Pupic

GOVERNMENT & NONPROFIT
ACCOUNTING (ACFN2121)
CHAPTER 1
The Environment of Financial
Reporting for Governmental &
Nonprofit Entities
ACFN 2121 1-1

Learning Objectives
 Nature of Nonbusiness( nonprofit in general) Organizations
(What)
 Definition (meaning)
 Distinguishing Characteristics (similarities & differences)
 Classification (types)
 Objectives of Financial Reporting(Why)
 Governmental organizations
 Nonprofit organizations
 Accounting & Reporting Standards-GAAP(How)
 Governmental organizations
 Nonprofit organizations
ACFN 2121 1-2

Course Remark
Welcome to the strange new world of accounting
and financial reporting for governmental and other
nonprofit [G & NP] organizations, i.e. Fund
Accounting.
Students beginning the study of accounting for
governmental (G) entities, in particular, & other
nonprofit (NP) entities, in general, temporarily
must set aside many of the familiar accounting
principles for business enterprises.
ACFN 2121 1-3
Definition of Nonbusiness Organizations
Nonbusiness organizations are economic

entities organized to provide a socially
desirable service (service to society)
without regard to financial gain.
ACFN 2121 1-4

Salient points
– economic entities=undertake economic activities
– beneficiaries= society as a whole or in general
− No profit motive=enhance/maintain the well-
being/welfare of citizens/society/constituency
− Socially desirable services include (those agreed-to
by constituency) public safety (police & defense),
education, health, transportation, water supply,
infrastructure, etc
ACFN 2121 1-5
- Often cannot be met by profit-seeking firms as the

economic incentives are not sufficient for business to
provide them at the quantity, quality, and price
considered appropriate by public policy
 Why? (Rational):
– Nonalignment of free market incentives & public
interest: need to provide a K-12 education to all
citizens without regard to recipient’s ability to pay.
– Service subject to free-riding: benefit every citizen
whether or not they contribute to its cost & no
practical means for businesses to sell this service.
ACFN 2121 1-6

Similarities of G & NP with Businesses
 Operate in the same economic system
 Acquisition of resources to provide goods or services
 Use of financial management processes
 Use of financial information systems
 Use of cost analyses, control and evaluation techniques
 Need to operate economically, efficiently, & effectively
 Compete & acquire scarce resources & provide goods &
services many of which may be similar
 Some characteristics of nonprofit organizations that
resemble those of business enterprises are the following:
ACFN 2121 1-7

Similarities to Businesses
–Governance by Board of Directors-as with a
business corporation, a nonprofit corporation is governed by
elected or appointed directors, trustees, or governors. In
contrast, the legislative and executive branches of a
governmental entity share the responsibilities for its
governance.
–Measurement of Cost Expirations-governance by a
board of directors means that a nonprofit organization does
not answer to a lawmaking body as does a governmental entity.
One consequence is that cost expirations, or expenses, rather
than expenditures, are reported in the statement of activities of
most nonprofit organizations. Allocation of expenses (including
depreciation) and revenues to the appropriate accounting
period thus is a common characteristic of nonprofit
organizations and business enterprises.
ACFN 2121 1-8
Similarities to Businesses
 Use of Accrual Basis of Accounting-

nonprofit organizations employ the same
accrual basis of accounting used by business
enterprises.
ACFN 2121 1-9

Differences of G & NP from Businesses
1. Organizational Objective
 Businesses:
 Operating Motive: maximize income from revenues and other
resources
 Maximize wealth of only a limited number of individuals
 primary focus is on earning net income, return on investment
and earnings per share
 Governmental & Nonprofit entities:
 Operating Motive: maximize services provided from revenues
and other resources-No profit motive!
 Service to society-enhance or maintain the well-being of the
citizen/constituents in an efficient, effective, economical and
sustainable manner (maximize social welfare)
ACFN 2121 1 - 10
 Objective is to collect resources and make expenditures to
fulfill societal needs
 Except for some proprietary activities, NFP entities have no
profit motive in providing goods and services
 Goals are something other than to earn net income and/or
make profit
 Render goods/services with no expectation of receiving
revenue
 GOs
 ultimate objective is to meet some political and/or social
need
 NGOs
Ultimate objective is to meet some social need
ACFN 2121 1 - 11
2. Ownership Interest
 Businesses: Ownership interest is:
– Readily transferable (bought & sold)
– entitle legal right for share of residual assets on liquidation
& dividends
– equity transactions-investment by & distribution to owners
– presence of individuals with legal claim to the excess of
revenues over expenses and excess of assets over liabilities
 G & NPs: There is no clearly defined ownership interest that:
 can be sold, transferred or redeemed or
 convey entitlement to a share of a residual distribution of
resources in the event of liquidation or excess of revenues
over costs (distribution to owners-return on/of investment)
ACFN 2121 1 - 12
– No equity (stock or dividend) transactions
– No legally enforceable residual ownership claim to net assets
(excess of assets over liabilities)
– Collective ownership by constituents/investors (citizens,
businesses, other governments, donors)
– Public’s ownership- involuntary basis- paying taxes &
receiving certain services from their government as
determined collectively through elections or decisions of
elected representatives
– Absence of individuals with legal claim to the excess of
revenues over expenses and excess of assets over liabilities.
ACFN 2121 1 - 13
3. Sources of Financial Resources/Revenue
 Businesses
–Principal source of revenue is voluntary exchange transactions
between willing buyers & sellers –sales (service charges)
–Primarily supported by retained profit & investment by owner/s
– Equity and debt financing
 G & NPs:
– Resources providers do not receive proportional benefits
– Receive significant amount of resources from
individuals/organizations who/which do not expect to receive
either repayment of or economic benefits in return to the
resources provided
−Monopolistic services; no open market (Police and fire services)
ACFN 2121 1 - 14
– Citizenry support – depend on the general population for a
substantial portion of their support because revenues from
charges for goods/services are not intended to cover all
operating costs
– Service charges not key financing source
– Primarily supported by nonexchange/nonreciprocal
transactions such as taxes (involuntary/compulsory
contributions) and grants (voluntary contributions)
– Do not finance their operations through adequate charges to
the direct beneficiaries of their services
– User charges based on cost without profit (Charges often only
cover part of cost)
– Not financed through equity investments
ACFN 2121 1 - 15
GOs
- Primarily supported by taxes (nonexchange transactions)
- Legally forceful(involuntary) contributions
- Taxpayers do not necessarily receive an equivalent/
proportionate share of the government’s goods/services
- Donations/grants
 NGOs
- Primarily supported by donations/grants
- Voluntary contributions
- Donors contributing resources do not necessarily receive an
equivalent share of the organization’s goods/services
ACFN 2121 1 - 16
4. Regulation and Control
 Businesses
– market (DD & SS forces) is the major regulatory mechanism
– continuing a product or service determined by success in
marketplace
– profit is an automatic implicit regulating device for allocation
& utilization of resources
– Able to modify or withdraw unprofitable goods and services
from the marketplace
– Responds to value of resources provided to type and quality of
goods and services provided
– Profit motive and measurement result in an allocation and
regulation of resources vs. goods and services provided
ACFN 2121 1 - 17
 G & NPs:
- Their activities and resources are subject to more
stringent(strict) legal and/or contractual requirements
– Not able to modify or withdraw some unprofitable goods
and services from the marketplace
– Value of resources provided often not related to type and
quality of goods and services provided
– Goods and services provided often unique and without
charge or at a “token” charge
– Subject to stringent and extensive regulations (internal as
well as eternal)
ACFN 2121 1 - 18
–allocation & utilization of resources is achieved through
imposition of stringent and extensive controls/restrictions from:
• external elements: federal/state statutes & laws, grant
regulations, judicial decisions
• internal elements: charter, by-laws, contractual obligations,
trust / donor agreements
–Formal and restrictive budgets
–Preparation of budgets is mandatory and imposes limit on
spending
–Lack of competitive market, especially government forms a
monopoly for specified services (e.g. public protection)
ACFN 2121 1 - 19
– No automatic resource allocation

