Governmental and Proprietary Fund Accounting: Types, Budgeting, and Transactions, Lecture notes of Accounting

Download Governmental and Proprietary Fund Accounting: Types, Budgeting, and Transactions and more Lecture notes Accounting in PDF only on Docsity!

ACCOUNTING POLICIES

FOR ALL

FUND TYPES AND ACCOUNT GROUPS

Prepared by Accounting and Management Systems Local Government Services Bureau

Updated July 2004

L:\LGS\ACCOUNTI\CONTENTS

ACCOUNTING POLICIES TABLE OF CONTENTS

• Principles of Governmental Accounting A-1 thru A- Preface ii
• Governmental Fund Types B-1 thru B-
• Proprietary Fund Types C-1 thru C-
  • Enterprise Funds D-1 thru D-
  • Internal Service Funds E-1 thru E-
• Fiduciary Fund Types F-1 thru F-
• General Fixed Assets Account Group G-1 thru G-
• Long-Term Debt Account Group H-1 thru H-
• Refunding and Advance Refunding Bonds I-1 thru I-
• Cash and Investments J-1 thru J-
• Tax Deed and Tax Sale Procedures K-1 thru K-
• Grants, Entitlements and Shared Revenues L-1 thru L-
• Inventories M-1 thru M-
• Leases N-1 thru N-
• Interfund Transactions O-1 thru O-
• Joint Ventures P-1 thru P-
• Refunds Q-
• The Check/Warrant R-1 thru R-
• The General Journal Voucher S-1 thru S-
• The Trial Balance T-
• Checklist for Year-End Closing Entries U-1 thru U-
• Fixed Asset System Policy Guidelines V-1 thru V-

ACCOUNTING POLICIES

PRINCIPLES OF GOVERNMENTAL ACCOUNTING

SOURCES OF PRINCIPLES

Any discussion of governmental accounting principles should begin with the source of those principles. Formal standard setting in governmental accounting began in 1934, with the National Committee on Municipal Accounting and has evolved through the establishment of the Governmental Accounting Standards Board (GASB) in June1984. The GASB, like its private sector counterpart, the Financial Accounting Standards Board (FASB), functions under the auspices of the Financial Accounting Foundation (FAF). The GASB was established in accordance with a structural agreement, which sets forth the relative jurisdictions of the two boards. The structural agreement clearly establishes the GASB as the primary accounting and financial reporting standard - setting body for local governments. Moreover, the American Institute of Certified Public Accountants (AICPA) reaffirmed the GASB's authority by designating the GASB as the body to establish financial accounting principles for local governmental entities.

BASIC PRINCIPLES

There are twelve basic principles of accounting applicable to local governments. They are as follows:

Principle 1 - Accounting and Reporting Capabilities

A governmental accounting system must make it possible both: (a) to present fairly and with full disclosure the financial position and results of financial operations of the funds and account groups of the governmental unit in conformity with generally accepted accounting principles; and (b) to determine and demonstrate compliance with finance- related legal and contractual provisions.

Principle 2 - Fund Accounting Systems

Governmental accounting systems should be organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self- balancing set of accounts, recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations. Fund financial statements should be used to report additional and detailed information about the primary government, included its blended component units. The focus of governmental and proprietary fund financial statements is on major funds.

A-

PRINCIPLES OF GOVERNMENTAL ACCOUNTING

BASIC PRINCIPLES - cont.

Principle 3 - Funds Types

In fund financial statements, governments should report governmental, proprietary, and fiduciary funds to the extent that they have activities that meet the criteria for using those funds. The following fund types should be used.

A. GOVERNMENTAL FUNDS (emphasizing major funds)

1. General Fund
2. Special Revenue Funds
3. Capital Projects Funds
4. Debt Service Funds
5. Permanent Funds

B. PROPRIETARY FUNDS

6. Enterprise Funds (emphasizing major funds)
7. Internal Service Funds

C. FIDUCIARY FUNDS (and similar component units)

8. Pension (and other employee benefit) Trust Funds
9. Investment Trust Funds
10. Private-purpose Trust Funds
11. Agency Funds

A-

PRINCIPLES OF GOVERNMENTAL ACCOUNTING

BASIS PRINCIPLES - cont.

Principle 9 – Measurement Focus and Basis of Accounting in the Basic Financial Statements

Government-wide Financial Statements

The government-wide statement of net assets and the statement of activities should be prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange-like transactions should be recognized when the exchange takes place. Revenues, expenses, assets, and liabilities resulting from non-exchange transactions should be recognized in accordance with the standards relating to non-exchange transactions.

