Governmental and N-F-P test 2 Ch 5,6,7,8,9

* Governments that offer pension or OPEB benefits to their employees make pension or OPEB contributions, but pension or OPEB trust funds are used only by governments that sponsor a plan. -> Governments that do not sponsor a plan participate in external plans administered. * Regardless of whether the plan is external or internal to an employer government, the government generally records its contributions to the plan as expenditures/ expenses in the same funds in which other payroll-related expenditures/expenses are recorded. (see back for more)

* All governments are required to make pension- or OPEB-related disclosures in their annual financial report. -> Nature and extent of these disclosures depends on the structure of the plan. * When a government participates in an external plan only, f/s for the plan are issued by the plan, not by the participating government. -> When an employer government also sponsors a plan, the government typically establishes a pension or OPEB Trust Fund to account for plan receipts, investments, and disbursements and prepares annual f/s for that fund. *Because many OPEB plans currently are financed on a pay as you go basis, governments have no need to establish a trust fund.

*After all the organizations to be included in the reporting entity are identified, a decision needs to be made as to how these organizations should be included in the f/s. -> The two methods for inclusion are blending and discrete presentation. * Blending is the process of treating the funds used by the component unit as if they were the funds of the primary government. -> This is done by including them with the primary government's other funds in the fund f/s. * Discrete presentation of a component unit involves reporting the component unit's funds in a separate column in the reporting entity's government-wide f/s. (see back for more)

* Blending is used when the component unit, although legally separate from the primary government, is so intertwined with the primary government that it is, in substance, a part of the primary government. -> This occurs in any of the following circumstances: 1. The component unit's governing body is substantively the same as that of the primary government and (a) there is a potential for the component unit to provide specific financial benefits to, or impose specific financial burdens on, the primary government, or (b) the primary government's management is responsible for the component unit's operations. 2. The component unit provides services entirely (or almost entirely) to the primary government or otherwise exclusively (or almost exclusively) benefits the primary government- like an ISF. 3. The component unit's outstanding debt is expected to be repaid entirely (or almost entirely) with resources of the primary government.

* Often, government bonds are sold at a price above or below face value because the prevailing interest rates when the bonds are issued are below or above the stated interest rate on the face of the bonds. -> When the bond price is different from the face value of the bonds, the difference should be recorded separately from the face value. * Whether bonds are issued at a premium or discount, an account, Other financing source- long-term debt issued, is credited for the face value of the bonds. -> If the bonds are sold at a premium, an account, Other financing source- bond issue premium, is credited for the excess of cash received over the face value of the bonds. (see back for more)

* Bond covenants determine how the premium can be used. -> In some instances, a premium may be used for the purpose for which the bonds were issued. In others, a premium is required to be used to repay the debt. *If bonds are issued for less than the face value (at a discount), the total proceeds are recorded in the CPF, and Other financing source- long-term debt issued is credited for the face amount of the bonds. -> Another account, Other financing use- bond issue discount, is debited for the amount of the discount. *Regardless of whether bonds are issued at a premium or discount, the government will incur issuance costs. -> Bond issue costs include legal, financial advisor, accounting, underwriting, and registration fees. -> Issue costs are reported as expenditures in the fund that pays them.

* The statement of cash flows required by the GASB is different from that required in the private sector in several ways. -> first, use of the direct method is required for reporting operating cash flows. -> Major classes of gross operating cash receipts and gross operating cash payments are reported along with their arithmetic sum to arrive at the net cash flows from operating activities. -> PFs must also provide a reconciliation of operating income to net cash flows from operating activities at the bottom of the cash flows statement or in a separate schedule. -> This reconciliation is the equivalent of the indirect method used to report operating cash flows in the private sector. (see back for more)

* Cash receipts and disbursements are classified in four (instead of the FASB's 3) categories: 1. operating activities 2. noncapital financing activities 3. capital and related financing activities, and investing activities. * The combined totals for all ISFs should be reported in a separate column on the face of the proprietary fund f/s, to the right of the total EFs column. -> This aggregate information is supported by combining statements for ISFs in the annual report.

* Reporting-entity standards for state and local governments are set forth in GASB Statement No. 14, "The Financial Reporting Entity," as amended by GASB Statement No. 61. -> The reporting entity consists of a primary government and its component units. *Primary Government: -> All state governments and general-purpose local governments- such as counties, cities, towns, and villages- are primary governments. -> A special-purpose government (such as a local school district or hospital district) is also considered a primary government, provided it has a separately elected governing body, is legally separate (e.g., it is created as a body corporate and politic), and is fiscally independent of other state and local governments. -> To be fiscally independent, as defined by the GASB, the organization must be authorized to take all three of these specific ations without approval of another government: 1. determine its budget, 2. levy taxes or set user charges, and 3. issue bonded debt. (see back for more)

* Component Units: -> Component units are legally separate organizations for which the elected officials of the primary government are financially accountable. -> Component units can be other organizations for which exclusion would cause the entity's f/s to be misleading. * The GASB identifies these two broad sets of circumstances- related to governance of the potential component unit- that create financial accountability: 1. Primary government appoints a voting majority of the board. -> A primary government is financially accountable for a legally separate organization if a. It appoints a boting majority of the organization's governing body, and b. (1) It is able to impose its will on that organization, or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. (continued on next slide)

Debt Service Funds: * Many governments issue general obligation debt, typically to finance capital projects. -> By definition, general obligation debt (usually bonds) is secured by the "full faith and credit" of the government; that is, repayment of principal and payment of interest on the debt are supported by a pledge of the entity's property tax collections and any other resources. * The payment of principal and interest on a debt is referred to as servicing the debt. -> DSFs are used to accumulate resources that will be used to pay principal and interest on general obligation long-term debt. * General obligation debt does not include debt that will be serviced from resources accumulated in EFs or ISFs. (see back for more)

* Debt that becomes due in installments, such as serial bonds, can be serviced directly by the GF. -> If a legal requirement dictates a separate DSF, such a fund must be established. * A separate DSF must be established if the governmental unit is accumulating resources currently for the future servicing of debt, such as term bonds. -> These accumulated resources are generally referred to as a sinking fund.

