Chapter Seventeen
Accounting for
State and Local
Governments
(Part II)
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Learning Objective 17-1
Account for lease contracts
where the state or local
government finds itself as
either lessor or lessee.
17-2
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.
17-3
Learning Objective 17-2
Recognize the liability caused
by the eventual closure and
postclosure costs of operating
a solid waste landfill.
17-4
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 post closure activities as
groundwater monitoring.
17-5
Learning Objective 17-3
Explain the reporting of a net
pension liability resulting from a
defined benefit pension plan
provided to employees by a state
or local government.
17-6
Defined Benefit Pension Plans
Retirees are usually entitled to future benefits
based on a contractually set formula.
Future pension obligations of both companies
and state governments collectively amount to
trillions of dollars.
Obligations can be measured individually in
billions of dollars.
17-7
Learning Objective 17-4
Record the donation and
acquisition of works of art
and historical treasures.
17-8
Works of Art and Historical Treasures
Although optional reporting is allowed, 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
Financial Statements
Record an expenditure
and the cash payment (if
purchased). No entry is
made if the item is
donated.
17-9
Learning Objective 17-5
Explain the reporting and
possible depreciation of
infrastructure assets.
17-10
Infrastructure Assets and Depreciation
Infrastructure is defined as long-lived capital assets that
normally are stationary in nature and can be preserved
for a significantly greater number of years than most
capital assets.
Government-Wide Financial Statements:
 Infrastructure costs are recorded as assets in the
government-wide statements.
Fund Financial Statements:
Record the acquisition as an expenditure.
17-11
Learning Objective 17-6
Understand the composition of
a state or local government’s
comprehensive annual
financial report (CAFR).
17-12
Comprehensive Annual Financial Report
(CAFR)
The government-wide and the fund financial statements are
most often presented to the public as part of a
comprehensive annual financial report (CAFR). The CAFR
also includes an extensive amount of other information
about the reporting government.
Three distinct sections:
1. Management’s Discussion and Analysis (MD&A)
2. Financial Statements
– Government-wide Financial Statements
– Fund Financial Statements
– Notes to the Financial Statements
3. Required Supplementary Information
17-13
Learning Objective 17-7
Explain the makeup of a primary
government and its relationship to
component units and related
organizations as well as the
combination of governments.
17-14
Primary Government and
Component Units
 Reporting units start with a primary government unit (town,
city, county or state).
 Primary government must include all funds, activities,
organizations, agencies, offices and departments that are not
legally separate from it. May be difficult to determine
whether certain activities should be included
 Any unit legally separate from the primary government, but
where financial accountability still exists, must be included.
 Legally separate activities closely connected to the primary
government must be included if omission from the financial
statements would be misleading.
17-15
Special Purpose Governments
Special purpose governments carry out only a single
function or a limited number of functions for the
public. Common examples include:
- public school districts
- colleges and universities
- water utilities
- hospitals
- transit authorities
- library services.
17-16
Mergers, Acquisitions, and
Transfers of Operations
Combinations and realignment transactions are
common. GASB views a combination as a merger if
two legally separate entities are brought together to
form a new entity and no significant consideration is
exchanged.
A merger also exists if one of the entities ceases to exist
while the other continues.
In a merger, net carrying values for all assets, deferred
outflows of resources, liabilities and deferred inflows of
resources are combined.
17-17
Learning Objective 17-8
Describe the physical structure of a
complete set of government-wide
financial statements and a complete set
of fund financial statements.
17-18
Government-Wide Statements
Statement of Net Position
 Reports economic resources controlled by the government.
 Includes all assets, capital assets, and liabilities.
 Capital assets except land, inexhaustible works of art, and
construction in progress reported net of accumulated
depreciation.
 Several amounts are restricted; restrictions are reported if
usage of the resources has been specified.
Statement of Activities
 Contains information on functions of state or local government.
 Expenses are shown by function.
 Related program revenues should be shown for each function.
 Shows the net revenue figure for each function.
 General revenues are shown at the bottom of the statement.
17-19
Governmental Funds—
Fund Financial Statements
Balance Sheet
 Reports current financial resources (modified accrual accounting).
 Does not include proprietary funds, component units, or fiduciary
funds.
 Separate columns for the General Fund and each major fund.
 Identifies balances for both restricted and committed amounts.
Statement of Revenues, Expenditures, &
Other Changes in Fund Balances
Net revenues not identified for specific functions.
 Reports expenditures, not expenses.
 Other financing sources and uses reflect long-term debt, sale of
property, and transfers between funds.
 Reconcile ending fund balance and ending change in net assets.
17-20
Fund Financial Statements Proprietary Funds
Statement of Net Position
 Shows individual information about major enterprise
funds and all internal service funds.
 A single column for the summation of all other enterprise
funds.
 Provides a combined total for all of the enterprise funds.
Statement of Revenues, Expenses, &
Other Changes in Fund Net Assets
 Shows information about the same funds.
 Revenues, expenses, nonoperating items, and transfers
reported here.
17-21
Fund Financial Statements Proprietary Funds
A proprietary fund operates similarly to a for-profit
business, and information about cash flows is considered just
as vital. However, the physical structure is not entirely the
same.
Statement of Cash Flows
Four sections…
1) Cash flows from operating activities.
2) Cash flows from noncapital financing activities.
3) Cash flows from capital and related financing activities.
4) Cash flows from investing activities.
Note that the Direct Method is required for presentation.
17-22
Learning Objective 17-9
Understand the presentation of
financial statements for a public
college or university.
17-23
Public Colleges and Universities
 A large amount of funding for public schools comes from
governments, lessening reliance on tuition and fees.
 With public funding, public schools often raise and
accumulate a smaller amount of endowment funds than
private colleges and universities.
 Public universities may operate similarly to businesses
but they are special purpose governments and
accountable to the citizenry.
 Most public schools only need to prepare a single set of
statements equivalent to those of an enterprise fund.
17-24