thoughts to ponder - cdn.ymaws.com › ... › ch02.pdf · 3/7/2016 4 granof, et al. –7th edition...

3/7/2016

1

Granof, et al. – 7th edition Chapter 2 |

Chapter 2Fund Accounting

© 2016 John Wiley & Sons, Inc. All rights reserved. 1


Thoughts to Ponder

“A democratic society depends upon an informed and educated citizenry.”

-Thomas Jefferson


3/7/2016

2


Learning ObjectivesAfter studying Chapter 2, you should understand

• The nature of funds

• The elements of financial statements

• The hierarchy classification of fund balances

• The three basic fund types of a state or local government

• The main components of a CAFR

• The primary F/S issued by governments

• The difference between the fund structures and financial reports of not-for-profits and governmental entities



Business•One company

•“Fund” used as an informal term (multiple meanings)

• May refer to working capital (current net assets)

• May refer to cash or investments available

• May have other definitions

•The company is a single fiscal and accounting entity

• A = L + E (“E” usually called “Owners’ Equity”)


3/7/2016

3

Granof, et al. – 7th edition Chapter 2 |© 2016 John Wiley & Sons, Inc. All rights reserved. 5

Netflix


GovernmentalMultiple “entities”

• “Fund” used as a formal term (single meaning)

• “A fiscal and an accounting entity with a self-balancing set of accounts.”

• Each fund is like its own “entity”

• In other words, a fund is an entity with its own set of books (i.e., chart of accounts, general journal, general ledger, trial balances, and financial statements)


3/7/2016

4


Elements of Government Financial StatementsSeven Key elements -Five relating to financial position and two relating to resource flows

• Assets - resources with present service capacity

• Liabilities - present obligations to sacrifice resources

• Deferred outflow of resources - the consumption of net assets applicable to a future reporting period

• Deferred inflow of resources - the acquisition of net assets applicable to a future reporting period

• Net position - the residual of all elements presented in a statement of financial position; assets + deferred outflows - the liabilities - deferred inflows.

• Outflow of resources - consumption of net assets applicable to the reporting period.

• Inflow of resources - acquisition of net assets applicable to the reporting period.



Elements of Government Financial Statements (Cont’d)GASB Statement No. 63 requires that governments, unlike businesses, must report deferred items in a separate category. Thus, a statement of position might be,

Assets

+ Deferred outflow of resources

- Liabilities

- Deferred inflow of resources

= Net Position


3/7/2016

5



Not-for-profitUse fund accounting internally to ensure control of funds, but do not report these funds externally.

Classifies Net Assets into 3 groups:• Unrestricted

• Temporarily restricted

• Permanently restricted

FASB regulates NFP reporting for nongovernmental organizations and only requires 6 totals: o Total assets

o Total liabilities

o Total net assets

o Total unrestricted net assets

o Total temporarily restricted net assets

o Total permanently restricted net assets.


3/7/2016

6


Girl Scouts of the USA


FUNDSBased on GASB Statement No. 63, fund accounting uses the equation

• Assets + deferred outflows = liabilities + deferred inflows + fund balance

In a slightly different form

• Assets + deferred outflows – liabilities – deferred inflows = fund balance.

An important distinction:

In financial statements that are prepared on a full accrual basis, the residual amount is referred to as “net

position;” in statements that are prepared on a modified accrual basis it is referred to as “fund balance.”

Note:

Both fund balance and net position, like owners’ equity, are residuals—the difference between assets

(and deferred outflows) and the claims against those assets (liabilities and deferred inflows)


3/7/2016

7


GASB Statement No. 54Fund balances of governmental type funds are now to be reported based on a hierarchy in five different classifications.


Nonspendable

Restricted

Committed Assigned

Unassigned


GASB Statement No. 54•Only the Fund balance reported on the balance sheet of Governmental type funds is affected.

•It does not affect the reporting of net assets by proprietary or fiduciary funds.