– SS & DD economics not applicable
– Operations of governmental entities are for the most part
initiated by various legislative enactments, such as operating
budgets, borrowing authorizations, and tax levies.
– Use of budget
• Expresses public policy & intent
• Establishes contract between units
• Has the force of law once adopted
• Authorizes expenditures for specific purposes
• Limits/restricts expenditures
ACFN 2121 1 - 20
• Budgetary controls-the budget establishes the objectives and
priorities of state governmental entities and is enacted into
law by the legislative body to provide the legal authority to
levy taxes, collect revenues, and make expenditures
• Places detail restrictions on resource usage
• A form of fiscal control
• Basis to evaluate budgetary performance
• Need to demonstrate accountability
• Means to determine taxing levels
• Vital part of the political process as an important legislative
function
- Managers have limited discretion than managers of
businesses
ACFN 2121 1 - 21
5. Potential for Longevity
 Governments:
– Have greater longevity than businesses
– Rarely go “out of business” or liquidate (not bought and
sold)- Why
– Ongoing power to tax
– Nature of services provided (ongoing need for public
services)
– Lack of market competition
 Businesses:
– Risk of going out of business
– Risk of being bought out
 NFPs: Similar risks
ACFN 2121 1 - 22
6. Measurement of Performance
 Businesses:
– Profit
• economic natural selection (in the ultimate only profit
maximizers survive)
• Predominant & valid performance indicator/measure
– Objectives/outputs can be easily expressed in monetary or
other quantitative terms
– Direct input-output relationship exists
– Market (forces) is the major regulatory mechanism
– Continuing a product or service determined by success in the
marketplace
ACFN 2121 1 - 23
 G & NPs:
– Objectives and/or outputs cannot be objectively measured in
either monetary or any other quantitative terms or evaluating
performance & operating results is extremely difficult because:
 Power to tax (forced financial resource contributions-taxes!)
 Lack of market competition (no open market SS and DD test
occurs to evaluate value of services provided)
 No direct and proportional relationship between resources
provided and the benefits received.
 Absence of profit motive (frequently cannot be measured/test)
– Difficulties of constructing a truly comprehensive measure
(unidimensional)
ACFN 2121 1 - 24
– In the private sector benefits to consumers are embedded in
market prices, but this information is not available for public
services
– Profit test is neither a valid performance indicator nor an
automatic implicit regulating device for resource allocation &
utilization
– Neither net income or earnings per share can measure the
performance of a fire brigade or a church
─ Performance of public organizations cannot be reduced to a
single dimension, & is inescapably contestable (both objective
& subjective=qualitative & quantitative)
ACFN 2121 1 - 25
– Their activities and regulation of the allocation and utilization
resources are subject to more stringent legal and/or contractual
requirements as discussed above.
– NGOs-program expense ratio
– Federal Government-GDP, GNP, Inflation rates, national
reserve, etc
7. Use of Fund Accounting- Why?
• Diversity of activities
• Legal considerations/requirements
• Organizational objectives
• Decentralization of control over resources
– Meaning-Accounting for NFP Entities
ACFN 2121 1 - 26
i. Basic features
 Use of fund and budgetary accounting
 Traditional view of equity accounts is modified – fund balance
replaces the traditional/commercial equity accounts
 Recognition of revenues and/or expenditures/expenses for non-
exchange transactions.
 Financial reports must reflect the existence of restrictions on
use of certain resources.
 Non-financial performance measures are relatively more
important
 Gives more weight to budgetary compliance
ACFN 2121 1 - 27
ii. Fund accounting
 Accounting systems for many NFP entities are organized and
operated on fund basis.
 Use of multiple accounting entities to account for and report on
resources segregated according to purpose.
 Is a system meant to ensure that resources are used in accordance
with restrictions imposed on them
 In strict terms separate accounting records are kept and separate
set of financial statements are prepared for each fund.
 Designed primarily to meet internal reporting and control
objectives
 The fundamental equation for the fund accounting theory is:
Assets = Restrictions » »Liabilities + Fund Balance » » A=L+FB
ACFN 2121 1 - 28
iii. Fund
 is a fiscal entity responsible for resources segregated for
specific purposes
 is also an accounting entity with a self-balancing set of
accounts recording financial resources, claims against the
financial resources and changes in these items
 is a quasi-independent entity entrusted over resources
segregated for the purpose of carrying on specific activities or
attaining certain objective in accordance with special
regulations, restrictions or limitations
 is a distinct entity within a larger entity
 a part of an organization for which separate accounting
records are kept in such a way that enables preparation of
separate set of financial statements
ACFN 2121 1 - 29
 there may be several funds in an organization
 the fund concept is aimed at clearly defining the purposes for
which resources are to be used and who will be held
accountable for the resources
 fund may be unrestricted (general) – to be used for any
purposes or restricted to be used only for specific purpose
iv. Governmental fund accounting
 Uses modified accrual basis of accounting
 Focuses on measurement of current financial resources also
called current expendable resources
 Current financial resources include
ACFN 2121 1 - 30
 Cash and other assets which can be readily converted into
cash within the current period or short after the end of the
current period (e.g. receivables and short-term investments)
 Obligations to be settled within the current period or short
after the end of the current period
 Thus, capital assets, some prepaid items and long-term
liabilities are excluded from accounting records and reports
v. NGOs fund accounting
 Uses full accrual basis of accounting
 Focuses on measurement of all economic resources
 Thus, account for both current and non-current assets and
liabilities
ACFN 2121 1 - 31
vi. Budgetary accounting
 Budgeting is required in fund accounting and plays a unique
role as the basis of the entries that are recorded in a
governmental journals.
 Budgetary figures are incorporated/recorded in the
accounting systems
8. Diversity of activities
 Governmental activities are tremendously diverse and are
classified into three broad categories:
1. Governmental-activities that do not resemble commercial
activities and designed to provide basic governmental
services to the general public and are normally financed
from tax revenues. Examples are education, public safety,
the judicial system, social services and administration.
ACFN 2121 1 - 32
2. Proprietary-these activities resemble commercial activities

