july 2002 1 introduction to internal service funds

July 2002 1

Introduction to Internal Service

Funds

July 2002 2

Internal Service Funds (ISFs)

Instructions for this power point presentation. This button appears

throughout the presentation. Click to obtain additional data.

Clicking on underlined text will provide links to additional information.

July 2002 3

ISFs . . . continued

Established to avoid duplication of effort. Bill clients for service. Are self supporting. Provide services more conveniently or at

a lower cost.

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Reflect major capital items as assets. Record depreciation to determine all

costs of operating the activity. Measure the full cost of the goods or

services. Operate as a business.

July 2002 5

Journal Entries

Various journal entries record the establishment and operational activities of an Internal Service Fund.

See slides 6 through 9 for these journal entries.

July 2002 6

Journal Entries . . . continued

Establish an equity transfer: Debit: Cash

Credit: Contributed capital from General

Fund

July 2002 7


Acquisition of IT equipment Debit: IT equipment

Credit: Cash Supplies for the operation

Debit: Computer supplies expense Credit: Cash

July 2002 8


Billings for services rendered Debit: Due from State department

Credit: Revenues Payment of billings

Debit: Cash Credit: Due from State department

July 2002 9


Depreciation Debit: Depreciation expense

Credit: Accumulated depreciation

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End of the Year Internal Service Funds prepare various

financial statements: Trial Balance Closing Entries Balance Sheet Revenue and Expense Statement Cash Flow Statement

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From here on, this presentation is on the State of California’s Internal Service Funds.

How does California establish an Internal Service Fund?

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Establishing ISFs

First, an Internal Service Fund is: Created Classified

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ISFs Created

Legislation

Administratively (Government Code Section 13306)

Electorate Initiative

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ISFs Classified Funding source/appropriation to

finance program activities must: Identify the resources. Specify the legal authority to

expend.

July 2002 15

ISFs Classified . . . continued Fund Codes

Alphabetical Numerical Fund structure Generally Accepted Accounting

Principles (GAAP) Legal basis

July 2002 16

Uniform Codes Manual (UCM)

Provides the source for coding the ISF. Provides a uniform coding system. Provides a chart of accounts for

budgetary, accounting, and reporting purposes.

July 2002 17

UCM . . . continued

Comprehensive listing of Accounts Funds Objects of expenditures Receipts

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In California, Internal Service Funds

are used to:

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Account for State of California activities, which provide: Goods and services to other State

departments. Reimbursement of costs.

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California has established over 20 ISFs. Not all of these ISFs are active. See slides 21 through 27 for some

examples of California’s ISFs.

July 2002 21

Examples of Internal Service Funds (ISFs) . . . continued Water Resources Revolving Fund

Accounts for charges for administrative services related to water delivery provided by the Department of Water Resources to federal, State, and local entities.

July 2002 22

Examples of ISFs . . . continued

Equipment Service Fund Accounts for the purchase,

maintenance, and administrative costs of equipment used by the Department of Transportation.

July 2002 23


Service Revolving Fund Accounts for printing and

procurement charges for services rendered by the Department of General Services for State departments and other public entities.

July 2002 24


Stephen P. Teale Data Center Revolving Fund (TDC) Accounts for charges of IT services

performed for various State departments by the TDC.

July 2002 25


Prison Industries Revolving Fund Accounts for charges for goods

produced by inmates in State prisons that are sold to State departments and other entities.

July 2002 26


Health and Human Services Agency Data Center Revolving Fund (HHSDC) Accounts for charges of IT services

performed for various State departments by the HHSDC.

July 2002 27


Other Internal Service Funds Account for all other goods or

services provided to other agencys, departments, or governments on a cost reimbursement basis.

July 2002 28


Let’s look more closely at the Health and Human Services Agency Data Center (HHSADC), an Internal Service Fund.

July 2002 29

Health and Human Services Agency Data Center (HHSADC) Created in 1972. Provides centralized IT services for

State departments. Centralizes IT at reduced costs. Eliminates of duplication of work. Ensures optimum capacity.