Fund Financial Statements

In fund financial statements, the modified accrual or accrual basis of accounting, as appropriate, should be used in measuring financial position and operating results.

a. Financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues should be recognized in the accounting period in which they become available and measurable. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term liabilities, which should be recognized when due.

b. Proprietary fund statements of net assets and revenues, expenses, and changes in fund net assets should be presented using the economic resources measurement focus and the accrual basis of accounting.

c. Financial statements of fiduciary funds should be reported using the economic resources measurement focus and the accrual basis of accounting, except for the recognition of certain liabilities of defined benefit pension plans and certain postemployment healthcare plans.

d. Transfers should be reported in the accounting period in which the interfund and receivable and payable arise.

A-

PRINCIPLES OF GOVERNMENTAL ACCOUNTING

BASIS PRINCIPLES - cont. Principle 10 - Budgeting, Budgetary Control, and Budgetary Reporting

a. An annual budget(s) should be adopted by every governmental unit.

b. The accounting system should provide the basis for appropriate budgetary control.

c. Budgetary comparison schedules should be presented as required supplementary information for the general fund and for each major special revenue fund that has a legally adopted annual budget. The budgetary comparison schedule should present both (a) the original and (b) the final appropriated budgets for the reporting period as well as (c) actual inflow, outflows, and balances, stated on the government’s budgetary basis.

Principle 11 - Transfer, Revenue, Expenditures, and Expense Account Classification

a. At a minimum, the statement of activities should present: (1) Activities accounting for governmental funds by function to coincide with the level of detail required in the governmental fund statement of revenues, expenditures, and changes in fund balances. (2) Activities accounted for in enterprise funds by different identifiable activities.

b. Governmental fund revenues should be classified by fund and source. Expenditures should be classified by fund, function (or program), organization unit, activity, character and principal classes of objects.

c. Proprietary fund revenues should be reported by major sources and should identify revenues used as

security for revenue bonds, and expenses should be classified in essentially the same manner as those of

similar business organizations, functions or activities. Revenues and expenses should be distinguished as

operating and non-operating.

d. Proceeds of general long-term debt issues should be classified separately from revenues and expenditures in the governmental fund financial statements.

A-

PRINCIPLES OF GOVERNMENTAL ACCOUNTING

BASIS PRINCIPLES – cont Principle 13 - Annual Financial Reports – cont.

c. The minimum requirements for MD&A, basic financial statements, and required supplementary information other than MD&A are: (1) Management’s discussion and analysis (2) Basic financial statements. The basic financial statements should include: (a) Government-wide financial statements (b) Fund financial statements (c) Notes to the financial statements (3) Required supplementary information other than MD&A

d. The financial reporting entity consists of (1) the primary government, (2) organizations for which the primary government is financially accountable, and (3) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s basic financial statements to be misleading or incomplete. The reporting entity’s government-wide financial statements should display information about the reporting government as a whole, distinguishing between the total primary government and its discretely presented component units as well as between the primary government’s governmental and business-type activities. The reporting entity’s fund financial statements should present the primary government’s (including its blended component units, which are, in substance, part of the primary government) major funds individually and non-major funds in the aggregate. Funds and component units that are fiduciary in nature should be reported only in the statements of fiduciary net assets and changes in fiduciary net assets.

e. The nucleus of a financial reporting entity usually is a primary government. However, a governmental organization other than a primary government (such as a component unit, joint venture, jointly governed organization, or other stand-alone government) serves as the nucleus for its own reporting entity when it issues separate financial statements

A-

GOVERNMENTAL FUND TYPES

INTRODUCTION

Nature and Purpose

Governmental fund types are those through which most governmental functions are typically financed. They are often called source and disposition or expendable fund types. The acquisition, use and balances of expendable financial resources and the related current liabilities, except those accounted for in proprietary funds, are accounted for through governmental fund types.

Governmental fund types are, in essence, accounting segregation of financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they are to be paid and the difference between governmental fund assets and liabilities, the fund equity, is referred to as fund balance.

The governmental fund measurement focus is on determination of financial position and changes in financial position (sources, uses and balances of financial resources), rather than on income determination. The statement of revenues, expenditures and changes in fund balance is the primary governmental fund operating statement. It may be supported or supplemented by more detailed schedules of revenues, expenditures, transfers and other changes in fund balance.

Governmental fund types are classified into five generic fund types:

1. General Fund - BARS - 1000
2. Special Revenue Funds – BARS - 2000
3. Debt Service Funds - BARS - 3000
4. Capital Projects Funds - BARS – 4000
5. Permanent Funds – BARS – 8000

Since the elimination of the special assessment fund type, special assessments that are used to finance certain service type activities may now be accounted for as a special revenue fund (maintenance), debt service fund (bond funds), or a capital projects fund (construction). Service type special assessments are for operating activities and do not result in the purchase or construction of fixed assets.