*Because CPFs follow a current financial resource measurement focus, bonded-debt principal is not recorded as a liability of a CPF. *Retaining (holding back) a certain amount from each payment to a contractor provides an incentive for the contractor to timely and satisfactorily complete the job. -> If the contractor does not perform, the retained amount can be used to pay another contractor to complete the project. ->Because the retainage is owed to the contractor, it is reported as a liability in the balance sheet of the CPF. *Interest earned on short-term investments held at year-end by governmental-type funds should be accrued provided it meets the available criterion. (see back for more)

* During the year, all costs incurred in construction are debited to expenditures. At the end of the year, the Expenditures- construction costs account will be closed into Restricted fund balance. -> The asset's cost is not capitalized in the CPF. *General capital assets are reported only in the government-wide f/s. *Investments held by governments generally are reported at current FV. -> Changes in the FV of most governmental investments are reported in the operating statement, along with interest and dividends received. -> Investments that are not reported at FV include debt instruments purchased with a maturity date of 1 year or less; for example, commercial paper and U.S. Treasury obligations.

*The most common types of general obligation debt are term and serial general obligation bonds. -> The principal portion of term bonds matures at one specified future date. -> The principal portion of serial bonds matures over a period of time- often over 10 or more years. * Serial bonds are more common because they allow for more constant debt service payments over a period of years. -> Some principal and interest comes due each year over a period of years, rather than having the entire principal come due in a single period, as occurs with term bonds. (see back for more)

* Governments also borrow short term to provide cash for operating or capital purposes. -> Some notes mature in less than 1 year and because of their short-term nature, generally are reported as liabilities in governmental funds. At year-end, unpaid interest on short-term notes is accrued as a governmental fund liability. -> Long-term notes- including bank notes, certificates of obligation, and commercial paper- are not reported in governmental funds until the principal and interest on them are due and payable.

*Governmental units often lease assets rather than purchase them. * A lease is classified as an operating lease if the lessee does not acquire any property rights through the contract. -> these leases are generally short-term and are recorded by a debit to an expenditure account and a credit to cash when rental payments are made. * A lease is classified as a capital lease by the lessee if the lessee acquires property rights through the contract, the lease is noncancellable, and it meets at least one of the following tests: 1. The lessee owns the property at the conclusion of the lease, through either a transfer of title or a bargain purchase option. 2. The life of the lease is 75% or more of the expected economic life of the asset. 3. The PV of the minimum lease payments is 90% or more of the FMV of the leased asset. (see back for more)

* If a government enters into a capital lease as a lessee, the government records a debit to a capital expenditure and a credit to an Other financing source. -> In effect, a capital lease is reported as if the government had financed the acquisition of a capital asset through long-term borrowing. * A debit to capital outlay expenditures is recorded in a governmental fund when a capital asset is purchased, and a credit is made to an Other financing source when a government receives proceeds from long-term borrowings. -> This entry "nets out" the receipt and disbursement of cash that would take place if money actually were first borrowed then expended. * Governmental leases usually contain a fiscal funding clause, which is a provision in the lease that permits the government to cancel the lease if resources are not appropriated to make lease payments. -> if the possibility of actual cancellation is remote, a fiscal funding clause does not affect the noncancellable test (the lease is still capitalized).

* For governments either sponsoring a sole-employer pension plan or participating in an agent multiemployer plan, annual pension cost or annual OPEB cost in the simplest case is equal to a government's annual required contribution (ARC), as determined by the actuarial valuation. * The ARC has two components- normal cost and amortization of the unfunded actuarially accrued liability (UAAL). -> the normal cost is generally the present value of the pension or OPEB benefit earned by each employee for the year. -> The UAAL results from a variety of factors, such as previous underfunding and benefit increases attributable to earlier years of service that have not yet been fully funded. (see back for

* If an employer government has contributed less than the ARC for a previous year, it likely will have a net pension or net OPEB obligation reported in its government-wide statement of net position. -> In this case, the annual pension or OPEB cost, which is reported as an expense in the government-wide statement of activities, will include three elements: 1. The ARC, 2. Interest on the net pension or OPEB obligation already reported by the government, and 3. an adjustment to the ARC.

* The individual f/s for PTFs are a statement of changes in plan net position and a statement of plan net position. -> The GASB also requires two supplementary schedules for defined benefit pension plans. 1. a schedule of funding progress 2. a schedule of employer contributions * The schedule of funding progress helps f/s users determine whether the financial status of the PTF is improving over time. -> This schedule reports the trend in the funded ratio- actuarial value of assets (AVA) divided by actuarial accrued liability (AAL). -> The schedule also shows the trend in the UAAL as a percentage of covered payroll. (the UAAL is simply the difference between the AAL and the AVA.) -> As a general rule, the financial status of the pension fund is improving if the first ratio increases over time and if the second ratio decreases. (see back for more)

* In developing these ratios, actuarial, not accounting, information is used. -> Actuaries generally "smooth" changes in market values of investments over periods of 3 to 5 years. -> The AAL is generally a by-product of the method used by the actuary to compute the funding requirement for a particular pension plan. * The AAL provides a rough measure of the PV of the pension benefit earned to date by retired an active members of the plan. -> A key element in calculating the AAL is the investment earning assumption (discount rate)- the plan's estimated long-term investment yield. -> Thus, the higher the investment earning assumption used by the actuary, the lower the AAL. * The AAL is not a uniform measure of the earned pension benefit, because the AAL would be different for different actuarial funding methods. * The notes to the f/s for defined benefit plans must include: 1. a description of the plan, 2. a summary of significant accounting policies, 3. information about contributions and reserves, and 4. identification of concentrations of investments in certain organizations.

