Chapter Twelve
Accounting for
State and Local
Governments,
Part II
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
12-2
Accounting for Leases
For accounting
purposes, leases
must be identified
as either Capital
or Operating.
GASB has
adopted the same
four criteria
applied by FASB
to identify a
capital lease.
The lease transfers
ownership at the end of
the lease term.
The lease has a bargain
purchase option.
The lease term ≥ 75% of
the asset’s estimated
useful life.
The minimum lease
payments > 90% of the
PV of the asset.
12-3
Accounting for Operating Leases
Government-Wide Financial Statements:
 Do not record an encumbrance.
 Record an expense when the lease
payment is made.
Fund-Based Financial Statements:
 Record the encumbrance.
 Record an expenditure when the
lease payment is made.
12-4
Accounting for Capital Leases
Government-Wide Financial Statements
Record both the asset and the lease obligation.
On 1/1/10, Good City signs a 10-year capital
lease for a $50,000 dump truck with an implied
interest rate of 8%.
Date
Description
Truck - Capital Lease
Capital Lease Obligation
Debit
Credit
50,000
50,000
12-5
Accounting for Capital Leases
Government-Wide Financial Statements
Record interest expense & reduce the obligation.
At 12/31/10, Good City made a $7,452 payment
that included interest of $4,000.
Date
Description
Capital Lease Obligation
Interest Expense
Cash
Debit
Credit
3,452
4,000
7,452
12-6
Solid Waste Landfill
The operation of a solid waste
landfill creates long-term liabilities.
The EPA imposes requirements that
will require large outlays of
resources to close a landfill in the
future and to deal with such
postclosure activities as
groundwater monitoring.
12-7
Solid Waste Landfill
Government-Wide Financial Statements
Record a portion of the expected closing
costs, pro-rated as a % of capacity used,
each year as an expense and a liability.
Fund-Based Financial Statements
Make no entry to record a liability.
Record cash payments made to fund the
future obligation as “expenditures”.
12-8
Compensated Absences
Employees accrue vacation and sick leave at a
predetermined rate. Unused/accrued vacation
and sick leave are payable upon termination or
retirement, creating a liability.
Government-Wide
Financial Statements
Accrue the expense
and liability related to
unused/accrued
vacation and sick
leave.
Fund-Based
Financial Statements
Record only the
portion of the liability
that is expected to be
paid from current
resources.
12-9
Works of Art and Historical
Treasures
GASB No. 34 says governments “should
capitalize works of art, historical treasures, and
similar assets at their historical cost or fair value
at date of donation.”
Government-Wide
Financial Statements
Record the asset and
the payment (if
purchased) or
revenue (if donated).
Fund-Based
Financial Statements
Record an expenditure
and the cash payment
(if purchased). No
entry is made if the item
is donated.
12-10
Works of Art and Historical
Treasures
GASB 34 made capitalization optional if
the following three criteria are met:
1. Item is held for public exhibition,
education, or research in furtherance
of public service, rather than financial
gain
2. Item is protected, kept
unencumbered, cared for, and
preserved
3. Item is subject to an organizational
policy that requires the proceeds from
sales of collection items to be used to
acquire other items for collections
12-11
Infrastructure Assets
Government-Wide Financial Statements:
 Record all newly acquired assets.
 Show approximate cost for all major
assets previously acquired that
Were acquired after June 30, 1980,
or that
Had major renovations,
restorations, or improvements
since that date.
Fund-Based Financial Statements:
 Record the acquisition as an
expenditure.
12-12
Infrastructure Depreciation
Depreciation
For government-wide financial statements,
depreciation is recorded for all assets
except land, art works, and historical
treasures that are inexhaustible.
12-13
Infrastructure Depreciation
GASB 34 provides an alternative, known as
the “modified” approach, which
eliminates the need for depreciating
qualifying infrastructure.
 Maintenance costs are immediately
expensed in lieu of depreciation
 Information must be accumulated about
particular infrastructure items
 A minimum acceptable condition level
must be met and documented
 An asset management system must
monitor the network or subsystem
 The cost and record-keeping have so far
limited adoption of the modified approach
12-14
GASB Statement 34 General Purpose Statements
Three distinct sections:
1. Management’s
Discussion and Analysis
(MD&A)
2. Financial Statements
 Government-wide
Financial Statements
 Fund-based Financial
Statements
 Notes to the Financial
Statements
3. Required Supplementary
Information
12-15
Public Colleges and Universities
Public colleges and
universities must follow the
same guidelines as state
and local governments.
(GASB retains primary
reporting authority)
Their statements will differ
from those of private
colleges and universities,
who are following FASB
accounting standards.