•It also does not affect the reporting of net assets of governmental activities in the government-wide financial statements.

•Fund Balance identified between nonspendable and spendable resources

• Nonspendable – amounts that are not in spendable form or need to be maintained intact

• Spendable – the remaining balance and is reported in categories based on constraint

The next slide shows the marked up area on the Balance Sheet of Governmental Funds which is impacted by this statement


3/7/2016

8



3/7/2016

9


Level of Constraints (GASB 54)


Most constraint

• Restricted

• Committed

• Assigned

No constraint

• Unassigned


Spendable Resources - RestrictedIncludes amounts constrained to specific purposes by their providers, through constitutional

provisions, or by enabling legislation. Externally imposed constraints by

• creditors, bondholders,

• grant providers, contributors, or

• imposed by law through constitution or enabling legislation .

Enabling legislation authorizes the government to assess or mandate payments of resources

and includes a legally enforceable requirement that the resources be used only for the

specific purpose.

Level of constraint on restricted fund balance is equivalent to the level of constraint on Net

Position-Restricted in proprietary funds and the government-wide statement of net position.


3/7/2016

10


Spendable Resources – CommittedThe constraints are imposed by a formal action of the government’s highest level of decision-making authority. (City council committing funds for construction contracts, rainy day fund etc.)

These funds cannot be used for any other purpose unless the government removes or changes the specified use by taking the same formal action that originally imposed the constraint.

Committed funds include contractual obligations for which existing resources in the fund have been specifically committed for use.

The funds may also include “rainy day” or “stabilization funds.”

Note: In contrast to fund balance that is restricted by enabling legislation, amounts in the committed fund balance can be redeployed for other purposes with appropriate due process.



Spendable Resources - AssignedGovernment intends to use the funds for a specific purpose.

Intent can be expressed by the governing body itself or another body that has the delegated authority.

In the General Fund, assignment conveys that the intended use is narrower than the general purposes

Fund Balance in other governmental funds (except General Fund) that is not restricted or committed is considered as assigned in those funds. In other words it is the residual balance of these funds.

Note: the authority for making an assignment does not have to be made by the government’s highest level of decision-making authority.

Constraints imposed on assigned amounts can be more easily removed or modified than those that are classified as committed.


3/7/2016

11


Spendable Resources - UnassignedThe residual classification of the General Fund

Includes amounts that are available for any purpose

Only the GF can report this positive Unassigned FB

For other governmental funds, this category is used to report only a negative fund balance (i.e. when expenditures have exceeded the revenues).



A crosswalk

Governmental-type funds Nons

pend

able

*

Rest

ricte

d

Com

mitt

ed

Assig

ned

Nega

tive

Unas

signe

d

Posit

ive

Unas

signe

d

Special Revenue Funds ? x x ? ? NO

Debt service funds ? x x x ? NO

Capital project funds ? x x x ? NO

Permanent funds x ? ? ? ? NO

General fund x ? ? ? ? x

Level of Constraints (GASB 54)

X = likely

? = possibly

NO = prohibited

* Nonspendable amounts associated with long-term receivables that are restricted, committed or assigned are included in that category instead of the nonspendable category. For permanent funds, the corpus of gifts which must be maintained in perpetuity are designated nonspendable in governmental-type funds but as restricted-nonexpendable in the government-wide financial statements.

3/7/2016

12


Basis of AccountingFull Accrual

• Revenues recognized when earned; expenses recognized when incurred

Cash

• Revenues recognized when available; expenses/expenditures recognized when paid

Modified Accrual

• Revenues are recognized when measurable and available; expenditures when incurred



Measurement FocusWhat is measured?

Where is the focus of an entity?

