Chapter Sixteen
Accounting for
State and Local
Governments
(Part I)
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Learning Objective 16-1
Explain the history of and the reasons for the unique characteristics of the financial statements produced by state and local governments.
16-2

Governmental Accounting
Governmental Accounting Standards Board (GASB), created in 1984, is the public sector counterpart of FASB.
Concepts Statement No. 1 identifies three basic user groups :

Citizenry

Legislative and oversight bodies

Investors and creditors
Characteristics of Governmental Accounting:
Allocation of limited resources to unlimited causes

Absence of profit motive

Provides services in accordance with public policy goals

Serves a broader group of stakeholders

Requires two sets of financial statements
16-3

Learning Objective 16-2
Differentiate between the two sets of financial statements produced by state and local governments.
16-4

Two Sets of Financial Statements
GASB requires two distinct sets of statements by state and local governments , each with its own unique principles and objectives.
Fund Financial
Statements
Show restrictions on the use of resources, and report current revenues and expenditures from certain activities.
Government-wide
Financial Statements
Report all revenues and costs with a long term focus. Of interest to creditors, to assess the likelihood of being paid.
16-5

Fund Financial Statements

Report on individual government activities during the current year.

Primary measurement focus is current financial resources especially cash and receivables.

Assess fiscal accountability in raising and utilizing money.

The timing of recognition, in most cases, is based on modified-accrual accounting.
16-6

Government-wide Financial Statements

Report on financial affairs as a whole.

Assess operational accountability.
 Help users evaluate government’s financial decisions and long-term stability. Permits stakeholders to:
• Determine the government’s overall financial position
•
Understand cost of services
•
See how programs are financed.
•
See extent government has invested in capital assets.

Focus on all economic resources.

Utilizes accrual accounting.
16-7

Learning Objective 16-3
Understand the reason that fund accounting has traditionally been a prominent factor in the internal recording of state and local governments.
16-8

Internal Recordkeeping - Fund Accounting
Governmental units report a diverse array of activities financed from numerous resources.
Governments operate through many relatively independent departments and functions.
Accounting for each activity is maintained in a quasi-independent, bookkeeping system – a fund.
Separate information is accumulated for every activity such as: library, school system, fire department, road construction, and more.
16-9

Learning Objective 16-4
Identify the three fund types and the individual fund categories within each.
16-10

Fund Accounting Classification
All funds fall into one of three broad classifications.
Governmental
Funds
Proprietary
Funds
Fiduciary
Funds
Accounting for activities related to serving the public.
Accounting for business-type activities.
Accounting for financial resources held for others as trustee.
16-11

Governmental Funds

Dominate because of a service orientation.

Internal accounting system maintains individual funds for every distinct service function.

Each fund accumulates and expends current financial resources to achieve one or more desired public goals.

Governmental funds are subdivided into five categories:
•
General Fund,
•
Special Revenue Funds,
•
Capital Projects Funds,
•
Debt Service Funds, and
•
Permanent Funds.
16-12

Proprietary Funds

Category accounts for government activities that assess a user fee.

User charges help recover some of the costs.

Accounting resembles that of a for-profit activity accrual accounting is used to recognize assets and liabilities.

Proprietary funds are broken into two divisions:

Enterprise Funds

Internal Service Funds
16-13

Fiduciary Funds
Account for assets held in a trustee or agency capacity for external parties.
Money cannot be used for government’s programs.
Use the economic resources measurement focus and accrual accounting.
Funds are omitted from government-wide statements.
Separate statements are included within the fund financial statements.

Investment Trust

Private-Purpose Trust

Pension Trust

Agency Funds
16-14

Learning Objective 16-5
Understand the basic structure of government-wide financial statements and fund financial statements (as produced for the governmental funds).
16-15

Government-wide Financial Statements
Two statements are required:
1) Statement of Net Position
2) Statement of Activities
Reporting is separated into:

Governmental activities

All governmental funds and most internal service funds.

