Adv Acc Hamlen 3 e 11 L

1
Chapter 11:
State and Local Governments:
SRF, Proprietary Funds,
Fiduciary Funds
Learning Objectives
Describe reporting for special purpose

activities-SRF, PF, DSF, and CPF.
Describe reporting for the funds of
proprietary activities.
Describe reporting for the funds of
proprietary activities.
AdvAcc.Gjoh@SOA.SDSU
Special Revenue Funds

Accounts for revenue sources restricted by
law or administrative action, other than
those for:
Permanent funds (endowment)
Capital projects funds (construction)
Debt service funds (repayment of debt)
Example: education, highway maintenance

Accounting is similar to the general fund
Usually does not use encumbrances
Budgetary accounts needed if the budget is legally
adopted
Special Rev. Fund (E11.15)
Balance Sheet (Special Revenue Funds)
Fund balances
divided into
five categories.
Application: Special Revenue Funds

of San Diego County
Accounting for
Special Purpose Activities
Permanent funds
Resources used for activities benefitting the
government and/or citizens
Resources received from donor or grantor
Expenditures limited to investment income
Principal must remain intact
Fund balances are generally
Nonspendable endowment
Restricted unspent investment income
Permanent Fund (Texas State)

This is a
Special
Revenue
Fund.
Permanent Funds (E11.1)
10
Accounting for Capital Projects

Includes acquisition or construction of
Land
Buildings
Equipment
Infrastructure
Accounting depends on the fund

General or special revenue fund
Capital outlay (part of expenditures)
Enterprise fund
Uses normal business accounting, with depreciation
recognized periodically
11
Capital Projects Fund (E11.3)
12
Capital Projects Fund
Treatment of Long-Term Debt

in Fund Financial Statements
Long-term debt incurred by
General, special revenue,
capital projects funds
Where
liability is
recorded
13
Sources of resources to
repay debt
General fund budget

Special tax levies
Not recorded
Bond premium
Unspent bond proceeds
Specific
Enterprise, internal service enterprise or
funds
internal
service fund
Debt
payment
made from
Debt service
fund
Revenues
from operations
Specific fund
Government liable for debt Not recorded
Assessments on
property owners
Debt service
fund
Government not liable for

debt
Assessments on
property owners
Agency fund
Special assessment
construction activities:
Not recorded
Major Sources and Uses of Cash

in the Debt Service Fund
Sources of Cash
Budgeted transfers from
general fund
Transfers from special
revenue fund (special tax
levies for debt service)
Transfers from capital
projects fund (bond
premium, unspent bond
proceeds, investment
earnings)
Special assessments
Investment earnings
Liquidation of investments
14
Uses of Cash
Current payments of
interest and principal on
general obligation debt
Investment for future
principal and interest
payments
Accounting for the

Debt Service Fund
15
Budgets for estimated revenues and

appropriations may be recorded
Appropriations for interest payments
include only interest due in the current year
Modified accrual accounting
Can be either serial or term bonds

Serial Principal matures in equal annual
installments
Term Principal matures at end of the bond
issue
Accounting for
Serial and Term Bonds
Serial bonds
16
Budgeted resource inflows generally equal

budgeted outflows
Little or no investments or investment income
Term bonds
Budgeted resource inflows are greater than
budgeted outflows
To accumulate resources for future payment of
principal
include required additions (transfers in) and required
investment earnings
Balance sheet reports investments

17
Debt Service Fund (E11.6)
Debt Service Fund F/S
18
19
Special Assessment Debt

Some projects are financed by assessing
property owners that directly benefit
Financing is called special assessment debt
Assessments on the property owners provide
resources for debt service
If government is not liable

Agency fund accounts for debt service
transactions
If government is obligated in case of

default
Debt is reported as general obligation debt
20
Proprietary Fund Accounting

Used to report government activities that provide
goods or services in return for a fee
Emphasis is on measuring income, financial
position, and cash flows
Two types
Enterprise funds
Account for provision of goods or services to the
general public
Internal service funds

Account for provision of goods or services by one
department or agency of the government to another
on a cost reimbursement basis
21
Enterprise Funds
Enterprise funds account for provision of goods or
services to the general public, including:
Utilitiesmunicipal water, gas, and electricity
Sanitationsewer systems and landfills
Recreational facilitiesgolf courses, marinas,
swimming pools, stadiums
Lotteries
Commercial facilitiesairports, ports, and farmers
markets
Transportation facilitiesbuses, parking, toll bridges
Public hospitals and health clinics
Public housing projects
Public colleges
22
Internal Service Funds

Internal service funds account for provision
of goods or services by one department or
agency of the government to another, on a
cost reimbursement basis
Maintenance and repair services

Vehicle pool and transportation services
Supply facilities
Print shop
Computing and information services
23
Accounting for Proprietary Funds

