Sources of GAAP for Government Entities
1. GASB Statements & Interpretations
2. GASB Technical Bulletins
3. Consensus Positions of GASB EITF (if it existed)
4. Implementation Guides of GASB Staff & Widely Recognized Industry Practices
5. Other Accounting Literature
Objectives of Financial Reporting for State and Local Governments are based on notion of Accountability (GASB Concept Statement No. 1 (1987)
1. Compare actual results to budget
2. Assess financial condition and operating results
3. Assist in determining compliance with relevant laws and regulations
4. Assist in evaluating efficiency and effectiveness
The Reporting Entity
The Primary Government: Typically a state or local government entity.
A Component Unit (e.g., community college, housing authority, arts organization) is usually reported in discrete presentation (separate column), but may be blended.
Contents of Comprehensive Annual Financial Report
• Introductory Section – Table of Contents, Transmittal Letter, Officers, Organization Chart
• Financial Section
• Management’s Discussion and Analysis
• Auditors’ Report
• Basic Financial Statements
• Required Supplementary Information
• Statistical Section
Basic Financial Statements include:
1. Government-wide Statements, under Accrual Accounting (GASB Statement No. 34) and Economic resources measurement focus:
• Statement of Net Assets (Balance Sheet)
• Statement of Activities
2. Fund Statements – content and accounting methods vary by fund
3. Notes to the Financial Statements
Fund Accounting: The use of multiple accounting entities to account for resources segregated according to purpose.
Fund = Fiscal entity with self balancing set of records that record financial resources, related liabilities, residual balances, and changes therein.
Depending on the type of fund, financial statements will be prepared either using the [modified accrual basis and current financial resources measurement focus] or using the [accrual basis and economic resources measurement focus].
Current Financial Resources Focus
Current Assets – Current Liabilities = Fund Balance
Economic Resources Focus
Current + Noncurrent – Current – Long-term = Net Assets
Assets Assets Liabilities Liabilities
Modified Accrual Accounting description/examples
• Revenue Recognition – generally, when measurable and available
Imposed Non-Exchange (Tax) Revenue: Recognized when taxes are levied & resources available.
Property taxes are an example.
o Derived tax revenues: Recognized when susceptible to accrual (measurable and available), and/or when underlying transaction occurs.
Motor Fuel Tax
o Government-mandated Non-exchange Transactions: Record when conditions for receipt are met
Inter-governmental grants (e.g., grant from Federal Government)
o Voluntary Non-exchange Transactions: Record when conditions for receipt are met
Similar to other inter-governmental grants, except that no restrictions on the use of the funds are imposed
o Interest: accrued as earned
o Miscellaneous Revenue: generally cash basis
• Expenditures – Generally record when fund incurs liability
• Costs of personnel: when paid (but this is close to when incurred because of recurring nature)
• Costs of goods and services: when received
• Capital Outlays: recorded as expenditures when asset is acquired
• Interest: when legally payable (a little different than when incurred, so it is not accrued)
(If due date is < one month after fiscal year end, the expenditure may be recorded) Guidelines for Interest expenditures also apply to other Debt Service (i.e., principal payments) Types of Funds Governmental Funds • General Fund • Special Revenue Fund • Capital Project Fund • Debt Service Fund • Permanent Fund Under Modified Accrual Accounting and Current Financial Resources Measurement Focus, Basic Financial Statements Include: • Balance Sheet • Statement of Revenues, Expenditures, and Changes in Fund Balances Proprietary Funds • Internal Service Funds • Enterprise Funds Under Accrual Accounting and Economic resources measurement focus, Basic Financial Statements Include: • Statement of Net Assets (Balance Sheet) • Statement of Revenues, Expenses, and Changes in Fund Net Assets • Statement of Cash Flows o Operating o Noncapital Financing (includes interest and principal paid on debt not related to capital assets) o Capital and Related Financing (includes capital assets acquired and interest and principal paid on debt related to capital asset acquisitions) o Investing (includes interest and dividends received) Fiduciary Funds • Agency Funds (one government collecting taxes for others) • Trust Funds (Pension, Investment, Other) Under Accrual Accounting and Economic