designed to provide for the delivery of goods and services to the
general public or to other departments or agencies of the
government. Usually financed wholly or partially from user
charges, these operations may be considered secondary
services. Examples are utilities, public transportation, parking
facilities, and recreational facilities. These operations usually
have the objective to earn a profit or recover a certain level of
operating costs from fees charged the public for their use.
3. Fiduciary-these activities pertain to accounting for assets
held by a governmental unit as trustee or agent (governmental
unit holds assets for others). The most common example is a
pension fund for current and former employees.
ACFN 2121 1 - 33
Classification
 Broad classification
– Governmental organizations (GOs)
– Non-governmental organizations (NGOs) or private NFPs
 FASB classification
– Governmental units (federal, regional, local, etc)
– Educational (KGs, schools, colleges, universities, etc)
– Health & welfare (charitable/philanthropic/aid
organizations-hospitals, orphanages, red cross/crescent,
USAID, Care Ethiopia, Save the Children, etc)
– Religious (churches, mosques, missions, etc)
– Foundations (professional associations, labor unions, civic
organizations, trade associations, political parties)
ACFN 2121 1 - 34
Classification
 Governmental Organizations
General purpose governments
– Provide a broad array of services
– Examples: Federal government, state governments,
cities, towns, townships, villages, counties, boroughs, and
parishes
 Special purpose governments
– Usually provide only a single or just a few services
– Examples: Independent school systems, public colleges
and universities, public hospitals, fire protection districts,
sewer districts, transportation authorities, and many
others
ACFN 2121 1 - 35
Classification
 Private nonprofit organizations:
a. Charitable Organization
- It includes religious organization, health care entities,
educational institutions, and social services providers and so on.
- principally provide their service to the general public
- main source of resource is donations (gifts)
- Contribution to charitable organization is tax deductibles
 Membership Organization
- It includes social clubs, fraternal organization or professional
society, labor union, chamber of commerce etc…
- principally provides their service to their members
- source of resource is membership fees
- contribution to membership organization is not tax deductible
ACFN 2121 1 - 36
CH. 1
Overview of Financial Reporting for
Government Entities
II. Objectives of Financial Reporting

 Authoritative Literature that specifies GAAP
(Standard Setters)
 Objectives, Uses, & Users of Financial Reports
ACFN 2121 1 - 37
Primary Sources of Accounting & Reporting
Standards
Comptroller General
Financial
Director of OMB
Accounting
Sec. of Treasury
Foundation
Fed. Accounting
FASB GASB Standards Advisory
Board (FASAB)
Business Non- State & Local Governmental Federal govt.

(for-profit) governmental governmental nonprofit and agencies
organizations nonprofits organizations organizations and depts.
ACFN 2121 1 - 38
GASB CONCEPTUAL
FRAMEWORK
ACFN 2121 1 - 39
ACFN 2121 1 - 40
ACFN 2121 1 - 41
ACFN 2121 1 - 42
ACFN 2121 1 - 43
ACFN 2121 1 - 44
ACFN 2121 1 - 45
ACFN 2121 1 - 46
ACFN 2121 1 - 47
ACFN 2121 1 - 48
Financial Reporting Objectives of
Federal Government
 Set by FASAB/IPSASB (Int’l Public Sector Acct Board)
 Financial reporting should help to achieve accountability
and is intended to assist report users in evaluating:
 Budgetary Integrity — demonstrate budget regulations
were adhered to
 Operating performance — help evaluate service, efforts,
and accomplishments
 Stewardship — show the impact on operations and
investments
 Systems and controls — indicate whether they are
adequate
ACFN 2121 1 - 49
Financial Reporting Objectives of SLG
 Set by GASB/IPSASB
 Reporting should provide information to assist users in
[USES]:
− assessing accountability, &
− making rational & informed economic, social, and
political decisions primarily by:
 Assess if current revenues were sufficient to pay for
current services (interperiod equity)
 Comparing actual financial results with the legally
adopted budget
 Assessing financial condition and results of operations
ACFN 2121 2 - 50
− Assisting in determining compliance with finance-
related laws, rules, and regulations
− Assisting in evaluating efficiency and effectiveness
Accountability
− the paramount objective
− cornerstone of all financial reporting in
government
−interperiod equity-key component of
accountability
−operational accountability—efficient & effective
utilization of resources in meeting operating
objectives.
ACFN 2121 1 - 51
– fiscal accountability-whether financial resources
are raised and spent in accordance with budget
plans and in compliance with pertinent laws and
regulations.
 Need for Public Accountability: help stakeholders assess
– How public resources are acquired and used
– Whether current resources were sufficient to meet current
service costs
– Whether some costs were shifted to future taxpayers
– Whether the government's ability to provide services
improved or deteriorated
ACFN 2121 1 - 52
 How Do GASB’s Objectives Differ from Business

Objectives?
 There is more emphasis on
– The budget
– Legal compliance
– Efficiency and effectiveness measures other than net
income
 GASB Concepts Statement No. 2 explains that
nonfinancial measures (i.e. measures other than
dollars) are required to assess effectiveness
ACFN 2121 1 - 53
Users of Financial Reports
 FASAB has identified four major groups of users
of federal financial reports: citizens, Congress,
executives, and program managers.
 Primary groups of users of external financial
reports of SLG
1. The citizenry: those to whom the government is
primarily accountable-including citizens
(taxpayers, voters, service recipients), the media,
advocate groups, and public finance researchers
ACFN 2121 1 - 54
2. Legislative and oversight bodies: those who directly represent
the citizens-including members of state legislatures, county
commissions, city councils, boards of trustees, school boards,
executive branch officials with oversight responsibility over
other levels of government
3. Investors and creditors: those who lend and participate in the
lending process-including individual and institutional
investors and creditors, municipal security underwriters,
bond rating agencies, bond insurers, and financial institutions
4. Government administrators: internal executive branch
managers who do not have ready access to the government’s
internal information
ACFN 2121 1 - 55
Objectives Financial Reporting for Not-
for-Profit Organizations
 set by FASB/IASB
 Financial reporting should provide information useful in:
 Making resource allocation decisions
 Assessing services and ability to provide services
 Assessing management stewardship and performance
 Assessing economic resources, obligations, net resources and
changes in them
 Reporting objectives for not-for-profit organizations
emphasize decision usefulness over financial accountability
needs, presumably reflecting the fact that the financial
operations of not-for-profit organizations—as compared to
those of governments— are generally subject to less detailed
legal restrictions
ACFN 2121 1 - 56
CH. 2
Principles of Accounting for State &
Local Governments (SLG)
ACFN 2121 1 - 57
CH. 2
Principles of Accounting for State &
Local Governments (SLG)
ACFN 2121 1 - 58
THE 13 GASB PRINCIPLES
 GAAP and legal compliance (1)