Economic resources measurement focus

• Report on the determination of net income, financial position, and cash flows (i.e. capital maintenance)

• To measure operational accountability

Current financial resources measurement focus

• Report on the inflows and outflows of current financial resources (i.e. cash or other items expected to be converted into cash during the current period)

• To measure fiscal accountability; meet the legal and budget needs of government


3/7/2016

13


Measurement Focus and Basis of Accounting

Government-wide statements (GASB 34)

Governmental fund statements

Proprietary fund statements

Fiduciary fund statements

Measurement Focus

Economic resources

Current financial resources

Economic resources

Economic resources

Basis of Accounting

Accrual

Modified accrual

Accrual

Accrual



Types of Local Governments

Counties 3,031

Municipalities 19,519

Townships 16,360

School districts 12,880

Special districts 38,266

Total 90,056

Source:

U.S. Census Bureau, 2012 Government Organization Summary Report.

http://www2.census.gov/govs/cog/g12_org.pdf


3/7/2016

14


Activities of GovernmentGovernmental Activities• Activities financed predominantly through taxes and intergovernmental grants• Core governmental services like police and fire protection, streets, highways, etc.

These activities are accounted under governmental funds.

Proprietary-type Activities• Activities financed predominately through user charges• Public utilities, toll roads and toll bridges, airports. These activities are accounted

under proprietary funds.

Fiduciary Activities• Activities for which the government acts as a trustee or agent• Sometimes known as Trust & Agency Funds. Accounts for resources for which the

government is acting in a trustee capacity. These activities are accounted under fiduciary funds.



Definition of Fund TypesGovernmental Funds• A generic classification used by GASB to refer to all funds other than proprietary or fiduciary

• No guarantee that the funds will be reimbursed for services rendered

Proprietary Funds• Government generally makes initial contribution but thereafter the fund is expected to “pay its

own way” through fees for services rendered. Also referred to as business-like or commercial-type funds.

Fiduciary Funds• Any fund held by a government in a fiduciary capacity.

• Since it is not the government’s money, it is not expendable for the government’s own programs.


3/7/2016

15


Types of Funds


Governmental Funds

• General Fund

• Special Revenue Funds

• Capital Projects Funds

• Debt Service Funds

• Permanent Funds

Proprietary Funds

• Internal Service Funds

• Enterprise Funds

Fiduciary Funds

• Agency Funds

• Trust Funds


Governmental Funds


U.S

. A

ir F

orc

e P

hoto

/Air

man 1

st

Cla

ss C

hels

ea C

um

min

gs

3/7/2016

16


OverviewBasis of Accounting:• Modified Accrual

Measurement Focus:• Current Financial Resources

• Other names: “financial flow” focus or spending focus

• Only current assets and liabilities are generally included on their balance sheet (i.e. Capital assets and long-term liabilities are not included)

• Reports expenditures (not expenses) of appropriations

Fund Balance (net current assets) measures “available spendable resources”• Fund Balance = Current Assets – Current Liabilities• Increased by revenues and other financing sources• Decreased by expenditures and other financing uses• Governmental fund operating statements present these increases and decreases in

net current assets.



Required financial statements Balance Sheet

Statement of Revenues, Expenditures, and Changes in Fund Balances

Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities at the government-wide level.


3/7/2016

17



3/7/2016

18



General Fund•The operating fund of the government-embraces most major governmental functions

•Accounts for all resources that are not required to be accounted for in other funds; in essence, it accounts for all unassigned resources.

•Only one per government and is the most significant single fund

•General Activities of city government (ex. Fire, police)


3/7/2016

19


Special Revenue Funds •Accounts for financial resources that are restricted or committed (does not include assigned) to expenditure for specific purposes other than debt service or capital projects.

•Accounting and budgeting usually identical to General Fund

•Ex. City of Houston maintains over 17 Special Revenue Funds• Examples include

• Public Safety Special Fund (9-1-1 Emergency Network)

• Public Works Special Fund

• Health and Housing Special Fund

• Parks and Recreation Special Fund

• Other Special Revenue Fund (Cable Television)



Capital Projects FundsAccounts for financial resources that are restricted, committed, or assigned to expenditure for capital outlays.