July 2002 30

HHSADC . . . continued Self supporting. No General Fund appropriation. Costs recovered through user charges. User charges set at the beginning of each

fiscal year. Goal is to break even. Uneven demand for services makes it

difficult to predict billing rates. Shortages or surpluses often occur.

July 2002 31

HHSADC . . . continued

Uses a standard costing system. Costs are categorized under separate

group or cost pools related to an activity. Cost centers represent a billable service. Expenses are assigned a cost center. Expenses are totaled at the end of year

to determine the cost for each service.

July 2002 32

HHSADC . . . continued Example of some cost centers at HHSADC :

Cost center

number

Description Costs captured Measurement unit to allocate costs to clients

001 Mainframe All CPU costs Per CPU hour

038 Printing Services

All print support costs Per line printed

060 Internet Service

Internet provider cost Per Internet user

300 Disk Storage Disk storage costs Per track stored

July 2002 33

HHSADC. . . continued

Each cost center has a billing rate:

Projected Annual Cost

Billing Rate = ----------------------- Projected

Annual Usage

July 2002 34


Utility system records the usage for each client. Calculates a bill based on actual usage of each services.

Monthly an invoice is sent to the client listing service usage multiplied by the billing rate.

Client pays invoice.

July 2002 35


Analysis of Costs Quarterly review of rates. Annual adjustments. Invoice adjustment for refunds. Financing impacts rates charged to

clients. Click on button to see types of

financing.

July 2002 36


Clients receiving federal funds bill the federal government for these charges.

Over/under collections result in over/under billings to the federal government.

July 2002 37


Why should anyone care if the federal government is over or under charged?

Or any other fund, State department, entity?

Let’s look at some items for background to this issue.

July 2002 38

Cost Plans Statewide Cost Allocation Plan

(SWCAP) recovers central service costs from federal funds.

SWCAP plan has two sections.

July 2002 39

Cost Plans . . . continued Both Section I and Section II of the

SWCAP follow the regulations and guidelines of . . . Office of Management and Budget,

Federal Circular A-87 “Cost Principles for State and Local Governments”.

Department of Health and Human Services guideline ASMB C-10.

July 2002 40

Cost Plans . . . continued

SWCAP Section I is the allocated central service costs distributed to State departments.

State departments transfer SWCAP recoveries to the General Fund from reimbursements received from the federal government.

July 2002 41


SWCAP Section II includes data for each ISF with an operating budget over $5 million, including: Rates Billings Policies Refunds

July 2002 42


SWCAP Section II Costs for operating the ISF are

included in billings by the State department (indirect cost rate proposals, cost allocation plans) to the federal government.

Yearly, the federal government reviews these ISFs.

July 2002 43

Cost Plans . . . continued For each ISF, SWCAP Section II includes:

Description of Service Balance Sheet Revenue and Expense Statement Cost recovery and billing methodology Cost center billing rates Other information

July 2002 44

State Requirements State’s requirements are:

Full Cost Recovery Government Code 11010

Government Code specific to an ISF HHSDC Fund Balance billing rate

Government Code 11755 State Administrative Manual Rates reviewed by audit groups

July 2002 45

Federal requirements are: Rates reviewed annually. Allowable A-87 retained earnings. Include only reasonable costs as

defined in A-87 and ASMB C-10.

Federal Requirements

July 2002 46

Federal Requirements . . . continued After issuance of the Comprehensive

Annual Financial Report (CAFR) each ISF in the SWCAP prepares a Reconciliation of Retained Earnings Balance to Federal Guidelines .

SCO website for CAFR:

California Comprehensive Annual Financial Report

July 2002 47

Federal Requirements . . . continued Retained earning reconciliation

determines the excess retained earnings. A portion is owed to the federal government, based upon the federal financial participation of the clients.

July 2002 48

State and Federal Differences

State and federal government differ on the calculation of working capital.

Differences are shown on the next slides.

July 2002 49

State and Federal Differences. . . continued Working Capital 2001-02 State of California Federal government

Definition

Current Assets

minus Current

Liabilities

60 days worth of cash expenses, a portion of retained earnings

that functions as a reserve

Authority FASB and AICPA OMB Circular A-87

Complies with GAAP Yes No

Excess RE balance $0 $0

July 2002 50

Other Differences

Different statements Governmental funds

Only current assets and current liabilities are accounted and reported.