* A pension or OPEB plan will have one of three structures: (1) sole-employer, (2) agent multiemployer, or (3) cost sharing. * According to the GASB, "sole and agent employers are individually responsible for the accumulation of sufficient plan net assets to pay the actuarial accrued liabilities for benefits to their employees as they com due." * A sole-employer plan performs the administrative and investment function for a single employer, whereas an agent multiple-employer plan pools the administrative and investment function for multiple employers in order to reduce the plan's overhead while maintaining separate accounts for each employer. -> Each individual employer in an agent multiple-employer plan is still liable for the benefit obligation for its retirees. Thus, the required pension contribution rates for such employers are unique to each. (see back for more)

* In the third structure, cost-sharing plans, "the actuarial accrued liabilities of the various employers are shared, and the plan net assets are pooled and are available to pay the shared actuarial accrued liabilities as they come due." -> This means that all employers are liable for the accumulated liabilities of the plan. -> As a result, the contribution rate as a percentage of payroll is the same for all employers participating in the plan. * Governments participating in cost-sharing plans legally are obligated to make their annual contributions in full as specified by the plan administrator; sole-employer governments and governments participating in agent multiemployer plans have flexibility to contribute less in a given year than the actuarially recommended amount- a practice that can cause the pension or OPEB plan to be severely underfunded.

* Unlike interfund services provided and used (which are exchange-type transactions), interfund transfers should not be accounted for as revenues and expenditures/expense of either fund involved in the transaction. -> Instead, interfund transfers in and out are reported in governmental fund operating statements as Other financing sources (uses) after the caption "Excess (deficiency) of revenues over expenditures" -> In proprietary fund operating statements, interfund transfers in and out are reported separately after the caption "Income (loss) before transfers." *Transfers out and in can be accrued before cash is paid. *Interfund transfers should net to zero among all funds within a government; that is, for every transfer in reported in a fund, an equal transfer out should be reported in another fund. (see back for more)

* Interfund Loans: -> Interfund loans arise when one fund lends cash to another with a requirement for repayment. -> When the loan is made, the lender fund records a receivable, and the borrower records a payable. -> Although there is no authoritative requirement to do so, practitioners generally distinguish between short-term and long-term interfund loans. *Interfund Reimbursements: -> Sometimes expediency may require that an expenditure be paid entirely or parly by a fund other than the one that should be charged for the transaction. -> Subsequent repayment to the paying fund by the fund properly chargeable for the expenditure is called an interfund reimbursement.

* An agency fund is a fiduciary-type fund used when a governmental unit is the custodian for resources that belong to others. * AFs typically involve only the receipt, temporary investment, and remittance of fiduciary resources to individuals, private organizations, or other governments. * Because an AF is used purely for custodial purposes, there is no net position reported for this type of fund. -> Instead, ass the assets held are offset by liabilities. * The AF accounting equation is Assets=Liabilities. * No operating statements are prepared for AFs because no inflows or outflows of resources are recorded. (see back for more)

* One of the most common uses of an AF is as a clearing mechanism for recording the collection of property taxes by one government on behalf of other governments. * By definition, AFs are only used to account for assets held for those outside the government. *A key factor in determining whether an AF should be used is whether the governmental unit disburses the assets according to a preciously agreed upon formula, legal requirement, or instruction by the "owner". -> AFs should be used when the government has no discretionary use of the assets over which it has temporary custody and no trust agreement is established. *When uncollectible tax accounts are written off by governments, an adjustment needs to be made in the AF.

Intergovernmental Grants: *GASB standards require that grant recipients recognize revenues in governmental-type funds in the period that all applicable eligibility requirements have been met and the resources are available. -> Although time requirements affect the accounting period in which grant revenues are recognized, purpose restrictions do not. --> Thus, if a grant has purpose restrictions but no time requirements, the entire grant amount should be recognized when all eligibility requirements are met. --> Any unspent revenues remaining at year-end should be reported as Restricted fund balance until the resources are used for the specified purpose. (see back for more)

* Pass-through grants: Governments often receive so-called "pass-through grants" that they can transfer to or spend on behalf of a secondary government. -> As a general rule, pass-through grants should be recognized as revenues and expenditures in the primary recipient's governmental-type funds, provided it has administrative involvement with the program. -> If the primary recipient serves merely as a "cash conduit" and has no administrative involvement, it should account for the grant in an Agency Fund.

* PFs account for activities involved in providing goods and/or services to paying customers on an exchange basis. -> The operating cycle is similar to that of a business organization: ->During the fiscal period, the fund acquires assets such as supplies, property, and equipment. -> Goods or services are provided to paying customers, and revenues from user charges are recorded. -> The cost of assets used is recorded along with other operating and nonoperating expenses. -> Revenues earned are compared with expenses incurred, and the resulting profit or loss increases or decreases net position. (see back for more)

* Some ISFs price goods and services above cost to provide financing for expansion or to cover anticipated inflation when equipment must be replaced. -> Sometimes services provided by EFs (such as mass transit) are "underpriced" and subsidized by GF revenues as a matter of public policy. -> Some activities accounted for in EFs (such as lotteries) produce "profits" that are transferred to the GF. -> By computing the activity's full cost of operations and comparing these costs with the revenues earned, the extent of the subsidy needed is determined.

