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Chapter 2 PPT Presentation - State and Local Government Financial Reporting Model: The Foundation
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Learning Objectives
Discuss major aspects of government financial reporting model
Define fund and examine broad categories Identify MFBA found in financial statements Analyze effects of transactions Discuss budgetary accounting & reporting Understand revenue, expenditure, expense and
interfund activity classifications Understand basic financial reporting
requirements
GASBS 34: Basis forFinancial Reporting
Issuance in 1999 marked a major change in governmental financial reporting
Created dual perspective reporting: Government-wide financial statements,
using accrual accounting Fund financial statements, using other
bases of accounting
Basic Financial Statements: Overview
Notes to the Financial Statements
FundFinancial Statements
FiduciaryFunds
ProprietaryFunds
GovernmentalFunds
7 - 8 Financial Statements
Links[Worksheets]
Reconciliations(Explanations)
Government-wideFinancial Statements
TotalPrimary Government
Business-TypeActivities
GovernmentalActivities
2 Financial Statements
Minimum Requirements for External Financial Reporting:The GASB’s View
Management's discussion and
analysis
Required supplementary information(other than MD&A)
Government-wide financial statements
Notes to the financial statements
Fund financial statements
Classifications of Principles
1. GAAP & legal compliance
2. Fund accounting
3. Measurement focus and basis of accounting (MFBA)
4. Capital Assets & Long-term Liabilities
5. Classification & terminology
6. Annual financial reports
Principle 1:Accounting & Reporting Capabilities
Present fairly and with full disclosure funds and activities in conformity with GAAP
Determine and demonstrate compliance with finance-related legal and contractual provisions
GAAP Requirements
Trying to assure comparability among and between governments
Full disclosure may result in much more information than “adequate” disclosure required by FASB
Compliance: With What?
With GAAP – in most basic form With budget requirements – may be
complicated if budgetary basis is different then GAAP basis
With requirements of grants received from other governments (special reports or non-GAAP basis reports)
Principle 10:Budgeting, Budgetary Control and Budgetary Reporting Annual budget should be adopted by
every governmental unit Accounting system should allow for
budgetary control Budgetary reporting should provide for
comparisons for budget and actual information
Adopting an Annual Budget
Not GAAP – GASB does not have authority to make this a requirement
Typically placed on cities and counties by State and on State by constitutional requirements
Accounting system allowing for budgetary control
GASB cannot require certain accounting system designs
Still, GASB can encourage governments to use system that will allow for budgetary and financial control over revenues and expenditures or expenses
Budgetary Reporting
This is a GAAP requirement GASB requires reporting for General
Fund and major Special Revenue Funds as part of minimum reporting requirements
Governments may elect to provide additional reports outside minimum requirements (other information)
Information to be provided in budgetary reporting
Original budget Final budget for the reporting period Actual inflows and outflows on budgetary
basis – if different from GAAP basis, the differences must be explained on face of statement/schedule or elsewhere in report
Principle 2:Fund Accounting Systems
Accounting system should be organized on a fund basis
Fund defined by the GASB
Accounting system
As in budgeting, GASB cannot define capabilities of accounting system
Still, if governments are to report on a fund basis, accounting system better have capabilities for accounting and reporting in this manner
What is a Fund?
Abraham Lincoln once said that America is a government “…of the people, by the people, and for the people…”
Ordinary people have traditionally run local governments – they designed a system they understand
Other financial resources and related liabilities added to checkbook concept to get a governmental fund:
Cash and Other
Financial Resources
Fund
Balance
Related
Liabilities=–
Categories and Types of Funds
GOVERNMENTAL FUNDS General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds
PROPRIETARY FUNDS Enterprise Funds Internal Service Funds
FIDUCIARY FUNDS Pension Trust Funds Investment Trust Funds Agency Funds Private Purpose Trust
Funds
Governmental Funds
Most basic type of fund – use basic fund format defined earlier
Used to account for general government activities
Accounting equation does not allow for capital assets and long-term liabilities – necessitates use of nonfund accounts: General Capital Assets General Long-Term Liabilities
Nonfund accounts
General Capital Assets – property, plant, & equipment used in general operation of government
General Long-term Liabilities – debt used to finance capital assets and other long-term liabilities not recognized in the governmental funds
Proprietary Funds
Used to account for business-like activities of the government: Golf courses Maintenance operations Airports Utilities
May use more “traditional” accounting equation:
Current Assets
+
Capital Assets
Current +
Long-term
Liabilities
Net Assets– =
Fiduciary Funds
Accounts for assets held by government in trustee or agency capacity for others
Not used to report assets held for government’s own use
Principle 3:Types of Funds
Provides definition for each fund type Permanent Fund is exception to rule
concerning Governmental Funds – more on that later
Principle 4:Number of Funds
Governments should use minimum number of funds in order to reduce complexity – must still comply with rules and regulations
Requires use of professional judgment
Trick Questions:
What is the minimum number of funds?
One
Which is it?