 Fund accounting (2-4)
 Capital assets and long-term liabilities (5-8)
 Measurement focus and basis of accounting (9)
 Budgeting, budgetary control and reporting (10)
 Classification and terminology (11-12)
 Annual financial reports (13)
ACFN 2121 2 - 59
THE GASB PRINCIPLES
Principle 1
Accounting & Reporting Capabilities
 Accounting systems are required to comply with
– GAAP and
– Legal / contractual requirements
 Most common difference - budgetary basis differs from GAAP
 Maintain accounts on a legal / budgetary basis (e.g. legal
provisions specifying use of cash basis) and convert to GAAP at
year end
 A governmental accounting system must make it possible both:
(a) to present fairly and with full disclosure the funds and
activities of the government in conformity with GAAP and (b) to
determine and demonstrate compliance with finance-related legal
and contractual provisions.
ACFN 2121 2 - 60
THE GASB PRINCIPLES
Principle 2
Fund Accounting Systems
 Principle: Organized and operated on a “fund” basis
 The two most important legal and administrative controls
affecting governmental and nonprofit accounting and
financial reporting
1. Funds and fund accounting (use of funds)
2. Budgets and appropriations (budgetary controls)
 key differences of government and nonprofit from business
accounting & financial reporting
1. Use of fund accounting [Use of special accounting for
restricted activities]
2. Presentation of budgetary comparisons in connection
with regular financial reporting
ACFN 2121 2 - 61
THE GASB PRINCIPLES Principle 2
 Purpose of Fund
1. To control and segregate resources that are
– externally restricted and internally (managerially)
designated
2. To ensure and demonstrate compliance with legal and
administrative requirements (facilitates compliance with
laws/Helps ensure that dedicated funds are used as
intended)
 Funds divide a government into units to control resources or
attain objectives, not functional department or operations
 Meaning of Fund
A fund is defined as:
– Is an accounting entity (separate)
o Self-balancing set of accounts, reflecting (with its own) the
assets, liabilities, net assets, and changes in those balances
o Represents a part of the activities of some organization
ACFN 2121
1 - 62
THE GASB PRINCIPLES
Principle 2
o Created & maintained for a specific purpose
o Designed primarily to meet internal reporting & control
objectives
o Segregates resources for specific activities or restrictions
[accounting for certain activities separately from all
other operations] in such a way as to ensure compliance
with appropriate regulations or restrictions
o Segregates financial resources, liabilities payable from
fund resources, and fund equities to attain objectives
specified by regulations, restrictions, or limitations
− fiscal entity (separate)
o Assets set aside for specific purposes
o a separate entity with its own resources, its own
liabilities, and its own operating activity for the fiscal
period.
ACFN 2121 1 - 63
THE GASB PRINCIPLES
Principle 2
 segregate those financial resources that have constraints
or limitations on their use so that the government may
demonstrate compliance with those limitations
 Not sufficient in itself to meet the objectives of financial
reporting by Nonbusiness organizations
 Provides a basis for determining the fiscal responsibility
& status of the organization & the compliance of
administrators within the approved or stipulated receipt
& utilization of financial resources
 Important means of meeting several of the accounting,
control, & reporting objectives of most nonbusiness
organizations
ACFN 2121 1 - 64
THE GASB PRINCIPLES
Principle 2 (Continued)
 Commercial Vs. Fund Accounting
For Commercial Accounting
 “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 [e.g. bond sinking fund]
 The company is a single fiscal and accounting entity
 A = L + E (“E” usually called “Owners’ Equity”)
For State and Local Government Accounting
 Multiple “entities”
 “Fund” used as a formal term (single meaning)
“A fiscal and an accounting entity with a self-balancing set of
accounts.” ((like a branch or a division of a commercial entity)
ACFN 2121 2 - 65
THE GASB PRINCIPLES
 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)
 Fund accounting uses the equation:
Assets = Liabilities + Fund balance (net assets)
 Rationale for use of Fund (Why?)

 Because of legal requirements pertaining to financial
accounting areas & the diversity of governmental activities,
the use of single set of accounts to record & summarize all the
financial transactions of a governmental unit is neither legally
possible nor practical
ACFN 2121 2 - 66
THE GASB PRINCIPLES
 Diversity & legal considerations requires multiple

accounting “entities”
 Each is similar to a business accounting entity
 Categories of SLG accounting entities
– Governmental funds (*)
– Governmental non-fund accounts (*)
 General Fixed Assets Account Group (GFAAG)
 General Long-Term Debt Account Group (GLTDAG)
– Proprietary funds
– Fiduciary funds
(*) General government accounting entities
ACFN 2121 2 - 67
THE GASB PRINCIPLES
 Governmental (Expendable) funds
– general citizen services/governmental activities
– Focus on sources, uses, and balances of current financial
resources and related liabilities
− Expendable :Resources, where focus is on the receipt and
expenditure of resources. Financial resources of an expendable
fund entity are not intended to be maintained intact . Ordinarily
it is intended that they will be expended annually /over some
other specified time period in order to carry out the objectives
for which the fund was created –all resources in the fund may be
spent for the specified purpose
− Financial resources dedicated to a specified use.
– An accounting segregation (not physical) of working capital
available for general government purposes
– Working capital accounting equation: CA-CL=FB
ACFN 2121 2 - 68
THE GASB PRINCIPLES
 Governmental non-fund accounts

– To account for
fixed assets and
unmatured long-term debt
related to general government activities
– Not "funds” (no working capital)
– Accounting equation
(Fixed assets – unmatured long-term liabilities =
net invested in general capital assets)
ACFN 2121 2 - 69
THE GASB PRINCIPLES
 Proprietary funds (Nonexpendable)

– business-like activities such as water utility
– Nonexpendable -Resources, which are
maintained largely on a self-sustaining basis
– Focus on income determination, cost recovery,
financial position and cash flows
– Similar to private sector business-type entities
– Accounting equation: CA+NCA=CL+NCL+NA
[Equity]
ACFN 2121 2 - 70
THE GASB PRINCIPLES
 Fiduciary funds (Expendable/Nonexpendable)
– holding money in trust for others
– Account for resources (assets) held & administered by a
reporting government in fiduciary (trustee or agency )
capacity for beneficiaries outside the government or for
others such as:
Individuals
Private organizations
Other governments
outside of the reporting governmental unit
– Not used to report resources or activities of a
government’s own programs
ACFN 2121 2 - 71
16-72
THE GASB PRINCIPLES