resources measurement focus, Basic Financial Statements Include: • Statement of Fiduciary Net Assets • Statement of Changes in Fiduciary Net Assets Government-wide Statements (under GASB 34): • Similar to GAAP for for-profit • Measurement of Economic Resources • Accrual Accounting • Includes recording liabilities for LT Debt, Fixed Assets, and Depreciation (Under certain conditions, government may choose the modified approach for infrastructure fixed assets, where infrastructure is not capitalized or depreciated. Conditions relate to adequacy of control and maintenance of infrastructure.) ************** Budgeting (for the General Fund) Estimated Revenues Appropriations - Approved or authorized (and estimated) expenditures (in the budget) Steps in the Expenditure Process • Appropriation • Encumbrance –A reservation for a Commitment • Expenditure • Payment (Disbursement) At any time, appropriations can be broken down for control purposes into: • Expenditures already made • Encumbrances (committed, but not expended) • Unencumbered Available Original Remaining = Appropriation – Encumbrances - Expenditure Appropriation The budget is recorded using debits and credits that are the opposite of actual: Estimated Revenues Appropriations Estimated Other Financing Uses (Transfers Out) Budgetary Fund Balance Journal Entry Examples For the Governmental Funds (All entries are recorded in the General (Governmental) Fund unless otherwise stated) Record the Budget with 400 of expected revenue and 395 of approved expenditures): Estimated Revenues 400 Appropriations (Budgeted Expenditures) 395 Budgetary Fund Balance 5 Record 200 of tax revenue (and 2 of estimated uncollectibles): Taxes Receivable-Current 200 Estimated Uncollectible Taxes-Current 2 Revenues 198 Record taxes received of 176 for current year and 14 for prior year: Cash 190 Taxes Receivable-Current 176 Taxes Receivable-Delinquent 14 Record fees (revenues) for services of 60: Accounts Receivable 60 Allowance for Uncollectible Accounts 0 Revenues 60 Record collections of such fees of 58: Cash 58 Accounts Receivable 58 Record other Revenue of 20 (generally on cash basis): Cash 20 Revenue 20 Record Expenditures of 20 that did not have an encumbrance: Expenditures 20 Vouchers (accounts) Payable 20 Record encumbrances (commitments) - for things like fixed assets and supplies – estimated at 15: Encumbrances 15 Budgetary Fund Balance (BFB) Reserved for Encumbrances 15 Record receipt of encumbered supplies and payment at 14 actual BFB Reserved for Encumbrances 15 Encumbrances 15 Expenditures 14 Cash 14 (If the encumbrance is still outstanding at balance sheet date, the reserve for encumbrance is shown as part of fund equity.) Adjusting entries may be used to record inventory balance (of 3) under the “Purchase Method”: Supplies Inventory 3 Reserve for Supplies Inventory (part of fund equity) 3 (When the supplies were originally purchased they were simply recorded as an expenditure.) Transfers in and transfers out are common and generally also are budgeted. Closing Entries Close out Estimated Revenues and Appropriations (the budget) with net going to Budgetary Fund Balance. Close out Revenues, Expenditures, & Encumbrances (the ‘actual’) with net going to Fund Balance. Financial Statements • Statement of Revenues, Expenditures and Changes in Fund Balance (with Budget and Actual) • Balance Sheet Fund Equity = Fund Balance = Fund Assets - Fund Liabilities Unreserved Fund Balance = Fund Equity (Assets - Liabilities) – Reserves Only the unreserved fund balance is unrestricted and available for appropriation (the reserves have already been committed). Required Notes to Financial Statements GASB 34 requires disclosure of: • Summary of Significant Accounting Policies • Cash deposits with financial institutions • Investments • Significant contingent liabilities • Encumbrances outstanding • Significant subsequent events • Annual pension cost and net pension obligations • Material violations of finance-related legal and contractual provisions • Debt service requirements • Commitments under operating leases • Construction and other significant commitments • Required disclosures about capital assets • Required disclosures about long-term debt • Deficit fund balances or net assets of individual funds • Interfund receivables and payables • Significant transactions with discretely presented component units • Disclosures about donor-restricted endowments Major Required Supplementary Information • Budgetary Comparisons for the General Fund and Special Revenue funds with a legally adopted budget • Disclosures regarding infrastructure if depreciation is not recorded on them