GOVERNMENTAL ACCOUNTING: What You

Don’t Know Could Hurt You

Karen Tenace CPA, CMACity of Tucson

Objectives

What makes governmental accounting different than private sector?

Budgetary Accounting What’s a fund? Measurement Focus & Basis of

Accounting

How is Government different from Private

Sector?PRIVATE SECTOR

Exists to enhance owners wealth

Are free to provide only those goods and services they feel will enhance their profits

Harmony in purpose-make a PROFIT

Are NOT restricted to use resources in certain areas of their business

Budgets are used for INTERNAL purposes and are NOT the force of law

Continuity in leadership

GOVERNMENT Exist to provide goods and

services to their constituents

Are required by law to provide certain services

LACK harmony in purpose-different agendas and different politics

Financial resources have restrictions

Budgets are used BOTH internally and externally and ARE a force of law

Do NOT have a continuity of leadership?

Users of Accounting Information

PRIVATE SECTOR Shareholders Securities

Exchange Commission

Lending Institutions

Internal Management

GOVERNMENT Taxpayers Donors Investors Bond Rating

Agencies Grantors Political Groups

Principles and Standards

FASAB- Federal Accounting Standard

Advisory Board

Recommends financial reporting standards for the

federal government

Principles and Standards

GASB- Governmental Accounting Standards BoardStandard making

board for STATE AND LOCAL

governments as well as GOV’T

RELATED NFP’S

Principles and Standards Cont.

FASB- Financial Accounting Standards BoardLays out rules for both profit seeking businesses as well as NONGOV’T NFP

entities.

Other Acronyms…

FAF- Financial Accounting Foundation oversees GASB and FASB

GAAP- Generally Accepted Accounting Principles

FAF

GASB FASBFASAB

GAAP

Objectives of Financial Reporting

Fulfill government’s duty to be publicly accountable to constituents

Evaluate operating results for the year

Assess level of services provided Assess financial position Disclose restrictions and risk

potential loss of revenue sources

Budgetary Accounting

Budgets are Used Internally & Externally and are a Force of Law

Budget Accounts Integrate with General Ledger (GL)

Budgetary Accounts in GL

Estimated Revenues Appropriations- authorized

estimated expenditures Encumbrances- commitment of

budgetary resources

Encumbrance Accounting

An extra step in the procurement process to ensure that governments do NOT spend more than what’s appropriated.

An encumbrance is an obligation NOT a liability (Think Purchase Order)

Example: Public Safety Budget

July 1, 2007Total Total Total Unencumbe

red

Appropriations Encumbrances Expenditures

Balance

$1,000,000 $0 $0 1,000,000

Example: Public Safety Budget

Sally issues P.O. for Vehicles

Total Total Total Unencumbered

Appropriations Encumbrances Expenditures

Balance

$1,000,000 $200,000 $0 $800,000

Example: Public Safety Budget

George runs payroll (600k)Total Total Total Unencumbe

red

Appropriations Encumbrances Expenditures

Balance

$1,000,000 $200,000 $600,000

$200,000

Example: Public Safety Budget

Sarah runs A/P (150k)Total Total Total Unencumbe

red

Appropriations Encumbrances Expenditures

Balance

$1,000,000 $200,000 $750,000

$50,000

Chief wants to buy a $60k SWAT Vehicle-Can he do

it?Total Total Total Unencumbe

red

Appropriations Encumbrances Expenditures

Balance

$1,000,000 $200,000 $750,000

$50,000

Example: Public Safety Budget

Vehicles Rec’d; Paid For *Total Total Total Unencumbe

red

Appropriations Encumbrances Expenditures

Balance

$1,000,000 $0 $950,000

$50,000

*3 WAY MATCH = PO, RECEIVER, INVOICE

Unique Characteristics of Governmental Accounting

1. Use of Fund Accounting

2. Measurement Focus and Basis of Accounting or MFBA

Full Accrual AND Modified Accrual

What’s a Fund?

Fund: A self contained accounting entity with its own asset, liability, revenue, expenditure or expense and fund balance or other equity accounts.

Fund Types

GOVERNMENTAL FUNDS

1. General Fund2. Special Revenue Fund3. Capital Project Fund4. Debt Service Fund5. Permanent Fund

PROPRIETARY FUNDS

1. Enterprise Funds2. Internal Service Funds

FIDUCIARY FUNDS

1. Agency Funds2. Pension Funds3. Investment Trust Funds4. Private Purpose Trust

Funds

Governmental Funds

General Fund- day to day operations; can only have ONE General Fund

Special Revenue Funds- accounts for proceeds of specific revenue sources that should be used for specific purposes (HURF)

Capital Project Funds- accounts for financial resources used for acquisition or construction of major assets

Governmental Funds Cont.

Debt Service Fund- to account for accumulation of resources that will be used to pay general long-term debt

Permanent Fund- used to report resources that are legally restricted to the extent that only earnings, not principal, can be spent. Program must benefit the government or its citizenry, not a specific group or organization.