Business-type activities

All enterprise funds and remaining internal service funds.
16-16

Fund Financial Statements
Two statements are required:
1) Balance Sheet
2) Statement of Revenues, Expenditures, and
Other Changes in Fund Balance
Three categories in the second fund financial statement are addressed in detail:
1) Revenues
2) Expenditures
3) Other Financing Sources (Uses)
16-17

Learning Objective 16-6
Record the passage of a budget as well as subsequent encumbrances and expenditures.
16-18

Procedures - Importance of Budgets
The budget serves several purposes:
–
Expresses public policy
–
Expresses financial intent
–
Provides control by establishing spending limits
–
Compares actual results to the budget as a means of evaluating performance
–
Indicates whether there is sufficient revenue to pay for expenditures
16-19

Procedures – Recording Budgetary
Entries Example
A town enacts a motel excise tax to promote tourism and conventions. For 2015, the tax is expected to generate
$490,000 in Special Revenues. The city council authorizes expenditures of $420,000 including $200,000 for salaries,
$30,000 for utilities, $110,000 for supplies, and $80,000 for advertising.
Prepare the journal entry to record the Special Revenue
Fund budget.
16-20

Procedures for
Encumbrances Compared
Purchase commitments and contracts are recorded, but they do not yet represent liabilities.
A recorded commitment or contract is an “encumbrance.”
When the purchased item is received, the expenditure account is recognized and the encumbrance account is removed.
For Fund-Based Financial Statements:

An entry records the encumbrance.

An entry records the item as it is received.
 At the end of the fiscal period, remaining commitments are removed by reversing the original journal entry.
For Government-Wide Financial Statements:
 No entry is required to record the encumbrance.

An entry is required when the order is filled.
16-21

Learning Objective 16-7
Understand the reporting of capital assets, supplies, and prepaid expenses by a state or local government.
16-22

Procedures –
Fixed Assets

Virtually no assets are recorded within the fund statements for governmental funds.

The expenditure for capital assets is recorded at acquisition and closed out at the end of the fiscal period.

Fund financial statements report the amount expended each period by the governmental funds for capital assets and infrastructure items.
16-23

Learning Objective 16-8
Determine the proper timing for the recognition of revenues from various types of nonexchange transactions.
16-24

Procedures –
Recognition of Revenues
Revenue for governmental organizations differs from revenue for business. Governmental revenue is not true revenue for which an earnings process exists. The revenue is derived from “nonexchange transactions” for which the government does not provide a direct and equal benefit for the amount received.
Nonexchange Transactions Classifications
Derived Tax Revenues
Imposed Nonexchange Revenues
Government-mandated Nonexchange Transactions
Voluntary Nonexchange Transactions
16-25

Learning Objective 16-9
Account for the issuance of longterm bonds and the reporting of special assessment projects.
16-26

Procedures –
Issuance of Bonds

Bond proceeds are not revenue, but the proceeds serve as a major source of financing for many sate and local governments.

The proceeds must be repaid, so the government recognizes no revenue.

Government-wide financial statements recognize cash received and debt incurred.

Fund financial statements recognizes the cash received, but does not record the debt as a claim on current financial resources.
16-27

Special Assessments - Accounting

Governments may provide improvements or services that benefit particular properties.

They may assess the costs, in total or in part, to the property owners for paving and constructing:
–
Streets
–
Curbs
–
Sidewalks
–
Sewers and drains
–
Water lines

Usually financed by debt issuance and liens on the benefited property (to ensure reimbursement).
16-28

Learning Objective 16-10
Record the various types of monetary transfers that occur within the funds maintained by a state or local government.
16-29

Interfund Transactions

Commonly used, particularly monetary transfers from the General Fund
 Normally reported as “other financing source” and
“other financing use” within the fund-based financial records

Intra-activity transactions between two government or two enterprise funds are not reported in the governmentwide financial statements because they create no net impact.

Interactivity transactions occur between governmental and enterprise funds and are reported on governmentwide financial statements
16-30