Each of the above governmental fund types is examined in more detail later in this discussion.

B-

GOVERNMENTAL FUND TYPES

SPECIAL REVENUE FUNDS – cont.

Nature and Purpose

Special revenue funds are used to account for the proceeds of specific revenue sources (other than expendable trusts or major capital projects) that are legally restricted to expenditure for specified purposes. A separate fund should be established for each such purpose. GAAP only requires the use of special revenue funds when legally mandated.

Revenue Sources

Special revenue funds derive their revenue from local, state and federal sources. Local sources include property taxes and special assessments, while state and federal sources include grants, entitlements and shared revenues. Revenue recognition of grants, entitlements and shared revenues is subject to and governed by NCGA Statement 2.

Under NCGA Statement 2, grants, entitlements, or shared revenues recorded in governmental funds should be recognized as revenue in the accounting period when they become susceptible to accrual, i.e., both measurable and available (modified accrual basis). In applying this definition, legal and contractual requirements should be carefully reviewed for guidance. Some such resources, usually entitlements or shared revenues, are restricted more in form than in substance. Only a failure on the part of the recipient to comply with prescribed regulations will cause a forfeiture of the resources. Such resources should be recorded as revenue at the time of receipt or earlier if the susceptible to accrual criteria are met. For other such resources, usually grants, expenditure is the prime factor for determining eligibility, and revenue should be recognized when the expenditure is made. Similarly, if cost sharing or matching requirements exist, revenue recognition depends upon compliance with these requirements.

For discussion and accounting treatment on pass-through resources, please refer to the section on Grants, Entitlements and Shared Revenues, pages L-1 to L-10.

DEBT SERVICE FUNDS - (BARS 3000)

Nature and Purpose

Debt service funds are used to account for the accumulation of resources for the payment of principal and interest on general long-term debt. Debt service funds are also used for the accumulation of resources for the payment of judgments and improvement district revolving fund loans. Debt service funds are sometimes referred to as sinking funds. A separate fund should be established for each general obligation bond issue, for each improvement district bond issue, for each judgment, and for each improvement district revolving fund. B-

GOVERNMENTAL FUND TYPES

DEBT SERVICE FUNDS – cont.

Revenue Sources

Debt service funds derive their financial resources primarily from local property taxes and special assessments. With respect to improvement district revolving funds, authority in Section 7-12- (County), and Section 7-12-4222 (City), provides that a County or City may, in addition to support from the general fund, levy a tax each year not to exceed 5 percent of the principal amount of the outstanding improvement bonds for use by such revolving funds.

Amounts Available and Amounts To Be Provided (173000 and 174000)

Concept Discussion

With the implementation of GASB Statement #34, the reporting of the general long-term debt account group is no longer required. However, to facilitate the accumulation of the data necessary to prepare the government-wide statement of net assets and the statement of activities, the use of the account group will continue within the general ledger accounting of the local government.

It is virtually impossible to discuss debt service funds without discussing their relationship to the long- term debt account group (GLTDAG). Within the GLTDAG, the amounts available in the respective debt service fund for the retirement of general obligation bonds and/or special improvement bonds at year-end are recorded as an asset (amounts available for general obligation debt and/or special improvement debt) These amounts typically represent the fund (equity) balance of the respective debt service fund at year-end. However, the amount in any improvement district revolving fund is excluded since this amount is not considered available, as such, for debt retirement. It is important to reiterate that the amount available in the respective debt service fund for bonded debt retirement is actually recorded in the GLTDAG, and not in any debt service fund. Debt service funds are not affected, but their year-end fund (equity) balances are used as the basis for recording the amount(s) available in the GLTDAG.

The amounts to be provided represent the difference between the long-term liabilities reported in the GLTDAG and the amounts available in the GLTDAG. Please note that the amounts to be provided do not affect debt service funds only GLTDAG. It is discussed here to emphasize the relationship between amounts available and amounts to be provided and the need for their concurrent recording for proper effect.

The accounting entries normally associated with amounts available and amounts to be provided are illustrated in the GLTDAG section on pages H-3 and H-7.

B-

GOVERNMENTAL FUND TYPES

DEBT SERVICE FUNDS – cont.

Illustrative Accounting Entries – cont.

Parallel entry (3) to GLTDAG would also be required.