ISF funds All assets and liabilities are

accounted and reported.

July 2002 51

Other Differences . . . continued Governmental funds

Modified accrual basis Expenditures No gain or loss Spending

ISFs funds Full accrual Expenses Gain or loss recognized Income determination

July 2002 52

State’s Working Capital

Defined in Accounting Research Bulletin No. 43 issued by the AICPA.

July 2002 53

Federal Working Capital Calculation Total Expenses per audited financial

statements. Less Non-cash expenses such as

depreciation. Equals total cash expenses for year. Calculation continued on next slide.

July 2002 54

Federal Working Capital Calculation . . . continued Divide by 360 days equals total average

cash expenses per day. Multiply by 60 equals 60 days worth of

cash expenses. Deduct from retained earnings to

arrive at the excess level of retained earnings.

July 2002 55

Working Capital Impact Comparison State and federal working capital

comparison is shown in the following spreadsheet. Re.xls

July 2002 56

State Controller’s Office Reports SCO presents financial data on activities

similar to the private sector. Per GASB (Governmental Accounting

Standards Board) statement number 20, the State applies all applicable GASB and FASB (Financial Accounting Standards Board) pronouncements issued on or before November 30, 1989, with one exception.

July 2002 57

Exception

Prison Industry Authority, an ISF, follows FASB pronouncements issued after November 30, 1989, unless they conflict with or contradict GASB pronouncements.

July 2002 58

Auditors review of ISFs Some points auditors look at when

reviewing ISFs: Users billed at the same rate for the

same service. Identification of outside users, such

as other governmental entities (local governments).

Treatment of past profit/loss.

July 2002 59

Auditor’s review of ISFs. . . continued Some points auditors look at when

reviewing ISFs: . . . continued Procedures followed for billings that

exceed original amounts. Review of rate base to determine

equal distribution of costs for services.

In the future, selectively reviewed.

July 2002 60

Reconciling Budgetary Basis with Generally Accepted Accounting Principles (GAAP)

Perspective difference Fund classification

July 2002 61

Reconciling Budgetary Basis with GAAP . . . continued Perspective difference - continued

State basis Governmental

General Fund and other governmental cost fund.

July 2002 62

Reconciling Budgetary Basis with GAAP . . . continued Perspective difference . . . continued State basis

Non-governmental Not subject to annual appropriation Monies other than General Fund

and special taxes, fees, etc.

July 2002 63

Reconciling Budgetary Basis with GAAP . . . continued Perspective difference . . . continued GAAP

Classified as governmental, proprietary, or fiduciary funds.

July 2002 64

Reconciling Budgetary Basis with GAAP . . . continued

Basis difference Advances and Loans

Budgetary basis -- recorded as expenditures

GAAP -- recorded as assets

July 2002 65

Reconciling Budgetary Basis with GAAP . . . continued Basis difference . . . continued

Encumbrances Budgetary basis -- not recorded GAAP -- recorded

July 2002 66

Reconciling Budgetary Basis with GAAP . . . continued Basis difference . . . continued

Contributed capital Budgetary basis -- not recorded GAAP -- recorded

July 2002 67

Additional Information http://www.dof.ca.gov/fisa/fisa.htm

Provides information or links to a variety of items: UCM CALSTARS Budgets Pro Rata and SWCAP State Administrative Manual Federal websites

July 2002 68

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Establish Funds Administratively Necessary to . . .

Properly manage the State’s assets Account for the financial activities Deposit resources of the State

July 2002 74

Establish Funds Administratively . . . continued

Comply with legal requirements “Generally Accepted Accounting

Principles” Effective financial administration

July 2002 75

Financing ISF must find ways to buy new

equipment or other assets. How?

General Fund appropriations Capital contributions Debt financing

July 2002 76

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july 2002 1 introduction to internal service funds

Documents

cash slide

internal service funds

classified slide

general fund slide

state department slide

examples of isfs

accumulated depreciation

examples of californias