* PFs apply only GASB pronouncements, not FASB pronouncements. * The f/s for individual PFs are a statement of revenues, expenses, and changes in fund net position; a statement of net position (or balance sheet); and a statement of cash flows. * PF statements of net position should be prepared using a classified format. -> Assets are classified as current assets if they are reasonably expected to be realized in cash or sold or consumed within a year. -> All other assets are classified as noncurrent. -> Liabilities are classified as current based on whether their liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities. -> All other liabilities are noncurrent. -> Deferred outflows and inflows are classified in the same manner. (see back for more)

* The PF statement of net position reports all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. * Deferred outflows represent a use of net assets by the government that is applicable to a future reporting period- and, therefore, deferred. * Deferred inflows are an acquisition of net assets by the government that is applicable to a future reporting period. * Deferred outflows and inflows are limited to items specifically identified as such by the GASB; they are required to be reported separately from proprietary fund assets and liabilities. * The GASB requires the net position section of the statement of net position to be reported in three components: 1. net investment in capital assets; 2. restricted; and 3. unrestricted

* Governments use Fiduciary Funds to account for assets held in a trustee or agency capacity for entities outside the government. -> The assets of Fiduciary Funds cannot be used to finance the government's own programs. -> The four types of funds included in this fund category are: 1. Employee Pension (and other employee benefit) Trust Funds (PTFs) 2. Investment Trust Funds (ITFs) 3. Private Purpose Trust Funds (PPTFs) 4. Agency Funds (AFs) (see back for more)

* The first three fund types involve establishing a formal (and usually long-lived) trust relationship between the government and the parties at interest. -> AFs, in Contrast, are used in situations in which a government takes only custodial responsibility of resources belonging to others, usually for a comparatively short time.

* The focus of governmental fund f/s is on inflows, outflows, and balances of current financial resources; amounts available for appropriation; and fiscal compliance. -> The information provided by those statements should be useful in assessing 1. the sources, uses, and balances of current financial resources; 2. the extent of compliance with legally adopted budgets; 3. actual current financial results compared with legally adopted budgets; and 4. the amounts available for appropriation. (see back for more)

* The focus of the government-wide statements is on reporting the operating results and financial position of the government as an economic entity. -> The GASB states that the government-wide statements will help users assess the finances of the government in its entirety, determine whether its overall financial position improved or deteriorated, evaluate whether the government's current-year revenues were sufficient to pay for current-year services, see the cost of providing services to the citizenry, see how the government financed its program (through user fees and other program revenues versus general tax revenues), and understand the extent to which the government has invested in capital assets.

Permanent Funds: *Permanent funds are used to account for resources that are legally restricted in a manner that: 1. only earning on the principal of these resources can be expended, and 2. the earnings must be used to support the programs that benefit the government or its citizens in general. * A distinction should be made between PFs and Fiduciary funds. -> PFs are used to report nonexpendable gifts that must benefit a government's own programs, as opposed to specific individuals, organizations, or other governments. -> Fiduciary funds are used to hold assets in a trustee capacity for the benefit of entities or individuals outside the government. * Permanent funds should be established only when required by legal trust agreement or by law. -> When such agreements do not exist, the GF or SRF should be used, depending on the type of restrictions placed on the resources. (see back for more)

* The operations of PFs are controlled through applicable state laws and individual trust agreements. -> Therefore, the accounting system must be designed to provide information and reports that permit a review of this stewardship role. * Unless legally stipulated, formal integration of the budget into the accounting system is not usually required. * Activities financed by PFs typically are budgeted in the fund that receives the PFs' earnings (usually SRFs). *GASB standards require that investments be reported at FV. *F/S for a PF are a balance sheet and a statement of revenues, expenditures, and changes in fund balance.

*To finance projects, governmental units usually issue general obligation bonds and solicit federal and/or state grants. -> Bond and grant proceeds are not always spent immediately upon receipt. In such cases, the CPF will be used to account for some short-term investment activity. -> As construction work progresses, investments are liquidated, and payments are made to the contractor until the project is completed and finally accepted. -> Any financial resources remaining in the fund after the final payments are made on a project are transferred to another fund or returned to the grantors, as applicable. (see back for more)

* The operations of a CPF are generally controlled through provisions of bond indentures, provisions of grant agreements, and so forth. -> Formal budgetary integration into the accounts, as used in the GF and SRFs, is not always necessary. *Encumbrance accounting is ordinarily used for these funds because of the extent of involvement with contracts and purchase orders and because of the need to control the related expenditures.

* When the term reporting entity is used in the private sector, it refers to the boundaries of a particular financial reporting unit. -> That is it identifies whose assets, liabilities, revenues, expenses, and equities are embraced within the f/s of that economic unit. * A private-sector business enterprise may exercise control over legally separate organizations by owning a controlling share of their voting stock. -> Excluding the financial activities of those entities from the f/s of the parent enterprise would cause the parent's statements to be incomplete and even misleading. (see back for more)

* The same type of reporting entity issue also occurs in the public sector, because governments often create and control (or are otherwise financially accountable for) a number of legally separate entities. -> These entities ( referred to as public authorities or public benefit corporations) generally are created by statute, but may be created through a state's not-for-profit corporation laws. -> Depending on the circumstances, not reporting the financial activities of these legally separate organizations within the f/s of the parent government could cause the parent's statements to be incomplete and possibly misleading.