 Fund Accounting Classification
 All funds fall into one of three broad classifications
Governmental
Governmental Proprietary
Proprietary Fiduciary
Fiduciary
Funds .
Funds Funds
Funds Funds Funds
Accounting
Accountingfor for Accounting
Accountingfor for Accounting
Accountingforfor
activities
activitiesrelated
related business-type
business-type financial
financial
to
toserving
servingthe
the activities.
activities. resources
resourcesheld
heldfor
for
public.
public. others
othersasastrustee.
trustee.
ACFN 2121 1 - 72
THE GASB PRINCIPLES
Principle 3
TYPES OF FUNDS (11 within 3 categories)
1. Governmental 2. Proprietary funds

funds (Nonexpendable)
 6 – Enterprise funds
(Expendable)
 7 – Internal service funds
 1 - General fund (only one)
 2 - Special revenue funds 3. Fiduciary funds
 3 - Capital projects funds  8 - Pension trust funds
 4 - Debt service funds  9 - Investment trust funds
 5 - Permanent funds  10- Private purpose trust funds
 11- Agency funds
ACFN 2121 2 - 73
THE GASB PRINCIPLES
TYPES OF FUNDS - Governmental
Fund Purpose
 General fund (GF)  Any SLG unrestricted use
 Special revenue funds (SRF)  Restricted operating purposes
 Capital projects funds (CPF)  Acquire major general
government capital facilities
 Debt service funds (DSF)  Payment of general long-term
debt principal and interest
 Permanent funds (PF)  According to legal agreement;
(N.B. nonexpendable) principal not expendable, only
income is expendable
(endowments)
ACFN 2121 2 - 74
THE GASB PRINCIPLES
TYPES OF FUNDS - Governmental

Typical Types of Expenditures
Capital Debt
Fund Operating Outlay Service
 General fund (GF) XXX X X
XXX X X
 Special revenue funds (SRF)
- XXX X
 Capital projects funds (CPF)
- - XXX
 Debt service funds (DSF)
X X X
 Permanent funds (PF)
ACFN 2121 2 - 75
THE GASB PRINCIPLES
TYPES OF FUNDS - Proprietary
Fund Purpose
 May be used for any activity where a fee is
 Enterprise
charged to external users
funds (EF)
 Must be used if any one of the following
criteria is met:
–Debt secured by revenues
–Laws require cost recovery with
fees vs. taxes
 Internal service
–Pricing policies designed to
funds (ISF) recover costs, including capital
 For services to other internal users -Common
activities :central garage, central duplicating
ACFN 2121 2 - 76&
THE GASB PRINCIPLES
TYPES OF FUNDS - Fiduciary
Purpose
Fund  To account for resources held for
 Pension trust funds pensions & other benefits
 To account for the external portion of
 Investment trust funds investment pools (similar to money
market fund)
 Private-purpose trust  To account for all other trust
funds beneficiaries outside the entity (fund
 Agency funds used to report escheat property)
 To report resources held as a custodial
agent (taxes withheld /collected/pass
through)
ACFN 2121 2 - 77
Fund Structure of a School District
Fund Resources Derived from Resources Used for
General School tax; local, state, and federal aid; Administration, instruction,
fees transportation, maintenance,
debt service
Special Revenue Special state or federal aid (for example, Instruction and other costs
Head Start Program) related to specified program
Capital Projects Bond issues, state or federal aid, or Construction, acquisition, or
transfers from general fund renovation of school buildings;
major equipment purchases (for
example, fleet of buses)
Debt Service Transfers from general or capital projects Payment of principal and interest
funds
Enterprise Charges to customers of cafeteria, Operating expenses of cafeteria,
bookstore, and other enterprises; may be bookstore, or other enterprises
supplemented from other sources (for
example, state aid for school lunch
program)
Internal Service Transfers from other funds for central services Costs of central services
Trust and Collections for others (for example, taxes Transmittal of amounts collected;
Agency withheld); gifts for specified purposes (for payment of scholarships
example, scholarship funds)
ACFN 2121 1 - 78
THE GASB PRINCIPLES
 Public-purpose trusts for which both principal and earnings thereon
can be expended for a specified purpose are accounted for in a
special revenue fund
 Although the sources of revenue for SRF in general are similar to
those for the GF, a typical SRF will have only a single revenue source
such as a single tax, or specified portion thereof, or a license fee,
the proceeds of which must be used for a specific purpose, function,
or activity.
 the accounting for special revenue funds is generally the same as
for the general fund
 Account for activities in which goods or services are provided to
other departments of the same government for a charge ( central
stores, central computing, motor pools, and printing, etc)
 Usually reported as governmental activities in the government-
wide statements because they primarily serve departments
financed by governmental funds
ACFN 2121 1 - 79
THE GASB PRINCIPLES
Principle 4
Number of Funds
 Use funds necessary to ensure:

– Compliance with legal/contractual provisions
– Sound financial administration
 Too many funds can prove
detrimental/harmful
ACFN 2121 2 - 80
THE GASB PRINCIPLES
Number of Funds
 Provisions for minimizing number of funds
– Use GF to account for resources restricted to
purposes normally financed through GF
– SRFs not required unless legally mandated
– DSFs not required unless
Legally mandated, or
Accumulating resources for future debt payments
– DSF not necessary for leases
– DSF typically required for bond issue debt service
ACFN 2121 2 - 81
Number of Funds (principle 4)
 One and only one general fund always exists
 In the case of each of the other fund types, none, one, or
several exist
 May not need one of every fund type
o No outstanding long-term debt? Don’t need a debt service
fund.
 More than one of some types of funds
o Four building projects? Might use four capital projects
funds; or could possibly combine some.
 Exact number depends on judgment.
o Use the minimum number that will allow compliance with
legal and other restrictions
ACFN 2121 2 - 82
THE GASB PRINCIPLES
Principle 5
Reporting Capital Assets

 Distinguish between
– Capital assets of proprietary funds – reported in
Government-wide financial statements
Fund financial statements
– Capital assets of fiduciary funds – reported in
Only in fund financial statements
– General government capital assets
Only in government-wide financial statements with
“governmental activities”
Not financial resources available for expenditure
ACFN 2121 2 - 83
Reporting Capital Assets (principle 5)
General capital assets should be distinguished from
capital assets of proprietary and fiduciary funds
 General capital assets are reported only in the
Governmental Activities column of the government-
wide financial statements
 Proprietary capital assets are reported in both the
government-wide and fund financial statements
 Fiduciary capital assets are reported only in the
statement of fiduciary net position, a fund financial
statement
ACFN 2121 1 - 84
THE GASB PRINCIPLES
Principle 6
Valuation of Capital Assets

 Record at actual historical cost to include:
– Capitalized interest
– Ancillary (incidental) charges
– Follow the cost principle (subject to materiality
threshold)
 Use of estimated historical cost allowed when first
establishing records for assets acquired prior to
reporting under GAAP
 Record donated assets at fair value when acquired
ACFN 2121 2 - 85
THE GASB PRINCIPLES
Principle 7
Depreciation of Capital Assets
 Depreciate over useful lives unless:

– Inexhaustible (land and land improvements)
– Infrastructure using “modified approach” (e.g., roads,
streets, bridges)
– Certain noncapitalized works of art, historical treasures, or
similar assets
 Report depreciation expense in –
– Government-wide statement of activities
– Proprietary fund operating statement
– Statement of changes in fiduciary assets
 Report depreciation expense for general capital assets only in
the government-wide financial statements
ACFN 2121 2 - 86
THE GASB PRINCIPLES
Depreciation of Capital Assets