• Ex. Seattle, WA has “Open Space

and Trails Bond Fund”


Tao O

lezeski/S

eatt

leT

hro

ughT

heT

rees/f

lickr

3/7/2016

20


Debt Service Funds•Accounts for financial resources that are restricted, committed, or assigned for the payment of interest and principal on long-term debt.

•Ex. City of Houston as of 6/30/2015• Total fund balance in DSF

$122,349,000

• Total long-term liabilities

$22.157 billion



Permanent Funds Accounts for resources provided that are legally restricted so that only earnings, not principal, may be used to support the government’s programs.


3/7/2016

21


Proprietary Funds



Internal Service Funds Accounts for activities in which goods are services are provided to

• other departments of the same government

• other governments for a charge on a cost reimbursement basis

Examples include central stores, central computing, motor pools, and printing.

Reported as governmental activities in the government-wide statements because they primarily benefit the government.

• ex. City of Houston’s employees Health Benefits and Long -Term disability.


3/7/2016

22


Enterprise Funds Accounts for activities in which goods or services are provided to the general public for a charge

Reported as business-type activities in the government-wide financial statements

Examples include electric and water utilities, airports, parking garages, transportation systems, and liquor stores

Ex. City of Montgomery, Alabama’s Enterprise Funds• Montgomery Area Transit System

• Montgomery Zoo

• Municipal Golf

• Montgomery River Boat



Overview•Basis of Accounting:

• Full Accrual

• Operated like a “normal for-profit” business

• Ex. City of Houston operates its Airports under a Proprietary fund

•Measurement Focus:• Economic Resources

• All assets and liabilities (both current and noncurrent) are included in the balance sheet

• Accounts for expenses (not expenditures)

• Depreciation expense is reported

•Fund Equity (Net Position)• Net Position = Assets – Liabilities

• Increased by revenues and other financing sources

• Decreased by expenses and other financing uses

• Segregated into contributed capital and retained earnings components


3/7/2016

23


Required Financial Statements •Similar to those of for-profit entities

•Statement of Net Position

•Statement of Revenues, Expenses, and Changes in Net Position (i.e. operating statement)

•Statement of Cash Flows



3/7/2016

24



3/7/2016

25



FIDUCIARY FUNDS


3/7/2016

26


Agency Funds•Accounts for financial resources in which the government is acting in an “agency” capacity • Agent - Government holds assets on behalf of another government

• Accounting is simple: assets = liabilities.• No revenue and expense to accrue

• No fund equity account

•Examples are tax agency funds, certain special assessment funds, and pass-through agency funds



Overview•Both Trust funds and Agency funds account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations, other governments, and/or other funds. • Therefore, the government cannot include these funds in the government-wide

statements.

•Basis of Accounting:• Full Accrual

•Measurement Focus:• Economic Resources


3/7/2016

27


Required Financial Statements •Statement of Fiduciary Net Position

•Statement of Changes in Fiduciary Net Position• Only Trust Funds may have a change in net position



3/7/2016

28



Trust Funds•Each trust is classified for accounting measurement purposes as either a governmental fund or a proprietary fund Funds can be either expendable or nonexpendable.

•Three types of trust funds• (i) Pension (and other employee benefits)

Trust Funds (one or more)

• (ii) Investment Trust Funds

• (iii) Private Purpose Trust Funds


3/7/2016

29


Pension (and other employee benefits) Trust FundAccounts for financial resources in which the government (or other designated trustee) is acting in a trustee capacity for the employees of the government to provide retirement benefits.

Uses business-type accounting practices.



Investment Trust FundsAccounts for external investment pools in which the assets are held for other (external) governments, along with funds of the sponsoring government

Reports the assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants


3/7/2016

30


Private-purpose Trust FundsEncompasses all trust funds other than pension and investment trust funds

Accounts for financial resources in which the government is acting in a trustee capacity for the benefit of individuals, other organizations, or other governments (e.g., an endowment in which the principal amount must be kept intact)

Accounting is virtually identical to that for an enterprise fund.



