards Act
•Clean Air Act
•Anti-lobbying
•Others
•Facility and administrative costs
•Common/joint objectives
•Depreciation, G&A expenses, libraries, etc.
•Selected items
•Certificate of F&A costs
•Certification of charges
•Federal Cost Accounting Standards
•Cost estimates for proposals consistent with
accumulating & reporting costs
•Costs allocated only once
•Accounting for unallowable costs
•Time periods for cost accounting periods
•Disclosure statement must be prepared
and submitted
•Allocation methods provided in circular
•Single rate
•Multiple rates
•Negotiated lump-sum
•Predetermined or negotiated fixed rates
•Carry-forward provisions
•Simplified method (small institutions)
•Attachment D – Public assistance cost
allocations for programs administered
by agency
•Attachment E - Indirect cost rates
•Simplified method - IDC benefit functions to
approximate same degree
•Multiple allocation base method - IDC benefit
functions in varying degrees
•Special indirect cost rates - Single rate not
appropriate (location, support required)

Cost object
◦ Any item/purpose for which costs must
be measured
 Grant, program, division, etc.

Direct cost
◦ Can be clearly identified with or directly
related to a single cost object
 Economically feasible manner

Indirect cost
◦ Cannot be clearly identified with or
directly related to a single cost object
Cost and Cost Concepts

Common cost
◦ Related to two or more cost objects
 Cost objects could be achieved separately
 Occupancy costs – multiple use facility

Joint cost
◦ Related to two or more cost objects
 Cost objects can not be achieved
separately
 Annual meeting costs, certain
publications/brochures


Direct Cost - NO cost assignment
Allocation criteria
◦
◦
◦
◦

Cause and effect (most preferred)
Benefits received
Equity
Ability to bear (least preferred)
Allocation Methods
◦ Stand-alone
◦ Relative sales value (direct cost)
◦ Physical units




AKA causal criterion
Identify activity causing costs to be
incurred
Difficult for indirect costs
Statistical relationships vs. assumed
relationship

Direct Cost Allocation Method

Physical Units Cost Allocation Method

AKA beneficial relationship

Identify users of outputs from activity


Costs allocated among users
proportional to benefit
Direct costs – proxy for benefits


Use when cost allocation is
necessary for grant reimbursement
Reasonable/fair means of
establishing reimbursement basis
◦ Fairness is not an operational criterion

Cost allocation in proportion to some
user attribute
◦ Attribute supports charging costs to user
◦ Commercial vs. residential customers

Stand Alone Cost Allocation Method

Direct Cost Allocation Method
◦ Improvement over stand alone method



Allocates indirect costs to each final
cost objective
Proportional method independently
accomplish one objective
Disadvantages
◦
◦
◦
◦
Allocation can change - SAC does not
SAC changes, total basis changes
SAC may not exist
Assumes indirect costs functionally
related to SAC
Activity A:
500 X 750,000 = $375,000
1,000
Activity B:
400 X 750,000 = $300,000
1,000
Activity C:
100 X 750,000 = $75,000
1,000
Problems:


An allocation of indirect costs can change
Stand-alone costs may not exist


Sales value/direct cost used as basis
for allocation
Assumes indirect costs incurred in
same proportion and for same reason
as direct costs
◦ OMB calls the “simplified method”
◦ No change to expense for each objective
compared to total direct costs
◦ Increases total reported for each objective
Cost
Objective
Total
Direct
Costs
Relative
Share
Indirect
Costs
Allocated
Costs
Total
Costs
Activity A: 2,500,000
2,500 x 750,000 =$625,000
3,000
Activity B:
300,000
300 x 750,000 =
3,000
Activity C:
200,000
200 x 750,000 = 50,000
250,000
3,000
$750,000 $3,750,000
$3,000,000
75,000
3,125,000
375,000



Allocate costs to objectives
proportional to units of activity/output
for each objective
May not reflect total effort needed to
produce output
Assumes indirect costs incurred
proportional to some unit measure of
activity/purpose
1.
2.
3.
4.
5.
6.
7.
Reason(s) for cost information
Cost objects or purposes
Types of relevant costs
Assign direct costs to cost objects
Select allocation base(s) or cost drivers
Allocate indirect costs
Ensure appropriateness
Labor
Labor Hours
Cost Driver
A
Rent
Labor Hours
Cost Driver
B
C
Cost Assignment
Allocation
(Based on
Labor Hours)
Natural Expense
Purpose
Labor
Labor Hours
Cost Driver
Space Rent
Labor Hours
Cost Driver
A
(1)
Equipment Rental
B
C
Data
Processing
(2)
Cost Assignment
Stage 1 Allocation (Based on Labor Hours)
Stage 2 Allocation (Based on Computer Time)
Computer Time
Cost Driver
Resources
Labor
$1,600k
Facilitator
$1,000k
EquipRent
$400k
Contracting
$200k
Material
$600k
Storage
$400k
.25
Stage 1
Cost Drivers
.2
Activity Cost
Pools
Deliver
$1,800k
Stage 2
Cost Drivers
Cost
Objectives
.3
.25
Setup
$700k
.25
.6
.3
Contract
$450k
Process
$1,250k
.7
.75
.167
.4
Basic
$1,973k
Enhanced
$2,227k
.833