* The operations of ISFs are controlled indirectly by the operating budgets of the funds and departments using the goods or services and directly by means of flexible budgets. -> Because other funds must pay for the goods or services supplied, approval of their budgets acts as an indirect control device for ISFs. * A flexible budget is a budget in which most of the budgeted expenses are related to the level of operations. -> Governmental-type funds, by contrast, operate under a fixed budget. * The difference in budgeting practices between governmental-type funds and proprietary funds results because the revenues generated by the latter increases as the level of operations increases. -> Because of a general cause-and-effect relationship between the level of operations and the revenues earned and expenses incurred, a flexible budget allows higher levels of expenses at higher levels of operating activities. (see back for more)

* Typically we do not find the budget recorded in the accounts of ISFs, nor do we usually find the use of encumbrance accounting for these funds.

* Most state and local governments have established an irrevocable pension trust fund that is used to accumulate contributions from one or more government employers for investment purposes and, ultimately, to pay benefits to retirees. -> Typically governments fund their pension plans based on actuarially determined amounts, which should provide sufficient resources for future retiree benefits. *Historically, the monthly pension payment to retirees have been based on an agreement between the government and its employees before they retire. -> the employee's monthly benefit would be calculated, and the employee would continue to receive that amount each month until death. -> Called a defined benefit plan. (see back for more)

* With a defined benefit arrangement, the employer promises to provide the retiree a defined future benefit over a future time period. -> One effect of such arrangements is that the government bears the risk associated with unknown future economic factors. -> The retirees are promised a certain benefit regardless of future inflation, investment returns, salary increases, and how long the retiree lives. -> Some defined benefit pension plans increase the employer's uncertainty by having built-in cost-of-living-adjustments. That is, benefits increase, for example, as the consumer price index rises.

Capital Projects Funds (CPFs): * Acquisition or construction of major capital facilities and other capital assets (other than those financed by proprietary and trust funds) typically is accounted for in CPFs. -> Ex. of capital facilities include a new city hall and infrastructure assets, such as a bridge; other capital assets include buses and fire trucks. *The resources used to finance CPFs usually come from general obligation debt, transfers from other funds, intergovernmental revenues, and private donations. *Capital assets of a relatively minor nature, such as furniture and automobiles, are usually financed through the GF of a SRF, although they may be financed through a CPF. (see back for more)

*Capital projects normally are controlled by capital budgets. * Many governments supplement their current-year capital budgets with long-term capital programs. -> A long-term capital program presents information on the capital improvements desired over a multiyear period of time- often 5 to 10 years. -> Lists the projects planned, the estimated cost of each project, and the proposed sources of financing for each project. -> Generally prepared on a "continuous" basis, with a future year added, the past year dropped, and the other years updated for new cost estimates.

* Salaries, supplies, and utilities paid from the General Fund and Special Revenue Funds fall in category 1. ->Salaries, supplies, and utility services that are unpaid at year-end would be accrued in those funds in a manner similar to the accrual that would be made in business enterprise accounting. * Claims and judgments paid from governmental-type funds fall in category 2. -> Governments that do not transfer risk to third parties by means of insurance are subject to claims for damages for various torts, such as damages to vehicles caused by a government's sanitation truck operators. --> These claims may not be settled or adjudicated for several years. --> Under modified accrual accounting an accrual is made only for the matured liability. (see back for more)

*Compensated absences also fall within category 2. -> Under GASB standards for government-wide reporting, vacation leave and other compensated absences with similar characteristics should be accrued as an expense and a liability as those benefits are earned by employees if: 1. the employees' rights to receive compensation are attributable to services already performed, and 2. it is probable that the employer will compensate the employees through paid time off or some other means, such as cash payments at termination or retirement. --> Under the modified accrual basis of accounting, an accrual is made only for the matured liability, that is, amounts coming due for accumulated compensated absences because employees have been terminated or have retired but not yet received payment. (continued on next card)

Five types of Governmental funds: 1. The General Fund 2. Special Revenue Funds 3. Capital Projects Funds 4. Debt Services Funds 5. Permanent Funds * All have the same current financial resources measurement focus and use the modified accrual basis of accounting. * Capital Projects Funds are used to account for and report on financial resources that are restricted or otherwise limited to spending for capital outlays- typically the acquisition or construction of major capital assets. (see back for more)

*Debt Service Funds are used to account for and report on financial resources that are restricted or otherwise limited to spending for principal and interest on general long-term debt. -> That debt which is typically backed by the "full faith and credit" of a government, is generally issued for capital asset acquisition purposes, but it can be issued also for operating purposes.

* Typically, governments finance large capital acquisitions or construction projects, such as buildings and bridges, with the proceeds from the sale of general obligation bonds. -> The related debt covenants often include two important requirements: 1. the bond proceeds can be expended only for the purpose for which the bonds were sold, that is, the construction or purchase of a particular capital asset. 2. the borrowing government must set aside financial resources for the express purpose of "servicing"- making interest and principal payments on- the debt. *These debt covenant requirements make it prudent for a government to establish a Capital Projects Fund to account for the construction of the capital asset and a Debt Service Fund to account for accumulating resources to repay the debt and to make interest and bond principal payments as they come due. (see back for more)

*Governmental GAAP actually require that a government use a Capital Projects Fund if the project is financed wholly or partly by general obligation bond proceeds. -> Also, "Debt service funds are required if they are legally mandated and/or if financial resources are being accumulated for principal and interest payments maturing in future years."

