Chapter 9

Objectives:

•Learn why governments engage in business activities•Learn about proprietary funds •Learn about the unique accounting issues of enterprise funds and regulated funds

Accounting • Full accrualFull accrual, full costing, economic resources • No budget recorded, budgets are internal• Capitalized interest required when used• IncomeIncome recognized as earnedearned• ExpensesExpenses recognized as incurredincurred • Recognize long term assets and liabilities on the balance sheet• Has Net assetsNet assets• May pay “contribution” to state in lieu of property taxes

Why use Proprietary?

• When exchange transactions are predominant• Government wants to control the activity • Can provide more inexpensively than for- profit businesses because of tax breaks• Charges in government can be less than market rates to aid less advantaged.• Supports the mission of the entity• Needs to capture the essence of economic activity not just financial resources

What classifies fund as

Proprietary? • Operates like a for profit business• Resources are not legally restricted • Business-like reporting more important• Debt secured by net revenue of enterprise•Costs covered by fees and charges

Objectives and Principles

• Similar to for profit• Planning, control and evaluation • Cash management • Customer driven • Capital budget often prepared • Can benchmark to for-profits

Required Financial Statements

• Statement of Net Assets• Statement of Revenues, Expenses

and Changes in Net Assets• Statement of Cash Flows

Statement Differences

On the Net Assets : :

•Long term assets and associated depreciation•Long Term liabilities appear•Capital contribution from government•Has net assets instead of fund equity•Divided into unrestricted and restricted

net assets

Statement Differences

Statement of Revenues, ExpensesAnd changes in net assets:

•Recognize expenses•Calculate net income •Capital contributions and other changes •Show changes in net assets on the face

Statement Differences

Statement of Cash Flows:

Four sections instead of threeFinancing activities divided into two

Non-capital financing activities Capital and related financing activities

Order is different, operating, then financing, last is investing

Statement of Cash FlowsGovernmental: Four part statement:

Operating Activities (Direct method)Non-Capital Financing Activities

Borrowings not for acquisition of capital assets, repayments

Capital and related Financing ActivitiesBorrowings for acquisitions, etc. and repayments

Investing Activities

Interest paid is a financing activity in one of the above categories; Interest revenue is investing activity.

Restricted Assets

• Enterprise funds may still have restrictions• Reserves are created only for future outflows not already offset by a liability• Reported in separate section• If sinking fund established to pay debt, then use an “appropriation” or restriction in retained earnings.

Entries for Restricted Assets

Can be restricted to pay debt, for construction or as customer depositsWhen restricting assets: Cash Restricted for …

Revenue Bonds payable Net Assets – unrestricted

Net Assets - restricted

Efficiency ?

With no “maximize shareholder value”objective do governmental units haveefficiency incentive?

How can you insure efficient use of resources?Government employment issues?

Enterprise Funds

When government has exchange transactions with outside entities:

A city utilityTrash service

Environmental Cleanup Costs

• Cities might have a landfill and it charges for trash companies to deposit waste, so it is an enterprise fund

• Normal costs of operation are recognized• When there are environmental issues, entities are

required to accrue amounts in order to reclaim the site• Once the total cost of reclamation determined,

accrue as land is “used up”Landfill Expense 100,000

Liability for landfill costs 100,000• Liability is reduced as reclamation activities paid for

Internal Service Funds

• Exchange transactions with other governmental units.• Use full accrual, full costing• Prone to outsourcing • Capital maintenance objective

Self Insurance

If a separate insurance fund:

•Determine “set asides” based on history • Actual claims represent expenditure in general fund• Balance is an operating transfer• Total “set aside” is revenue to internal service

Government -Wide

Eliminations of Loans between funds Transactions between

governmental funds but not between governmental and enterprise

Review

Know how governments use proprietary funds Know the entries in the proprietary funds