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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
An Introduction toAccounting for State andLocal Governmental Units
Chapter 18
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 1
Learn about the historical
development of accounting
principles for state and local
governmental units.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
State and Local Governmental Units
With the exception of the federal
government, state and local
governmental units constitute
the largest single category
of nonprofit organizations.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1951 – The Municipal Finance Officers
Association (MFOA) National Committee
on Governmental Accounting) issued
Municipal Accounting and Auditing.
1968 – Governmental Accounting, Auditing,
and Finance Reporting (GAAFR, or Blue Book,
succeeded Municipal Accounting and Auditing.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1974 – The AICPA issued its industry audit
guide, Audits of State and Local Governmental
Units, in which it noted that GAAFR’s accounting
and reporting principles constituted GAAP
except when modified by the audit guide.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1979 – The MFOA National Council on
Governmental Accounting issued
Governmental Accounting and
Financial Reporting Principles, Statement 1.
1980 – AICPA issued Statement of Position
80-2 amending Audits of States and Local
Government Units to recognize the principles
of NCGA Statement 1 as GAAP.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial
Accounting
Foundation
GASB
FASB
Historical Development
(1984)
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Historical Development
1985 – Codification of Governmental Accounting
and Financial Reporting Standards was issued.
It integrated all NCGA and AICPA and all
subsequent GASB pronouncements.
It is revised annually.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
GAAP Hierarchy for Stateand Local Governmental Entities
1. GASB Statements and Interpretations
2. GASB Technical Bulletins
3. Consensus positions of GASB’s
Emerging Issues Task Force (EITF)
4. Implementation Guides
5. Other accounting literature
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 2
Define fund accounting
and explain why it is used.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Fund Definition and Categories
A fund is a self-contained accounting entity.
It records its own assets, liabilities, revenues,
expenditures, or expenses and fund balance.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Proprietary FundAccounting Model
Current
Assets
+
Noncurrent
Assets
–
Current
Liabilities
–
Noncurrent
Liabilities
=
Net
Assets
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Governmental FundAccounting Model
Current
Assets
–
Current
Liabilities
=
Fund
Balance
Fund G Fund SR
A = L + FBA = L + FB
General General
FundLong-Term
Assets Debt
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 3
Perform transaction analysis using
proprietary and governmental
accounting models.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
1. Incurred salary cost of $5,000.
2. Charges for services rendered, $2,500,
were billed and collected immediately.
3. Borrowed $30,000 on a one-year, 6%
note six months before year end.
4. Year-end accrual of interest on the note.
5. Borrowed $15,000 by issuing a three-year note.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
6. Purchased computer equipment costing $2,800 for cash.
7. Sold a truck for $1,000. It was originally purchased
three years ago for $18,000, had an estimated
residual value of $1,200, and is fully depreciated.
8. Computed depreciation on the computer equipment
for the year, $875.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net assets
Current assets
Current liabilities
Fund Balance
No. 1
+5,000
–5,000
+5,000
–5,000
No. 2
+2,500
+2,500
+2,500
+2,500
+30,000
+30,000
+30,000
+30,000
No. 3
+900
–900
+900
–900
No. 4
Proprietary Fund
Government Fund
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net assets
Current assets
Current liabilities
Fund Balance
No. 5
+15,000
+15,000
+15,000
–15,000
No. 6
–2,800
+2,800
–2,800
–2,800
+1,000
–1,200
–200
+1,000
+1,000
No. 7
–875
–875
No. 8
Proprietary Fund
Government Fund
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 4
Recognize various fund categories,
as well as their measurement
focus and basis of accounting.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Proprietary Fund Types
Internal service funds
Enterprise funds
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Governmental Fund Types
Special
revenue funds
Permanent
funds
Capital
project funds
Debt
service funds
General
fund
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Fiduciary (Trust and Agency)Fund Types
Pension
trust funds
Investment
trust funds
Private-
purpose
trust funds
Agency
funds
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Model UsingSpecific Funds
1. Issued general obligation bonds, par value of
$3,000,000, at 101 to finance construction
of a government office building.
2. Transferred the premium on the bonds to
the fund used to account for payment of
principal and interest on the bonds.
3. Incurred and paid construction costs
of $12,500 on the building.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Model UsingSpecific Funds
4. Levied and collected sales taxes restricted
to use for economic development, $6,000.
5. Paid general government employees’
salaries, $4,500. Another $500 of salaries
accrued but has not been paid.