 Governmental funds
– No depreciation recorded in governmental funds
(Not a source or use of financial resources)
– May calculate for cost purposes
 Proprietary funds
– Should record depreciation in each fund as part of
“income” determination
ACFN 2121 2 - 87
THE GASB PRINCIPLES
Principle 8
Accounting for Long-term Liabilities

 Distinguish between –
– Fund long-term liabilities expected to be repaid from:
Proprietary funds – reported in fund statements and in
government-wide statements
Fiduciary funds – reported in fund statements
– General long-term liabilities
All unmatured long-term debt principal not accounted for
in proprietary or fiduciary funds – reported in government-
wide statements
Matured liabilities reported as governmental fund
liabilities
ACFN 2121 2 - 88
Reporting Long-term Liabilities (principle 8)
 General long-term liabilities should be distinguished
from fund long-term liabilities
 General long-term liabilities should be reported in
the government-wide statements but not in the
fund financial statements
 Long-term liabilities to be repaid from proprietary
funds should be reported in the proprietary fund
statements and at the government-wide level
 Long-term liabilities to be repaid from fiduciary
funds should be reported only in the fiduciary fund
statements
ACFN 2121 1 - 89
THE GASB PRINCIPLES
Principle 9
Measurement Focus & Basis of Accounting (MFBA)

 Government-wide financial statements
– Economic resources measurement focus
– Accrual basis of accounting
 Fund financial statements
– Governmental funds
Current financial resources – modified accrual
– Proprietary & fiduciary funds
Economic resources – accrual
ACFN 2121 2 - 90
THE GASB PRINCIPLES
Principle 9
GASB Statement No. 34 (GASB 34) was a major
change in governmental accounting and reporting.
Perhaps the most significant change was that
governmental funds essentially report financial
statements on two bases of accounting with different
goals for each reporting basis.
The modified accrual basis focusing on current
resources helps users assess budgetary compliance
and fiscal accountability.
The accrual basis focusing on all economic resources
helps users assess long-term financial and operational
accountability.
ACFN 2121 1 - 91
MEASUREMENT FOCUS (Principle 9)
Measurement focus-refers to what items are being measured &
reported in the financial statements.
Economic resources measurement focus
- Measures inflows and outflows of economic resources (both
current and noncurrent) and is the measurement focus used by
businesses
- Focuses on operational accountability; whether management
efficiently uses resources in providing services
Current financial resources measurement focus
− Other names: “financial flow” focus or spending 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-Records inflows and outflows of liquid assets)
− Focuses on fiscal accountability; whether managers have met
budgetary and other legal financial requirements
ACFN 2121 1 - 92
 In essence, the accrual basis refers to recognition of
revenues and expenses as in business accounting. It
follows an “economic resources” measurement
focus, whereby all economic resources, whether
current or noncurrent, are reported.
 The modified accrual basis refers to recognition of
revenues when resources become available to meet
current obligations and recognition of expenditures
when incurred. The modified accrual basis of
accounting is consistent with a “flow of current
financial resources” measurement focus, whereby
funds report on current resources and current
obligations.
ACFN 2121 1 - 93
BASIS OF ACCOUNTING (Principle 9)
 Basis of accounting-determines when transactions and events are
recognized in the accounting records.
Full Accrual: Revenues recognized when earned; expenses
recognized when incurred (when the related goods or services are
used up). This is the basis of accounting used by businesses.
Modified Accrual: revenues are recognized when measurable and
available; expenditures recorded when liability is incurred.
o For example, property taxes revenues are recorded as revenues if
levied this year and collected this year, or soon enough after the year
end to still pay current year bills. Outflows are called “expenditures”.
Expenditures are recorded when the fund liability is incurred or cash
is paid out not when resources are used /consumed(expenses).
ACFN 2121 2 - 94
Criteria : Measurable and Available
 Measurable : Government is able to determine or reasonably
estimate the amount.
 Available : Collectible within the current period or soon enough
thereafter to be used to pay liabilities of the current period.
 When are governmental funds’ revenues available?
– Collected in the current period or
– Collection expected soon enough thereafter to pay period's
current liabilities and
– Legally available for expenditure, for example
(a) not specifically levied or granted for later period or
(b) earned and measurable in current period
 Expense/Expenditure Recognition
⃰ Expenditure basis: outflows are recognized when liabilities are
incurred (i.e. accrual basis) or cash is paid out (i.e. cash basis- no
DEFERRAL!).
ACFN 2121 1 - 95
Expense basis: outflows are recognized when acquired goods and
services are used or consumed in operations. Prior to recognition
as an expense, the outflows are recognized as assets. The expense
basis arises from the concept of matching.
– reflect or measure of costs expired or consumed during a period
– Similar to business accounting
– Includes depreciation and other allocations
An expenditure is “a disbursement, a liability incurred, or the
transfer of property for the purpose of obtaining goods or
services.”
– Measures financial resources expended
– measure of fund liabilities liquidated with current resources
– Excludes depreciation and other allocations
– Includes capital outlay & debt principal retirement
– unique to government accounting, typically reflect the use of
governmental fund working capital.
ACFN 2121 2 - 96
 Thus, expenditures normally reflect the cost of goods or services
acquired during a period, whether or not consumed, and the
maturing of general long-term debt principal.
 Many operating expenses and expenditures occur simultaneously.
For instance, the use of electricity, salaries and wages results in
both an expense and an expenditure in the same amount at the
same point in time.
 For other items, the timing of expense and expenditure recognition
differs dramatically. The purchase of a fixed asset that is to be used
by a governmental fund over a 10-year period results in
– a capital outlay expenditure in the year of acquisition and no
additional expenditures over the next 9 years.
– The same purchase within a proprietary fund results in a
depreciation expense each year over the 10-year period of its
use, however.
ACFN 2121 1 - 97
 Modified accrual basis of accounting
– Expenditures—decreases in financial resources-
typically reflect the use of government fund
working capital to pay liabilities for current
expenditures
– 3 types of expenditures
Operating—record when liability incurred
Capital outlay—record when financial assets are
used to acquire capital assets
Debt service—record when long-term debt
principal or interest is due for payment
ACFN 2121 1 - 98
Summary of Measurement Focus & Basis of Accounting
(Principle 9)
Measurement Basis of
Focus Accounting
Government-wide Economic Full

statements resources Accrual
Governmental fund Current financial Modified accrual

statements resources
Proprietary fund Economic Accrual (except

statements resources for statement of
cash flows)
Fiduciary fund Economic Full
statements resources Accrual
ACFN 2121 1 - 99
THE GASB PRINCIPLES
Principle 10
Budgeting, Budgetary Control & Reporting
 Governments should adopt an annual budget
 Accounting system should provide budget control
 Financial statements should include budget comparisons for
General Fund and each major Special Revenue Fund having a
legally adopted budget that presents a comparison of:
– Original budget
– Final budget
– Actual financial flows and balances on the budgetary basis
 Legally adopted budget often non-GAAP basis
– Cash basis or
– Encumbrance basis
 Financial reports should identify budgetary basis and
– Distinguish budgetary basis from the GAAP basis
– Demonstrate budgetary accounting controls
– Present financial statements on both bases and reconcile differences
ACFN 2121 2 - 100