Debit Credit

(3)-9500-231100 - Bonds payable $25, 9500-174100 - Amounts to be provided $25,

(This entry moves the principal amount of bonds due in the current fiscal year to debt service from GLTDAG, and records the appropriate offset to amounts to be provided. It requires the preparation of a General Journal Voucher.)

Debit Credit

(4)-3XXX-205100 - Bonds payable $25, 3XXX-205200 – Accrued interest payable 22, 3XXX-102210 – Cash $47,

(To record liquidation of bonds and accrued interest payable and payment for them. Ordinarily, this entry would be recorded as a part of the cash disbursement process.)

CAPITAL PROJECTS FUNDS - (BARS 4000)

Nature and Purpose

Capital projects funds are used to account for financial resources utilized in the acquisition or construction of major capital facilities (other than those financed by proprietary funds or trust funds). Capital projects funds must also be used, for other than the acquisition or construction of major capital facilities, when mandated by law or stipulated by regulations or covenants related to the financing source. Normally, a separate fund should be established for each project. The determining factor is the legal provisions that surround the source and use of such financial resources.

Revenue Sources

Capital projects funds derive their financial resources primarily from the issuance of debt obligations, the levying of property taxes, the receipt of grants and shared revenues from other governments and the transfer of cash from other local funds.

B-

GOVERNMENTAL FUND TYPES

CAPITAL PROJECTS FUNDS – cont.

Revenue Sources – cont.

Debt obligations include the sale of general obligation and improvement district bonds. Property taxes include those for capital improvement programs for cities, towns and counties. (7-6-616). Grants and shared revenues from other governments most often include federal and state grants and gas tax apportionment (15-70-101) for cities, towns and counties. (Regarding gas tax apportionment, a town or third class city may each year expend no more than 25 percent of the funds allocated to that town or third class city for the purchase of capital equipment and supplies to be used for the maintenance and repair of streets and alleys). The transfer of cash from other local funds includes county road and bridge capital improvement fund (7-14-2506), and city or county library depreciation reserves (22-1-305 and 22-1-306).

Capitalization of Interest

Concept Discussion

Capitalization of interest on capital projects also requires consideration. The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 34, Capitalization of Interest Costs, requires that interest costs incurred during the construction phase of certain qualified assets be capitalized as part of their cost. According to the FASB Codification, the application of this standard to assets that are reported in the GFAAG appears optional. Interest capitalization when capital projects funds are used for construction undertaken on behalf of a proprietary fund remains questionable. Those favoring interest capitalization in such cases argue that the value of an asset should not depend upon the fund used to account for its construction. Because interest capitalization is required for asset construction reported in proprietary funds, they support extending the same treatment to assets constructed on behalf of proprietary funds. Such an approach, however, can lead to both practical and theoretical problems. Interest capitalization results in higher depreciation expense and can lead to higher user charges. Yet, when construction is reported in a capital projects fund, the responsibility for debt service remains with the general government, not with the proprietary fund. Therefore, a proprietary fund could recover a cost that is, in fact, borne by another fund. For this reason, it is recommended that interest not be capitalized on assets constructed on behalf of proprietary funds.

B-

GOVERNMENTAL FUND TYPES

CAPITAL PROJECTS FUNDS – cont.

Illustrative Accounting Entries – cont.

Debit Sub Credit

(7)-4XXX-242000 - Expenditures $500, 4XXX-420400-920 - Buildings $500, 4XXX-101000 - Cash $500,

(To record construction costs. Ordinarily, this entry would be recorded as a part of the cash disbursement process.)

Closure to General Fixed Asset Account Group

Debit Credit

(8)-9000-182000 - Buildings $500, 9000-280000 – Investment in General Fixed Assets $500,

(To record expenditures incurred in the capital projects fund for buildings at year-end. It requires the preparation of a General Journal Voucher.)

Closure to Enterprise Fund

Debit Credit

(9)-5210-189XXX - Utility plant $500, 5210-343029 – Contributions from local government $500,

(To record expenditures incurred in the capital projects fund for buildings at year-end. It requires the preparation of a General Journal Voucher.)

B-

GOVERNMENTAL FUND TYPES

PERMANENT FUNDS

Nature and Purpose

Permanent funds (BARS fund numbers 8000) were first introduced as part of the governmental financial reporting model established by the Governmental Accounting Standards Board (GASB) Statement No. 34. They are used to account for and report resources that are legally restricted to the extent that only the earnings from the investment of the principal can be expended, not the principal itself. The resources may be used for purposes that support the reporting government’s programs, that is, for the benefit of the government.

Examples of such funds would include a cemetery perpetual care fund, endowments, or other funds donated to the government in which the donor has specifically identified a purpose for the use of the funds but has prohibited the expenditure of the principal of the bequest.

B-