The General Fund
Some believe the answer is two:
Additional fund is Debt Service Fund – used to hide money from governing
council to keep them from spending it
Principle 5:Reporting Capital Assets
Must know which fund type is using capital assets:
Proprietary fund – reported at fund and government-wide level
Fiduciary fund – reported only at fund level
Governmental Fund – reported only at government-wide level and in notes to financial statements
Principle 6:Valuation of Capital Assets Report at historical cost (may use
estimated cost of historical cost cannot be determined)
Cost of capital asset included charges to get it to intended location and ready for use
Donated capital assets reported at fair value at time of donation, plus charges to get it to intended location and ready for use
Principle 7:Depreciation of Capital Assets
Capital assets depreciated over useful lives
Inexhaustible capital assets (land and some land improvements) should not be depreciated
Infrastructure assets may be accounted for using the “modified approach”
Reporting depreciation depends on fund category
Proprietary fund – reported at fund and government-wide level
Fiduciary fund – reported only at fund level
Governmental Fund – reported only at government-wide level and in notes to financial statements
Principle 8:Accounting for Long-Term Liabilities
Must know type of fund incurring liability Proprietary Fund – report at fund and
government-wide level Fiduciary Fund – report only at fund level Governmental Fund:
Unmatured – report at government-wide level & in the notes
Matured – report as fund liabilities
Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Government-Wide Financial Statements Measurement focus is on economic [all]
resources Basis of accounting is accrual Revenues, expenses, gains, losses,
assets, & liabilities recognition depends on transaction: Exchange – when exchange takes place Nonexchange – according to GASBS 33
Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Governmental Fund Financial Statements Measurement focus is on current
financial resources Basis of accounting is modified accrual Revenues recognized in period they
become available and measurable Expenditures recognized when liability is
incurred, except for interest on long-term debt which is recognized when due
Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Proprietary Fund Financial Statements Measurement focus is on economic [all]
resources Basis of accounting is accrual Revenues, expenses, gains, losses,
assets, & liabilities recognition depends on transaction: Exchange – when exchange takes place Nonexchange – according to GASBS 33
Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Fiduciary Fund Financial Statements Measurement focus is on economic [all]
resources Basis of accounting is accrual Exception for certain liabilities of defined
benefit pension plans and certain postemployment healthcare plans
Principle 9:Measurement Focus (MF) and Basis of Accounting (BA)Internal interfund transfers should be
reported in the accounting period in which the [related] interfund receivable and payable arise.
Revenue Recognition Rules – Must be: Earned or levied Measurable Available
Collected in current period or soon enough thereafter to pay liabilities of the current period – usually considered to be 60 days
If not collected within this period, reported as deferred revenues in current period and revenues in year when they become available
Expenditure Recognition Rules
For current operations & capital outlay, when liabilities to be paid currently by governmental funds are incurred
For debt service (principal and interest) when payments on long-term liabilities are due
Expenditure / Expense Comparison
Expenditures Expenses
OperatingSalaries, supplies,
utilities, etc.
Salaries, supplies,
utilities, etc.
Capital Outlay Acquisition Depreciation
Debt ServicePrincipal &
interestInterest
Principle 11:Transfer, Revenue, Expenditure, & Expense ClassificationAt a minimum, [government-wide]
Statement of Activities should present: Activities accounted for in Governmental
Funds by function with level of detail determined by GF operating statement
Activities accounted for in Enterprise Funds by different identifiable activities
Principle 11:Transfer, Revenue, Expenditure, & Expense ClassificationGovernmental Funds Revenues reported by fund & major
sources Expenditures reported by fund, function
(or program), organizational unit, activity, character, or principal classes of objects
Principle 11:Transfer, Revenue, Expenditure, & Expense ClassificationProprietary Funds Revenues reported by major source Expenses should be classified in same
manner as a similar private sector business
Both revenues and expenses should be reported as either operating or nonoperating
Principle 11:Transfer, Revenue, Expenditure, & Expense Classification Proceeds of general long-term debt
issues should be reported separately from revenues and expenditures in the governmental fund financial statements
Contributions, special items, extraordinary items, & transfers should be reported separately from revenues and expenditures/expenses
Reporting Interfund Activity:Reciprocal interfund activity
Interfund loans (asset / liability) Short-term (due from / due to) Long-term (advance to / advance from)
Interfund services provided and used – recognized as revenue in providing fund and expenditure/expense in using fund
Reporting Interfund Activity:Nonreciprocal interfund activity Interfund transfers
Reported in governmental funds as Other Financing Sources / Uses
Reported in proprietary funds after nonoperating revenues and expenses
Interfund reimbursements Repayment from one fund to another – increases
expenditures / expenses in paying fund while decreases them in receiving fund
Not separately reported in financial statements
Principle 12:Common Terminology & Classification
A common terminology and classification should be used consistently throughout the budget, the accounts, and the financial reports of each fund or activity.
Like, what else would you do?
