The What and Why of Fund Accounting

May 15, 2014GFOAz

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Overview

•Who are the users and what are the uses of governmental financial information?•What is fund accounting?•Why do we need fund accounting?• Accounting principals and the types of

funds•Measurement Focus and Basis of

Accounting (MFBA) 2

Users of financial information

Private Sector• Investors• SEC• Lenders• Internal Management

Public Sector• Taxpayers• Governing Bodies• Donors• Bond Rating Agencies• Grantors• Investors

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Environmental Differences (Uses)

Private Sector• Profit motive

• Return on investment

• Budget is a financial plan

Public Sector• Service motive

• Stewardship

• Budget carries the force of law

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Fund Accounting

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What is accounting?

• “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results….”

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What is a fund?

• “a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations”

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What is fund accounting?

• Accounting & financial reporting that focuses on how resources are segregated for purpose of carrying on a specific activity or attaining certain objectives in accordance with special regulations, restrictions, or limitations

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Types of financial reporting

• Internal Financial Reporting• Special Purpose External Financial

Reporting

• General Purpose Financial Reporting

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Why do we need fund accounting?• Publicly accountable & transparent• Information to the taxpayers & stakeholders• Assess service levels• Evaluate operating results• Financial condition

• Compliance• Budgetary compliance• Debt covenants• Fund restrictions

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Accounting Principles & Funds

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Principles & Standards

•Who establishes principles and standards?• Federal Government – FASAB• State & Local Governments – GASB• Businesses & nonprofits – FASB•Who designated these three bodies?

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Who has the “sole legal authority” to set financial reporting standards?

Governmental Funds

• State and local governments must1. Present financial activities in accordance

with GAAP AND2. Determine and demonstrate compliance• Fund accounting meets the need of #2

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Number of Funds Principle• Only the minimum number of funds

consistent with legal and operating requirements should be established• Financial reporting (suitable for decision

making)• The number of funds for financial reporting is

less than the number for accounting purposes•What is the total number of fund types

available?14

Fund CategoriesFund Categories Purpose Types

Governmental Funds

Primarily supported by taxes, grants & similar revenue sources

1. General Fund2. Special Revenue Funds3. Capital Projects Funds4. Debt Service Funds5. Permanent Funds

Proprietary Funds

Receive significant support from fees & charges

1. Enterprise Funds2. Internal Service Funds

Fiduciary Funds

Accounts for resources that a governments holds as a trustee or agent of an outside party

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

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Interfund Activity

• Financial transactions between funds of the primary government• Two types

1. Reciprocal – interfund loans, interfund services

2. Non-reciprocal – interfund transfers, interfund reimbursements

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MFBA

•Measurement Focus• Determines what is measured• Basis of Accounting• Determines when recognition takes place

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MFBA•Measurement Focus• Governmental funds focus = current financial

resources• Focus is near term liquidity of assets & liabilities

• Proprietary & fiduciary funds focus = all economic resources

• Difference between the two = measurement focus

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MFBA

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Governmental FundsProprietary & Fiduciary

Funds

Measurement Focus

Current Financial Resources All Economic Resources

Basis of Accounting Modified Accrual Full Accrual

Statement of Position

Financial Assets – cash or converted to cash in the near termLiabilities – liquidates with current available financial resources (excludes long-term debt)

All Assets

All Liabilities

Statement of Resource Flows

Revenue – recognized if measurable & availableExpenditures – Recognized when a fund liability is incurred

Revenue – when earned

Expense – when incurred

Budgetary Accounting• Budgets for the private sector are essentially

management tools• Budgets for the public sector• Are also essential management tools, AND• Must be legally approved• Impose legal restraints on spending• Public sector management must be in a

position to ensure budgetary compliance (ensure spending is within the legally appropriated amounts) 20

Encumbrances•What are encumbrances?• Expenditure is not recognized until a

good/service is received• Encumbrances are “virtual” expenditures

between the issuance of a contract or P.O. and the actual receipt of the good or service• Prevents inadvertent overspending of

appropriation 21

Example: Vehicle Purchases

Appropriation Expenditures EncumbrancesUnencumbered

Balance

1. YTD Activity ($1,000,000) $250,000 $-0- ($750,000)

2. P.O. Issued (2) ($1,000,000) $250,000 $400,000 ($350,000)

3. 1 Vehicle Rec’d ($1,000,000) $450,000 $200,000 ($350,000)

4. Question: Can a $500,000 fire truck be purchased?

5. 1 Vehicle Rec’d ($1,000,000) $650,000 $-0- ($350,000)

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The Reporting Entity

• Primary Government + Component Units = Financial Reporting Entity• Special Purpose Must Meet ALL to qualify

as a primary government, otherwise a component unit• Separate Legal Status• Separately Elected Governing Body• Fiscal Independence

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The Reporting Entity• If not a primary government, then the entity

is a potential component unit (PCO)• If a PCO is financially accountable to the

primary government, then it is normally a component unit

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Primary Factor Secondary Factor

Fiscal dependence + Financial benefit or

burden relationship = Financial accountability

Board appointment + Financial benefit or

burden relationship = Financial accountability

Board appointment + Ability to impose will = Financial

accountability

The Reporting Entity• Blended Component Unit• Integral part of the primary government• Treated as funds of the primary government• General Fund of a Blended Component Unit is

reclassified as a special revenue fund of the primary government

• Discretely Presented Component Unit• Not an integral part of the primary

government• Presented separately in the government-wide

financial statements

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Beyond Fund Financial Reporting• Government-Wide Financial Reporting• Single, integrated financial reporting unit• Users could see the big picture• Are the government-wide financial

statements being utilized?• CAFR• Popular Annual Financial Reporting• Performance Reporting 26

Questions?

Tom Duensing, Executive Financial Services DirectorCity of Glendale(623) 930-2116

tduensing@glendaleaz.com27