THE GASB PRINCIPLES
Principle 11
Transfer, Revenue, Expenditure, & Expense A/c Classification
 Separate interfund transfers and GLTD proceeds from fund revenues
and expenditures / expenses
 Classify revenues by fund and source
 Classify expenditures / expenses by fund (*), function (*),
organization unit, and object
(*)=minimum classification
 Classify government-wide statement of activities at a minimum:
– By function for governmental activities
– By segment for business-type activities
ACFN 2121 2 - 101

Classification of Revenues/Inflows
(Principle 11)
 By Fund
 By Source
– Taxes (ad-valorem and self-assessing)
– Special Assessments
– Licenses and Permits
– Intergovernmental Revenues
– Charges for Services
– Fines and Forfeits
– Miscellaneous Revenues
ACFN 2121 1 - 102

Classification of Expenditures/Outflows
(Principle 11)
* GASB suggestions classifying expenditures by any of the
following (Purpose Served by Each Classification):
• Fund; Function or program; Organization unit; Activity;
Character (current, capital, debt service); Object
• Fund—Identifies which fiscal and accounting entity was
affected
• Function or program—Assists in budgeting resources for
carrying out major areas of service activities or goals
• Organization unit —Assists in enhancing managerial control
over departments and divisions, and responsibility accounting
• Activity—Assists in assessing performance on specific lines of
work and determining cost of activities
• Character—Assists in evaluating which period is benefited by
an expenditure: past, current, or future
• Object—Assists in determining how much was expended for
specific things, such as personnel and equipment
ACFN 2121 1 - 103
Classification of Expenditures/Outflows
(Principle 11)
− ‘Character’ relates to ‘time’ or interperiod equity issues:
current outlays, past spending (pay debts of previous generation
or debt service), or buildings that will benefit the future (capital
outlay)
− Character groupings are always: CURRENT, CAPITAL OUTLAY, and
DEBT SERVICE
− Current are typically classified by function: General government,
public safety, streets and highways
– Public safety could be subdivided by department: Police and fire
− Police could be subdivided further by activity: Traffic and drug
enforcement
– Activities in the traffic area could be divided into objects of
expenditure: Policeman’s salary, gas for automobiles
ACFN 2121 1 - 104

Classification of Expenditures/Outflows (Principle 11)
 Example
 Fund
 Ex. general fund, special revenue fund, etc.
 Function or Program
 Def. Group of activities carried out with the same objective
 Ex. general government, public safety, sanitation, etc.
 Organization Unit
 Ex. police department, fire department, etc.
 Activity
 Def. Line of work contributing to a function or program
 Ex. highway patrol, burglary investigations, etc.
 Character
 Def. The fiscal period presumed to benefit
 Ex. Current, Capital, Debt Service
 Object
 Def. The types of items purchased or services obtained
 Ex. Salaries, fringe benefits, travel, etc.
ACFN 2121 1 - 105

Classifying Revenues and Expenditures
Revenue Classifications
BY FUND
EXAMPLES:
General Fund BY SOURCE
Special Rev. Fund
Capital Projects EXAMPLES:
Debt Service Taxes BY SUBCATEGORY
Licenses
Intergov. EXAMPLES:
transfers Property Taxes
Sales Taxes
ACFN 2121 3-106
Classifying Revenues and Expenditures
Expenditure Classifications
BY FUND
EXAMPLES: BY FUNCTION/
General Fund PROGRAM
Special Rev. Fund
Capital Projects EXAMPLES: BY ORG. UNIT
Debt Service Public Safety
Parks and Rec. EXAMPLES: BY ACTIVITY
Health Police BY OBJECT
Fire EXAMPLES:
Investigation EXAMPLES:
Patrol Personnel
Vehicles
ACFN 2121 3-107
Fund Function Department Subunit Activity Object class
General Administration Criminal

Government investigation
Highways & Traffic Control Vice control Personnel

Streets services
General Public Safety Fire Crime Control & Patrol Supplies

Fund Investigation
Police
Health & Training Records & Other services

Sanitation identification & charges
Economic Support Youth Land

Development services Investigation &
Control
Parks & Custody of Buildings

Recreation property
Crime Equipment
laboratory
ACFN 2121 1 - 108
THE GASB PRINCIPLES
Category of Interfund Transactions/Activities
REPORTING TREATMENT
CATEGORY OF INTERFUND
TRANSACTION TYPES
PAYEE (RECIPIENT) FUND PAYER FUND
Loans Liability Receivable
Interfund Services Revenue Expenditure / Expense
Reimbursements Reduce Expenditure / Expenditure / Expense

Expense
Transfers Transfers In (“Other Transfers Out (“Other

Financing Sources”) Financing Uses”)
ACFN 2121 2 - 109
THE GASB PRINCIPLES
* Interfund Activity/Transactions
A. Nonreciprocal transactions
1. Interfund reimbursements
2. Interfund transfers
B. Reciprocal transactions
3. Interfund services provided/Received
4. Interfund loans
ACFN 2121 1 - 110

THE GASB PRINCIPLES
1. Interfund Reimbursements
– Expenditures/expenses initially recorded in ‘wrong’ fund
− Underlying event:
• Transaction initially recorded in one fund
• Should have been accounted for and reported in a different
fund
– Reimbursements not displayed/ separately reported in
financial statements
– Remove expenditure/expense from initial fund
– Record expenditure / expense in reimbursing fund
– No revenues reported, thus no double counting
− May also be used to distribute costs from one to others
ACFN 2121 1 - 111

THE GASB PRINCIPLES
2. Interfund Transfers
 Nonreciprocal flow of /moving assets from one fund to another
fund(s) without an exchange or expectation of subsequent
repayment (i.e., cash or goods for operating or capital
purposes)
A. Residual Equity Transfers: nonrecurring/nonroutine transfers
of equity between funds in connection with the formation,
expansion, contraction, or discontinuance of a fund (usually
involving the GF & one of the proprietary funds). Because such
transfers are of nonoperating nature ,they are reported as
direct additions to/subtractions from the fund equity accounts.
B. Operating Transfers: made in connection with the normal
operations of the recipient fund (e.g. subsidizing operations of
a fund).
ACFN 2121 1 - 112
ACFN 2121 1 - 113
THE GASB PRINCIPLES
B. May also result from one fund providing services to another
without charging for those services (rare)
 Common examples
- GF resources transferred to DSF for principal and interest payments
- GF resources transferred to CPF to pay for government’s portion of
capital project
- SRF resources transferred to GF to finance expenditures for which SRF
resources are restricted
- GF resources transferred to EF to provide initial permanent financing
- Residual assets of CPF or DSF transferred upon completion of purpose
of fund
- EF resources transferred to other funds to subsidize operations
 Governmental fund reporting: Other financing sources (uses)
 Proprietary fund reporting: After nonoperating revenues and
expenses
ACFN 2121 1 - 114