Principle 13:Annual Financial Reports
Appropriate interim reports should be prepared to facilitate management control
One problem – no GAAP for this requirement
Some governments have very formal process – most don’t
Principle 13:Annual Financial Reports
Comprehensive Annual Financial Report (CAFR)
Should be prepared for all governmental entities
Sections include: Introductory – little GAAP for this section Financial – most GASB standards apply to
this section Statistical – see recently issued GASBS 44
Principle 13:Annual Financial Reports
Notes
Nonmajor Fund Combining Financial Statements
Individual Fund Financial Statements& Schedules
Transaction Data(the accounting system)
CAF
R
MD&A
Government-Wide
Financial Statements
Major Fund & CUFinancial Statements
Other RSI
ME
FR
BFS
CAFR--Comprehensive Annual Financial ReportBFS--Basic Financial Statements
MEFR--Minimum External Financial ReportingCopyright 2001, G. Robert Smith, Jr.C
Principle 13:Annual Financial Reports
Minimum reporting requirements Management’s Discussion & Analysis Basic Financial Statements
Government-wide financial statements Fund financial statements Notes to the financial statements
Required supplementary information other than MD&A
Principle 13:Annual Financial Reports
Financial Reporting Entity consists of Primary government (PG) Organizations for which the PG is
financially accountable Other organizations whose omission
would cause financial statements to be misleading or incomplete
Principle 13:Annual Financial Reports
Government-wide financial statements should include separate columns for Governmental Activities, Business-Type Activities, Total column for PG, and discretely presented component units
Principle 13:Annual Financial Reports
Management’s Discussion & Analysis Brief discussion of financial statements Condensed government-wide financial
information Analysis of position & results of operations Analysis of individual funds Budget analysis Significant capital assets and LTL events Modified approach Description of currently known facts
Principle 13:Annual Financial Reports
Fund Financial Statements include major funds individually and nonmajor funds in the aggregate. Fiduciary fund statements are not included in the basic financial statements.
Principle 13:Annual Financial Reports
Financial Reporting Entity Nucleus is the PG Other activities include:
Discretely presented component units Blended component units Joint ventures Jointly governed organizations Related organizations
Principle 13:Annual Financial Reports
Government-wide Financial Statements Statement of Net Assets Statement of Activities
Principle 13:Annual Financial Reports
Governmental Fund Statements (Schedules)
Balance Sheet Statement or Revenues, Expenditures, &
Changes in Fund Balance Statement or Revenues, Expenditures, &
Changes in Fund Balance – Budget-to-Actual (may be either BFS or RSI)
Principle 13:Annual Financial Reports
Proprietary Fund Statements Statement of Net Assets / Balance Sheet Statement of Revenues, Expenses, &
Changes in Net Assets Statement of Cash Flows
Principle 13:Annual Financial Reports
Fiduciary Fund Financial Statements Statement of Fiduciary Fund Net Assets Statement of Changes in Fiduciary Fund
Net Assets
Preparation Process: Step 1
TransactionData
Start with the transaction data – the basic building blocks for everything in the Comprehensive Annual Financial Report (CAFR),
Preparation Process: Step 2
TransactionData
Schedules
Individual FundStatements
1
From the transaction data, prepare the individual fund financial statements and schedules. Also, some of the transaction data will be used later in the CAFR preparation process.
Preparation Process: Step 3
TransactionData
Schedules
Individual FundStatements
Major FundDetermination
1
2
3
Determine the major funds (this process will be discussed later). Also, information from the individual fund statements and schedules will be used later in the process.
Preparation Process: Step 4
TransactionData
Schedules
Individual FundStatements
Major FundDetermination
Non-Major FundCombiningStatements
Major FundStatements
1
2
3Once the major funds have been determined, the non-major fund combining statements can be prepared. The total column from these statements becomes a single column in the major fund statements along with a separate column for each major fund.
Preparation Process: Step 5
TransactionData
Schedules
Individual FundStatements
Major FundDetermination
Non-Major FundCombiningStatements
Major FundStatements
ConversionProcess
CUStatements
Govt.-wideStatements
1
2
3
The major funds statements undergo a conversion process and are combined with the component units financial statements to complete the government-wide statements.
Preparation Process: Step 6
TransactionData
Schedules
Individual FundStatements
Major FundDetermination
Non-Major FundCombiningStatements
Major FundStatements
ConversionProcess
Govt.-wideStatements
Notes
1
2
2
3
3
CUStatements
Information from all the financial statements and the schedules are used to prepare the notes to the financial statements. This process completes the Basic Financial Statements (BFS).
Preparation Process: Step 7
TransactionData
Schedules
Individual FundStatements
Major FundDetermination
Non-Major FundCombiningStatements
Major FundStatements
ConversionProcess
Govt.-wideStatements
Notes
OtherRSI
BudgetPersonnel
Dept.Heads
ProgramManagers
MD&A
1
1
2
2
3
3
CUStatements
Information from the transaction data, individual fund statements, and schedules are used to complete the Other RSI. Then information from all sources combine to provide data for the MD&A.