Use business accounting
Full accrual basis
Revenues and expenses (not expenditures)
Depreciation, accrued pension and OPEB expenses
Account for their own capital assets and

long-term debt
Often issue revenue bonds secured by the
proprietary funds operating revenues
Proprietary Funds
Statement of Net Position
24
Has same accounts and structure as a business

balance sheet
Net position replaces stockholders equity
Three categories of net position
Net investment in capital assets
Cost of capital assets
Less accumulated depreciation-capital assets
Less outstanding principal of related debt
Net investment in capital assets
Restricted
Subject to external or governmental
restrictions
Unrestricted (residual net position)
Proprietary Funds
Statement of Net Assets
25
Proprietary Funds
Operating Statement
26
Three
sections
Operating
revenues and
expenses
Nonoperating
revenues
and expenses
Capital
contributions
and transfers
27
Statement of Cash Flows for Proprietary

Funds
Direct method of reporting cash from
operating activities is required
Reconciliation of operating income to cash
from operating activities is required
28
Statement of Cash Flows for Proprietary

Funds
continued
Four categories of cash flows

Cash from operating activities
Cash from noncapital financing activities
Borrowings, grants, transfers not related to capital
assets
Cash from capital and related financing

activities
Borrowings, grants, assessments related to capital
assets
Cash from investing activities

Investments in equity and debt instruments
29
30
Enterprise Funds (E11.14)
31
Fiduciary Funds
Report financial activities where the
government acts as a trustee or agent for
others
Assets are not used to support governments
programs
Consist of two elements

Trust funds
Agency funds
Use full accrual accounting

With some exceptions
32
Three Types of Trust Funds

Pension and other employee benefit trust funds
Account for health insurance, pension, and other benefits
to government employees
Investment trust funds

Account for investment pools where other governments
invest excess cash on a short-term basis to earn
additional income
Private-purpose trust funds

Account for all other trusts not benefitting the public in
general
33
Agency Funds
Report activities where the government
acts in an agency capacity
Collects resources and remits them to
individuals or organizations outside the
government
Such as
Employee payroll deductions
Tax collections
Often used to account for the financing of

special assessment activities
When government is not liable for the related
debt
34
Transactions in Agency Funds

Two categories of transactions
Collection transaction
Debit to cash and credit to liability
Payment transaction
Debit to liability and credit to cash
No revenues or expenses
No net position balance
Assets = liabilities
35
Special Assessment Financing in an

Agency Fund Example
A township decides to install new street lights with financing from a
10-year 6% serial bond issue totaling $1 million. Residents in the
affected area will be assessed $1,318,000 over 10 years to retire and
to pay interest on the bonds. The first years assessments levied on
property owners total $160,000, and payment is received.
To record levy of special assessments:
To record collection of current assessments:
36
Special Assessment Financing in an

Agency Fund Example continued
The assessment payment received is used to pay the principal and
interest due on the 10-year, 6% serial bond issue totaling $1 million.
To record payment of $100,000 of principal and $60,000

of interest: $100,000 + [$1,000,000 6%] = $160,000
At the beginning of the next year, assessments on property owners are

recorded.
To record the second year's assessments:

[($1,000,000 $100,000) 6%] + $100,000 = $154,000
Financial Statements for

Fiduciary Funds
37
Fiduciary fund activities reported in

Statement of changes in fiduciary net position,
and
Statement of fiduciary net position
Only includes resources held for individuals

or organizations outside the reporting
government
Only trust funds are reported in the
statement of changes in fiduciary net position
Because agency funds have no net position
38
Application: Statement of Changes in

Fiduciary Net Assets
39
Statement of Fiduciary Net Assets
Investments in
Debt and Equity Securities
40
Short-term or long-term investments

Held in
Debt service funds for future principal
repayment
Capital projects funds as short-term investment
of bond proceeds
Permanent funds investment of endowments
Trust funds
Legal restrictions are placed on investment

vehicles
Accounting for Investments

SGAS 31
41
Investments reported at fair value for all

fund types (governmental, proprietary,
fiduciary)
Use discounted cash flow or other estimation
methods if market price not available
Investment income and changes in fair

value of investments
Report as revenue and gains/losses in the
funds operating statement
42
Derivatives Investments
Forwards, futures, options, interest rate
swaps
Lock in future prices to reduce risk of price
changes
Change variable rate debt payments to fixed
rate, or fixed rate debt payments to variable
rate
SGAS 53 requirements
Apply to accrual-based financial statements
(proprietary and fiduciary funds)
Investments reported at fair value
Derivatives Investments
43
continued
Derivatives used to generate income

Reported using SGAS 31 requirements
Income, realized gains/losses, unrealized value
changes reported on the operating statement
Derivatives used as hedge investments

Unrealized value changes deferred on the
statement of net position
If settled early or no longer qualifies as hedge,
deferred gains and losses reclassified as
investment income/loss on the operating
statement
44
Compensated Absences- SGAS 16