Interfund Transactions: *"nothing in return" *Interfund Services Provided and Used: -> occur when one fund sells goods to or performs services for another fund for a price approximating their external exchange value. -> These transactions occur typically when an Enterprise Fund or an Internal Service Fund provides goods or services to governmental departments that receive appropriations through the General Fund. --> Such transactions result in the recognition or revenues and expenditures (or expenses) by the participating funds in the same manner as if an exchange transaction occurred between the government and a commercial entity. (see back for more)

*Interfund transfers: -> Interfund transfers record flows of assets (such as cash or goods) without equivalent flows of assets in return and without a requirement for repayment. -> Interfund transfers account for the largest part of the interfund activity in most governments. -> A typical interfund transfer is a periodic cash transfer from the General Fund to a Debt Service Fund so the latter fund can pay for debt service. Other examples are: 1. an operating subsidy from the General Fund to an Electric Utility Fund (Enterprise Fund); 2. a payment mad by the General Fund to a Capital Projects Fund for part of the cost of constructing a capital project that is financed also with an intergovernmental grant; and 3. a transfer of the residual fund balance of a Debt Service Fund to the General Fund after the principal and interest have been paid in full. (continued on next card)

Sales Tax and Income Tax Revenues and Receivables: *State governments obtain most of their tax revenues from personal income taxes, general sales taxes, and taxes on specific items, such as motor fuel. -->These taxes are derived from the application of tax rates to underlying exchange transactions. *The standards regarding these "derived" tax revenues are expressed in a different manner than property taxes because of differences in the nature of the taxes and how they are collected, but the effect of the standards is generally the same. -> According to GASB statement No. 33, assets from derived tax revenues are recognized in the period the underlying exchange occurs, and revenues are recognized (net of refunds and estimated uncollectible amounts) in the period the underlying exchange occurs and the resources are available. (see back for more)

--> Available means the same for these taxes as it does for property taxes, but GASB does not require that the "60-day" property tax rule be applied to sales taxes and income taxes. ---> The GASB does, however, require note disclosure of the length of time the government uses to define available for purposes of revenue recognition. *Governments record sales taxes when they receive the taxes, regardless of whether they collect the taxes directly or another government collects the taxes for them. -> At year-end, an accrual is made to record taxes collected by the merchants during the fiscal year but not received by the government until after the end of the year.

Expenditures and Fund Liabilities: Nature of Liabilities in Governmental-Type Funds: * GASB standards identify three categories of transactions and events that create liabilities and expenditures: 1. Items that, "once incurred, normally are paid in a timely manner and in full from current financial resources- for example, salaries, professional services, supplies, utilities, and travel. -> Such liabilities are considered claims against current financial resources, and if not paid at year-end expenditures are accrued and liabilities are reported in the governmental funds. 2. Items that create liabilities that governments "normally" expect to liquidate over future time periods with financial resources that are available in those future periods. -> GASB standards identify the following items as falling within this category: claims and judgments, compensated absences, special termination benefits, and landfill closure and postclosure care costs. (see back for more)

--> Expenditures and liabilities for these items are recognized as the liabilities mature (i.e, as they come due for payment) each year on the occurrence of relevant events, such as the settlement of claims or the resignation of employees. The portion of the liability that has not matured is considered general long-term debt rather than fund debt. 3. Liabilities resulting from promises to pay pensions, retiree health care, and other postemployment benefits. -> GASB standards say expenditures from governmental funds for these salary-related items should be "equal to the amount contributed to the plan or expected to be liquidated with expendable available resources." --> These benefits are accounted for as expenditures and liabilities in the period they are financed. --> Liabilities resulting from differences between amounts calculated on the accrual basis of accounting and amounts financed are considered general long-term debt.

-> Amounts classified as committed are distinguished from amounts classified as"restricted by enabling legislation" in that: 1. amounts committed may be deployed to other uses through the same types of due process action (legislation, resolution, or ordinance) that created the commitment, and 2. constraints on the use of committed amounts are imposed by the government separately from the authorization to raise the underlying revenue. 4. Assigned Fund Balance: -> Amounts constrained by a government's intent to spend resources for specific purposes are classified as assigned. -> The intent to spend may be expressed either by the government's governing body or a body (such as a budget committee) or official to which the governing body has delegated that authority. (see back for more)

-> Constraints imposed on assigned amounts can be more easily removed than those imposed on restricted or committed amounts because: 1. assigned constraints are not imposed externally, and 2. internal authority to impose the constraint need not be at the highest level of decision making. -> In no event can the amounts assigned be so great as to create a deficit in Unassigned fund balance. -> Any fund balance in a governmental-type fund other than the General Fund that is not classified as nonspendable, restricted, or committed should be classified as assigned. -> Classifying these amounts as assigned reinforces the point that net assets reported in Special Revenue Funds, Capital Projects Funds, and Debt Service Funds cannot be used for the government's general purposes. (see next card)

Fund Balance Classifications: 1. Nonspendable Fund Balance: ->Fund balances classified as nonspendable are amounts that are not available for appropriation because they are either: 1. not in spendable form, or 2. legally or contractually required to be maintained intact. 2. Restricted Fund Balance: -> Fund balances classified as restricted have the most binding degree of constraint because the related resources can be used for no purpose other than that specified in the constitutional provision, enabling legislation, or contractual provision creating the restriction. -> Specifically, such constraints may be either: 1. Externally imposed; or 2. Imposed by law through constitutional provisions or enabling legislation. (see back for more)

-> GASB statement No. 54 defines "enabling legislation" as legislation that authorizes the government to mandate payment of resources (from external resource providers) and includes a legally enforceable requirement that the resources be used only for the purposes stipulated in the legislation. -> A "legally enforceable requirement" is one whereby the government can be compelled by external parties (such as citizens and the judiciary) to use the resources only as stipulated in the legislation. 3. Committed Fund Balance: -> Fund balances classified as committed are amounts that are constrained as to use as a result of formal action (legislation, resolution, or ordinance) of the government's highest level of decision-making authority. These actions require consent of both the legislative and executive branches of government, where applicable. (continued on next card)