COMPREHENSIVE ANNUAL FINANCIAL REPORT


3/7/2016

31


General Purpose External Financial Reports (SLGs)


Management's discussion and analysis

Required supplementary information (other

than MD&A)

Notes to the financial statements

Government-wide

financial statements

Fund financial

statements


Components of the Annual Financial Report

Management’s Discussion and Analysis

Government-wide Financial

Statements

Fund Financial

Statements

Basic Financial Statements

Notes to the Financial

Statements

Summary Detail

3/7/2016

32


Comprehensive Annual Financial Report (CAFR)

•Three Sections:

• Introductory section

• Financial section

• Statistical section

•Recommended, but not mandatory



CAFR – Introductory Section•Title page

•Contents page

•Letter of transmittal

•Other (as desired by management)

You can view online the City of Chicago’s Annual Reports for the years 2014, 2013, and other years at the following link: City of Chicago CAFR


http://www.cityofchicago.org/city/en/depts/fin/supp_info/comprehensive_annualfinancialstatements.html

3/7/2016

33


Award from the GFOA•The Government Finance Officers Association (GFOA) of the United States and Canada awarded a Certificate of Achievement for Excellence in Financial Reporting Program (CAFR Program) to the City of Chicago for its CAFR for the fiscal year ended December 31, 2013

•The Certificate of Achievement is a prestigious national award-recognizing conformance with the highest standards for preparation of state and local government financial reports.



CAFR – Financial Section(GASB Statement No. 34)

•Auditor’s report

•MD&A

•Basic Financial Statements

•Required Supplementary InformationRSI (Other than MD&A)

•Combining the individual fundstatements and schedules

•Remember GASB Statement No. 34 is the Reporting Model that SLGs have to follow.


3/7/2016

34


Management’s Discussion and Analysis•Brief objective narrative providing management’s analysis of the government’s financial performance

•This is basically “Tell it like it is.”



Basic Financial Statements•Government-wide Financial Statements

• Statement of Net Position

• Statement of Activities

•Fund Financial Statements

•Notes to the Financial Statements

•The Government-wide Financial Statements are

• the TWO additional F/S required under GASB 34.


3/7/2016

35


Fund Financial Statements•Governmental-type Funds

• Balance Sheet

• Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds and a schedule of reconciliation

•Proprietary-type Funds

• Statement of Net Position

• Statement of Revenues, Expenses, and Changes in Fund Net Position

• Statement of Cash Flows

•Fiduciary-type Funds

• Statement of Fiduciary Net Assets

• Statement of Changes in Fiduciary Net Assets



CAFR – Statistical Section•Tables and charts showing multiple-year trends in financial and socioeconomic information


3/7/2016

36


Summary•Fund accounting is an effective means of establishing control and accountability over restricted resources.

•Governments normally maintain five types of governmental funds to account for their operating and financing activities.

•Governments maintain two types of proprietary funds to account for their business-type activities and two types of fiduciary funds to account for resources that they hold for the benefit of parties other than themselves.

•Fund financial stmts. for governmental funds utilize the modified accrual basis of accounting and a current financial resources measurement focus.

•Fund Balance in the fund financial stmts. has to be presented based on a hierarchy of fund balance classification based on GASB Std. # 54

•GASB Std. # 34 requires both government-wide financial statements and fund financial statements.

•GASB in Concepts Stmt. # 4 provides definitions and explanations of seven key elements

•Government-wide financial statements and fund financial statements for proprietary and fiduciary funds follow the full accrual basis of accounting and the economic resources measurement focus (similar to commercial accounting).


thoughts to ponder - cdn.ymaws.com › ... › ch02.pdf · 3/7/2016 4 granof, et al. –7th edition...

Documents