Proprietary funds (full accrual basis)
Recognize the liability for compensated absences as
incurred
At the time when employees perform the services on
which the benefits are based (matching concept)
If benefit depends on a future event or on future

employee services to be provided
No liability recognized
Example: sick leave not accrued
Governmental funds (modified accrual basis)

Only compensated absences expected to be paid
with current financial resources are accrued in the
current period
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Compensated Absences Example

A funds administrative employees estimated liability for future compensated
absences is $2,500,000, of which $1,000,000 will be paid with current resources.
If reported in a proprietary fund

To record estimated compensated absences related to
employee services performed this year:
Administrative expenses
Liability - compensated absences
2,500,000
2,500,000
If reported in a governmental fund

To record estimated compensated absences to be paid with
current resources:
Administrative expenditures
Liability - compensated absences
1,000,000
1,000,000
46
Landfill Operations: SGAS 18

U.S. Environmental Protection Agency
Specific closure requirements requiring significant
future costs
Closure and postclosure care

Costs of capping the landfill
Mandated monitoring and maintenance costs
If landfill reported in proprietary fund

Accrue closure and postclosure care costs as landfill
operates (matching concept)
If landfill reported in governmental fund

Report closure and postclosure care costs as incurred
47
Reporting for Landfill Operations

in Proprietary Funds
Allocate estimated current cost of future
closure and postclosure care to each period
of landfill operation
Similar to units of production depreciation
Suppose the estimated current cost of closure and postclosure
care is $20 million, with $3 million reported in previous periods.
The landfill is 40% full.
To record the current year's allocation of future closure and

postclosure care costs:
($20,000,000 40%) $3,000,000 = $5,000,000
Expense - landfill closure and postclosure care
Liability - landfill closure and postclosure care
5,000,000
5,000,000
Reporting Landfill Operations in

Governmental Funds
48
Reports only costs requiring current

financial resources
Estimated future liability connected with
landfill not reported
Costs not yet incurred
49
Accounting for Leased Assets

Accounting depends on
If a capital or operating lease, and
Whether the affected funds use full or modified
accrual accounting
State and local governments

Follow FASB ASC Topic 840 concerning lease
classification
Proprietary funds use regular business

accounting for capital leases
Accounting for Leased Assets in

Governmental Funds Example
50
On January 1, 2014, Alameda Countys general fund agrees to lease

equipment for 5 years under these terms: $500,000 is due at the lease
signing, and payments of $500,000 per year are due at the end of each of
the next 4 years. The lease agreement reflects an implicit interest rate of
5%. The present value of the lease payments is $2,273,000.
If classified as a capital lease:

To record the signing of the lease:
2014
Jan. 1 Expenditures - capitalized leases

2,273,000
Other financing sources - capitalized leases
2,273,000
To record initial payment on the capital lease:

Jan. 1 Expenditures - principal
Cash
500,000
500,000

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1

Describe reporting for special purpose

Special Revenue Funds

Example: education, highway maintenance

Special Rev. Fund (E11.15)

Balance Sheet (Special Revenue Funds)

Application: Special Revenue Funds

Permanent Fund (Texas State)

Permanent Funds (E11.1)

Accounting for Capital Projects

Accounting depends on the fund

Capital Projects Fund (E11.3)

Capital Projects Fund

Treatment of Long-Term Debt

General fund budget

Government liable for debt Not recorded

Government not liable for

Major Sources and Uses of Cash

Accounting for the

Budgets for estimated revenues and

Can be either serial or term bonds

Budgeted resource inflows generally equal

Balance sheet reports investments

Debt Service Fund (E11.6)

Debt Service Fund F/S

Special Assessment Debt

If government is not liable

If government is obligated in case of

Proprietary Fund Accounting

Internal service funds

Internal Service Funds

Maintenance and repair services

Accounting for Proprietary Funds

Account for their own capital assets and

Has same accounts and structure as a business

Statement of Cash Flows for Proprietary

Statement of Cash Flows for Proprietary

Four categories of cash flows

Cash from capital and related financing

Cash from investing activities

Enterprise Funds (E11.14)

Consist of two elements

Use full accrual accounting

Three Types of Trust Funds

Investment trust funds

Private-purpose trust funds

Often used to account for the financing of

Transactions in Agency Funds

Special Assessment Financing in an

To record levy of special assessments:

To record collection of current assessments:

Special Assessment Financing in an

To record payment of $100,000 of principal and $60,000

At the beginning of the next year, assessments on property owners are

To record the second year's assessments:

Financial Statements for

Fiduciary fund activities reported in

Only includes resources held for individuals

Application: Statement of Changes in

Statement of Fiduciary Net Assets

Short-term or long-term investments

Legal restrictions are placed on investment

Accounting for Investments

Investments reported at fair value for all

Investment income and changes in fair

Derivatives used to generate income