-> The consumption method of inventory accounting inherently produces a balance sheet amount, but-assuming the inventory is significant in amount- the purchases method requires a special journal entry. * Consumption method: -> The consumption method of inventory accounting requires recording materials and supplies as assets when purchased and as expenditure when consumed. -> Thus, when the consumption method is used, the acquisition of supplies is considered an exchange of one financial asset (cash) for another (supplies inventory) , and the expenditure occurs on consumption of the inventory *Purchases method: -> The purchases method of inventory accounting records purchases of supplies as expenditures immediately on acquisition. (see back for more)

-> The purchases method of accounting for materials and supplies is consistent with the way most governments budget for supplies and is also consistent with governmental-type fund accounting for capital assets; that is, supplies are "written off" as expenditures when acquired. -> GASB standards require that significant amounts of inventory should be reported in the balance sheet. -> GASB standards provide the same accounting option for recording prepayments (such as prepaid insurance and prepaid rent) as they do for materials and supplies. --> Thus, if expenditures for insurance and similar services cover more than one accounting period, they may be allocated among the affected accounting periods (the consumption method), or they may be accounted for as expenditures in the year of acquisition (the purchases method). -> Although the consumption method may be used, General Fund and Special Revenue Fund expenditures for insurance and rent that cover more than one accounting period typically are charged to the accounting period in which the services are acquired (the purchases method), and prepaid amounts are not considered significant. (continued on next card)

* CPF activities often involve the short-term investment of idle cash. -> government officials need to exercise care to avoid running afoul of arbitrage regulations. *Arbitrage refers to borrowing money at a certain interest rate while investing the money at a higher interest rate. -> Governments often have the opportunity to earn arbitrage by issuing lower interest rate tax-exempt debt, but earing a higher interest rate on taxable investments. * The Internal Revenue Code has strict rules regarding the amount of interest that can be earned without penalty from the proceeds of tax-exempt debt is issued by a government. (see back for more)

-> These rules generally provide that interest earned on the investment of tax-exempt debt proceeds cannot be greater than interest paid. -> If interest earned is higher, then the government is subject to the arbitrage provisions of the Code. ->Excess interest earned by a state or local government must be paid to the federal government, or it will be subject to either an excise tax on the excess earning or revocation of the tax-exempt status of its debt. -> Revocation of the tax-exempt status of its debt would result in a government paying higher interest rates on future debt issues.

*Acquisition and Disposition of Long-Lived Assets: -> Under the current financial resources measurement focus used in governmental-type funds, purchases of capital assets are accounted for as immediate expenditures, rather than as depreciable balance sheet assets. --> This is because- from the perspective of the governmental-type fund- using the fund's resources to buy capital assets is no different from using its resources to pay for salaries, utilities, or anything else: they all decrease the available spendable financial resources of the fund. -> Capital assets acquired with General Fund resources cannot appear in the General Fund balance sheet. Further, having been immediately "written off" (because they were recorded as expenditures) on acquisition, there are no capital assets to depreciate in the General Fund. -> It is possible that the assets will be sold when they are no longer needed. Because the General Fund shows no "book value" for the assets, the entire proceeds from the sale are recorded as an inflow of resources. (see back for more)

-> the General Fund has only financial resources. -> the General Fund accounts for inflows and outflows of spendable financial resources; once financial resources are spent, they are gone and cannot be spent again. -> When financial resources are used to acquire capital assets, the accounting effect is the same as it is when financial resources are used to pay for operating expenditures. -> Further, because the General Fund does not try to measure net income, depreciation is neither necessary nor appropriate within that fund. But records do need to be kept of capital assets, and government-wide financial reporting uses the economic resources measurement focus for all governmental activities, regardless of the funds used to do the accounting. *Inventories and Prepayments: -> GASB standards provide a strange option regarding expenditure recognition for materials and supplies in governmental-type funds. -> Materials and supplies "may be considered expenditures either when purchased (purchases method) or when used (consumption method), but significant amounts of inventory should be reported in the balance sheet." (continued on next card)

Property Tax Revenues and Receivables: Basic Principles and Journal Entries: -> Under the modified accrual basis of accounting, property revenues are recognized in the fiscal period for which the tax is levied, provided the taxes are available. --> Available means the taxes must be collected within the current period or soon enough thereafter to be used to pay liabilities of the current period; the time period "soon enough thereafter" cannet exceed 60 days, unless unusual circumstances justify a greater period. --> At year-end, revenues expected to be collected after the 60-day period are deferred and recognized in the next year. (see back for more)

->Assets (cash or taxes receivable) from property tax transactions are recognized " in the period when an enforceable legal claim arises or when the resources are received, whichever occurs first." --> For most governments that levy property taxes, receivables are reported at year-end (reduced by an allowance for estimated uncollectible taxes) regardless of when they are expected to be converted to cash. --> If property taxes are collected before the period for which the taxes are levied, the revenues are deferred and recognized in the period for which they are levied. -> Many local governments require homeowners to pay real property taxes during the year for which the taxes are levied. However, the full amount levied may not be collected because taxpayers successfully appeal the assessed values on which the taxes are based or because the taxes are otherwise deemed uncollectible.

*Many governments charge penalties against delinquent taxpayers in the form of interest on the amount of taxes owed. -> Interest rates may increase with the length of the payment delay. -> Many governments do not accrue interest and penalties receivable in the accounting records. Instead, they calculate the interest and penalties owed and charge the taxpayer for them when the taxpayer pays the delinquent taxes. *When back taxes are owed, a government may place a lien against the property. -> A lien is the legal right to prevent sale of a piece of property in order to satisfy a claim against the property owner; the property cannot be sold or transferred by the owner until the lien is removed. -> When a lien is placed against a piece of property, existing receivables accounts are reclassified to an account called Tax liens receivable. (see back for more)

->In extereme cases, if the property owner does not pay the lien, the government will exercise its right to seize the property and sell it to the highest bidder. -> After the taxes, penalties, and costs of the sale have been deducted, any remaining proceeds from selling the property will be sent to the now-former property owner.