Proprietary Funds

Enterprise Funds- may be used to report any activity for which a fee is charged to EXTERNAL users for goods and services. Must be used if:

1. Debt is secured solely by a pledge of net revenues

2. Laws or regulations require fees to cover full cost of providing the service

3. Pricing policies require full cost recovery

Proprietary Funds Cont.

Internal Service Fund- accounts for the financing of goods and services provided by one department or agency to other INTERNAL departments or agencies of a governmental unit. Fees are charged with the intent to BREAK EVEN.

Fiduciary Funds Pension Fund- to account for

resources that are required to be held in trust for the members and beneficiaries of pension and/or benefit plans.

Private Purpose Trust Funds- to account for all other trust arrangements under which principal and income benefit individuals

Fiduciary Funds Cont.

Investment Trust Funds- to account for the external portion of investment pools reported by a sponsoring government.

Agency Funds- used to report resources held by the reporting government in a purely custodial capacity. Assets = Liabilities

Measurement Focus & Basis of Accounting (MFBA)

Measurement Focus tells you WHAT to recognize

Basis of Accounting tells you WHEN to recognize it

Two Types of MFBA’s in Governmental Accounting #1

Economic Resources Measurement Focus and Accrual Basis of Accounting

WHAT: Economic resource measurement focus considers ALL inflows, outflows and balances affecting or reflecting on an entity’s net assets.

1. Full Accrual Basis Cont.

WHEN: Accrual basis of accounting recognizes the financial effect of transactions, events, and interfund activities when they occur, regardless of the timing of related cash flows.

Two Types of MFBA’s in Governmental Accounting #1

Current Financial Resources Measurement Focus and Modified Accrual Basis of Accounting

WHAT: Current financial resource measurement focus only considers SHORT-TERM or CURRENT inflows, outflows and balances of expendable financial resources.

Two Types of MFBA’s in Governmental Accounting #2

Modified Basis Cont.

WHEN:Modified accrual basis of accounting in which:- Revenues are recognized in the accounting

period in which they become available and measurable.

- Expenditures are recognized in the accounting period in which the fund liability is incurred, if measurable.

Two Types of MFBA’s in Governmental Accounting #2

Fund Types

GOVERNMENTAL FUNDS(Current

Resources/Modified)

1. General Fund2. Special Revenue Fund3. Capital Project Fund4. Debt Service Fund5. Permanent Fund

PROPRIETARY FUNDS(Economic Resources/Full Accrual)

1. Enterprise Funds2. Internal Service Funds

FIDUCIARY FUNDS(Economic Resources/Full Accrual)

1. Agency Funds2. Pension Funds3. Investment Trust Funds4. Private Purpose Trust

Funds

Exercise

Turn PowerPoint presentation over – No peaking

Pull out exercise handout Get with neighbor or two Compare/Contrast pg 1 vs. pg 2 Compare/Contrast pg 3 vs. pg 4

How can you tell MFBA by looking at a financial

statement?Modified

Expenditures (Capital Outlay and Principal Payments)

Assets-Liabilities=Fund Balance

Only Current Assets and Current Liabilities Shown

Myopic View * No Long-term Assets means

no Depreciation Expense

Full Accrual Expenses Assets-Liabilities=Net

Assets Current AND Long-Term

Assets and Liabilities Shown Long-term View * Depreciation Expense

Included in Operating

•What You Don’t Know Could Hurt You!!!

See Handout

Governmental FundFinancial Statements

Current Resources; Modified Accrual

Balance Sheet

Statement of Revenues, Expenditures and Changes in Fund Balance

Proprietary FundsFinancial Statements

Economic Resources; Full Accrual

Statement of Net Assets or Balance Sheet

Statement of Revenues, EXPENSES, and Changes in Fund Net Assets

Statement of Cash Flows

Fiduciary FundsFinancial Statements

Economic Resources; Full Accrual

Statement of Fiduciary Net Assets

Statement of Changes in Fiduciary Net Assets

Let’s Make Gov’t Look More Like Private Sector-GASB 34

(2002)

GASB Statement No. 34The “New” Model

PRE-GASB 34: General Purpose F/S Emphasis on FUND

TYPE Governmental Fund

Financial Statements were ONLY presented using modified accrual accounting basis

POST-GASB 34: Basic F/S Emphasis on MAJOR

Fund vs. NONMAJOR Fund

Governmental Fund Financial Statements presented in BOTH modified and full accrual accounting basis

GASB 34Modified AND Full Accrual – Governmental Fund Impact

Capital Assets have to be shown in the financial statements for the first time!

Infrastructure had to be shown on the financial statements for the first time!

Depreciation had to be shown in the financial statements for the first time!

Long-term liabilities shown for the first time!

Other GASB 34 Impacts

New Fund Type-Permanent Fund Required Management Discussion

and Analysis (MD&A) New “Entity-wide”/”Government-

wide” Statements:1. Statement of Net Assets2. State of Activities

CAFRComprehensive Annual Financial Report

3 Things to Comply with GAAP

MD&ABasic Financial

StatementsRequired

SupplementaryInformation

Conclusion: What You Don’t Know WillWill Hurt You!