6. Borrowed $7,500 on a six-month note to
finance general operating costs
of the government.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Model UsingSpecific Funds
Current Current Fund
No.Fund Assets Liabilities Balance
1Capital projects+ 3,030,000– 3,030,000
2aCapital projects – 30,000 – 30,000
2bDebt service + 30,000 + 30,000
3Capital projects – 12,500 – 12,500
4Special revenue + 6,000 + 6,000
5General – 4,500 + 500 – 5,000
6General + 7,500+ 7,500
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Bases of Accounting
Accrual
Modified
Accrual
Economic resources
Measuring focus
Measuring focus
Flow of current
financial resources
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Reporting
In June 1999, the GASB issued
GASB Statement No. 34,
“Basic Financial Statements and
Management’s Discussion and Analysis –
for State and Local Governments.”
The statement establishes standards for
preparing government-wide financial
statements and fund-level financial statements.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Reporting
Management’s discussion and analysis
Government-wide financial statements
Statement of net assets (accrual basis)
Statement of activities (accrual basis)
Fund financial statements
Governmental funds
Statement of net assets (modified accrual basis)
Statement of revenues, expenditures, and
changes in fund balances (modified accrual basis)
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Reporting
Fund financial statements (cont’d.)
Proprietary funds
Statement of net assets (accrual basis)
Statement of revenues, expenses, and changes in
net assets (accrual basis)
Statement of cash flows (accrual basis, direct method)
Fiduciary funds
Statement of net assets (accrual basis)
Statement of changes in net assets (accrual basis)
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 5
Review basic governmental
accounting principles.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Revenue Recognition
Revenue recognition within governmental
entities is determined by the nature of
the underlying transaction.
GASB Statement No. 33,
“Accounting and Financial Reporting
for Nonexchange Transaction,”
characterizes revenue transactions.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Government-mandated
nonexchange
transactions
Voluntary
nonexchange
transactions
Imposed
nonexchange
transactions
Derived
tax
revenues
Revenue Recognition
GASB Statement No. 33 established four
categories of nonexchange transactions.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Expense and ExpenditureRecognition
Expenses reflect the cost of assets
or services used by an entity.
Expenditures typically reflect the use
of governmental fund working capital.
Expenditures normally reflect the cost of goods
or services acquired during a period and the
maturing of general long-term debt principal.
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Interfund Activity
Loans
Transfers
Reimbursements
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Role of the Budget
2003
2004
2005
2006
2007
Capital Program
2003
Capital
Budget
2003
Operating
Budget
2003
Current
Budget
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Financial Reporting Entity
GASB Statement No. 14, “The Financial
Reporting Entity,” explains that the financial
reporting entity is made up of the primary
government and its component units.
Each state and general-purpose local
government is a primary government.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Primary Governments
Separately elected governing body
Legally separated
Fiscally independent
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Component Units
These are legally separate organizations
for which the primary government
is financially accountable.
Blending
Discrete
Presentation
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 6
Learn about the contents of
a governmental entity’s
comprehensive annual
financial report under
GASB 34.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accountability
Operational accountability measures the extent
of a government’s success at meeting operating
objectives efficiently and effectively and its
ability to meet operating objectives in the future.
Fiscal accountability is the responsibility of a
government to demonstrate compliance with
public decisions.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Prior to GASB 34
General purpose financial statements
were prepared using the appropriate
basis of accounting.
The combined balance sheet included
columns for each fund type.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CAFR Major Sections
Table of contents
Letter of transmittal
List of officers
Organizational chart
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CAFR Major Sections
Management’s discussion and analysis
Auditor’s report
Government-wide financial statements
Fund financial statements
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CAFR Major Sections
Statistical tables
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Section
Management’s discussion and analysis is
required supplementary information (RSI)
that is presented before the financial statements.
The Board requires that MD&A
precede the statements.
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Section
Governmental and proprietary funds
are consolidated and reported in a single
set of government-wide financial statements.
Statement of
net assets
Statement of
net assets
Statement of
activities
Statement of
activities
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Statement of Net Assets
City of Davie Statement of Net Assets
December 31, 2003
Primary Government
Governmental
Activities
Business
Activities
Total
Assets
(Liabilities)
Net Assets
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Statement of Activities
Expenses
Revenues
Net
Functions
Primary
Government
Governmental
Activities
Function 1
Function 2
Business Type
Activities
Activity 1
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Fund Financial Statements
Governmental funds
Proprietary funds
Fiduciary funds
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
General
fund
Each major
governmental
fund
Total
funds
All nonmajor
governmental
funds
Major Fund Reporting
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Each major
enterprise
fund
All non-major
enterprise
funds
All internal
service
funds
Total
Major Fund Reporting
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Conversion
Fund-based
statement
Government-wide
statements
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Other Issues
Budgetary comparisons
Required supplemental information
Notes to the financial statements
Infrastructure
Combining and individual fund statements
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©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
End of Chapter 18