* The GASB requires extensive note disclosures by governments that provide pension benefits and OPEB to their employees. -> Disclosures required include the following: 1. A detailed description of the plan, including the types of benefits it provides, and whether the plan issues a financial report. 2. The authority under which obligations to contribute to the plan are established, the required contribution rates of active plan members, and the required contribution rates of employers. -> Additional disclosures required of employer governments participating in sole-employer or agent multiemployer plans include: 1. Annual pension or OPEB cost and the dollar amount of contributions made for the current year. If the employer has a net pension or OPEB obligation, the employer also should disclose the components of annual pension or OPEB cost, the increase or decrease in the net pension or OPEB obligation, and the net position or OPEB obligation at the end of the year. (see back for more)

2. Annual pension or OPEB cost, percentage of annual pension or OPEB cost contributed that year, and net pension or OPEB obligation at the end of the year- for the current year and each of the two preceding years. 3. Date of the actuarial valuation and identification of the actuarial methods and significant assumptions used to determine the ARC for the current year.

* The GASB concluded that the governmental financial reporting should provide information to assist users in assessing the accountability of public officials and in making economic, social, and political decisions. -> Accountability was considered to be the paramount objective from which all other objectives must flow, Specifically, 1. Financial reporting should assist in fulfilling government's duty to be publicly accountable and should enable users to assess that accountability by a.) providing information to determine whether current-year revenues were sufficient to pay for current-year services b.) demonstrating whether resources were obtained and used in accordance with the government's legally adopted budget, and demonstrating compliance with other finance-related legal or contractual requirements c.) providing information to assist users in assessing the service efforts and accomplishments of the government (see back for more)

2. Financial reporting should assist users in evaluating the operating results of the government for the year by a.) providing information about sources and uses of financial resources b.) providing information about how it financed its activities and met its cash requirements c.) providing information necessary to determine whether its financial position improved or deteriorated as a result of the year's operations 3. Financial reporting should assist users in assessing the level of services that can be provided by the government and its ability to meet its obligations as they become due by a.) providing information about its financial position and condition b.) providing information about its physical and other nonfinancial resources having useful lives that extend beyond the current year, including information that can be used to assess the service potential of those resources c.) disclosing legal or contractual restrictions on resources and the risk of potential loss of resources

Recognition and Measurement- General Principles: -> Governmental-type funds are budgetary devices. -> For internal purposes, the accounting records need to provide data to manage the current budget and prepare future budgets. 1. Focus on spendable resources: -> Resources held in governmental-type funds have utility only to the extent they can be spent to meet current budgetary needs. -> Resources that can be spent currently are financial resources, like cash and resources convertible to cash in the near term, such as investments, taxes receivable, and amounts due from other funds and other governments. -> Capital assets are not recorded in governmental-type funds because they are not financial resources available for current spending. -> Most governments account for the acquisition of supplies as if consumed when purchased. (see back for more)

2. Revenues recognized if resources are "available": -> From a revenue perspective, the word current (in the term current financial resources) generally covers a shorter time frame than the 1-year period used in private enterprise to distinguish current from noncurrent. -> Under GASB standards, governments recognize revenues only to the extent that they are "MEASURABLE AND AVAILABLE to finance expenditures of the fiscal period;" -> The standards define available to mean " collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period". 3. Expenditure budgeting on a cash or near cash basis: -> Depending on the fiscal circumstances, a government may choose not to finance certain types of expenditures, such as pensions and retiree health care benefits, in the years the benefits are earned by the employees. --> This is possible because there is a long time lapse between the earning of the benefits and the actual payment to or on behalf of the employees. When that occurs, the governments are not budgeting for all expenditures attributable to the budget period.

* GASB states, "ISFs should be used only if the reporting government is the predominant participant [customer] in the activity. Otherwise, the activity should be reported as an EF." * According to the GASB, EFs may be used to report any activity for which a fee is charged to external users for goods and services. * Activities are required to be accounted for as EFs if any one of the following criteria is met: 1. The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity [debt of this kind is usually revenue bonds] 2. Laws or regulations require that the activity's costs of providing services including capital costs (such as depreciation or debt service) be recovered with fees and charges, rather than with taxes or similar revenues. (see back for more)

3. The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service). * Governments should apply each of these criteria in the context of the activity's principal revenue sources. * Governments are not required to use EFs for insignificant activities that are financed by user charges.

The modifications to accrual accounting relate to the manner in which long-term debt is accounted for in the funds. -> GASB standards declare that, except for long-term debt expected to be paid from proprietary and fiduciary funds, the "unmatured long-term indebtedness of the government.....is general long-term debt and should not be reported as liabilities in governmental funds." ->"General long-term debt" is then defined to include not only debt arising from the issuance of general obligation bonds, but also "noncurrent liabilities on.... compensated absences, claims and judgments, pensions.... and other commitments that are not current liabilities properly recorded in governmental funds." --> In short, certain liabilities- and the expenditures creating those liabilities- are omitted from the funds. (see back for more)

What types of liabilities are recorded in the funds? -> According to the standards: 1. those that "once incurred, normally are paid in a timely manner and in full from current financial resources- for example, salaries, professional services, supplies, utilities, and travel, and 2. those that have "matured" and are "normally expected to be liquidated with expendable available financial resources."