THE GASB PRINCIPLES
3. Interfund services provided / used
– Quasi-external transactions
– Sales and purchases between funds
– Price should approximate external exchange value
– Similar to outside purchase (i.e., utilities)
– Recognize Revenue in the selling/Seller fund; Recognize
expenditure or expense in the purchasing/buyer fund
– Record unpaid amounts as receivable or payable
4. Interfund Loans
• One fund loans cash to another (Loan between funds)
• Transaction does not change Fund Balance (Expected to be
repaid)
• Reporting: Impacts only the balance sheet
–Receivable in the lending/lender fund
–Payable in the borrowing /receiving fund
ACFN 2121 2 - 115
THE GASB PRINCIPLES
–May charge interest (other than loans between governmental
funds)
• Interfund Loan Terminology
 Lender Fund
– Short-term loans – Due from XXX fund (interfund receivable)
– Long-term loans – Advance to XXX fund
 Receiving Fund
– Short-term loans – Due to XXX fund (interfund payable)
– Long-term loans– Advance from XXX fund
* N.B. General long-term debt (GLTD) proceeds
– Not recorded as fund liabilities
– Recorded as “Bond Issue Proceeds” in the “other financing
sources” (not revenue) section of governmental fund
operating statement
– Record liability as a “general long-term liability”
(Not applicable to proprietary and fiduciary long-term debt
ACFN 2121 1 - 116
Governmental Funds:
Operating Statement Format
Revenues
- Expenditures
= Excess of revenues over expenditures
+/- Other financing sources and uses
+/- Special and extraordinary items
= Net change in fund balance
+ Fund balance at beginning of period Reconciliatio
= Fund balance at end of period
ACFN 2121 2-117
Proprietary Funds:
Operating Statement Format
Operating revenues
- Operating expenses
= Operating income (loss)
+/- Non-operating revenues and expenses
= Income before other revenues, expenses, gains,
losses, and transfers
+ Capital contributions
+/- Special and extraordinary items
+/- Transfers
= Increase (decrease) in net position
+ Net position at beginning of period
Reconciliation
= Net position at end of period
ACFN 2121 2-118

THE GASB PRINCIPLES
Governmental Fund Proprietary Fund
Statement of Revenues, Expenditures, and Statement of Revenues, Expenses, and
Changes in Fund Balance Changes in Net Assets (Fund Equity)
For Year Ended September 30, 200X For Year Ended September 30, 200X
REVENUES: OPERATING REVENUES:
Taxes X Sales of goods X
Licenses and permits X Billings for services X
Intergovernmental X Other X
Charges for services X Miscellaneous X
Miscellaneous X Total Operating Revenues XX
Total Revenues XX
EXPENDITURES: OPERATING EXPENSES:

Operating X Operations X
Capital outlay X Depreciation X
Debt service: Other X
Long-term debt principal X Total Operating Expenses XX
Interest X
Total Expenditures XX
Excess (Deficiency) of Revenues XX Operating Income (Loss) XX

Over Expenditures
(Continued)
ACFN 2121 2 - 119
THE GASB PRINCIPLES
Governmental Fund Proprietary Fund
Statement of Revenues, Expenditures, and Statement of Revenues, Expenses, and Changes
Changes in Fund Balance in Net Assets (Fund Equity)
For Year Ended September 30, 200X For Year Ended September 30, 200X
Excess (Deficiency) of Revenues Over XX XX
Expenditures Operating Income (Loss)
OTHER FINANCING SOURCES (USES): NONOPERATING REVENUES (EXPENSES):

Transfer from (to) other funds X Interest revenue X
Long-term debt issue proceeds X Interest expense X
X X
SPECIAL AND EXTRAORDINARY ITEMS: SPECIAL AND EXTRAORDINARY ITEMS:
Special item X Special item X
Extraordinary item X Extraordinary item X
TRANSFER FROM (TO) OTHER FUNDS X
CAPITAL CONTRIBUTIONS X
Net Changes in Fund Balance XX Increase (Decrease) in Net Assets XX
Fund Balance - Beginning of Period XX Net Assets - Beginning of Period XX
Fund Balance - End of Period XX Net Assets - End of Period XX
ACFN 2121 2 - 120

THE GASB PRINCIPLES
Principle 12
Common Terminology & Classification

 Consistency should be used throughout
– Budgets
– Accounts
– Financial reports
e.g. basis of classification of revenues and
expenditures
 A prerequisite to valid comparisons
ACFN 2121 2 - 121

THE GASB PRINCIPLES
Principle 13
Annual Financial Reports
 A governmental unit issues an annual report called a
Comprehensive Annual Financial Report (CAFR)
covering all activities of the primary government (PG)
 Is governed by GASB Statement No. 34 which requires
dual reporting
1.Government-wide financial statements (using the
accrual basis of accounting)
2.Fund financial statements (using the modified
accrual basis of accounting)
N.B. GASB Statement No. 34 is the CURRENT Reporting Model that SLGs
have to follow
ACFN 2121 2 - 122

Major Elements of Principle #13
 GASB Principle 13 addresses four important
elements of annual external financial reports
 Interim financial statements and reports
 Comprehensive Annual Financial Report (CAFR)
 Minimum reporting requirements
– MD&A
– Basic Financial Statements (BFS)
– Required Supplementary Information
 Financial reporting entity
ACFN 2121 13 - 123

Interim Financial Statements
 Encouraged, but not required
 Prepared to facilitate management’s control of
the government, legislative oversight, and
(occasionally) external financial reporting
ACFN 2121 13 - 124

Comprehensive Annual Financial Report
(CAFR)
 The primary report [CAFR] should be prepared
and published
 Covers all activities of the primary government
(including blended component units) and
discretely presented component units
 Includes three main sections :
1. Introductory Section
2. Financial Section
3. Statistical Section
 Recommended, but not required under GAAP
125
ACFN 2121
The Financial Reporting Pyramid
MD&A
Government-
Wide
Financial Statements
Major Fund & CU

Financial Statements
Notes
Other RSI
Nonmajor Fund Combining Financial
Statements
Individual Fund Financial Statements

& Schedules
Transaction Data
(the accounting system)
CAFR--Comprehensive Annual Financial Report

BFS--Basic Financial Statements
MEFR--Minimum External Financial Reporting
ACFN 2121 1 - 126

Annual Financial Reports
Minimum GAAP Requirements
1. Management’s Discussion and Analysis (MD&A)
—part of required supplementary information
2. Basic financial statements to include:
a) Government-wide financial statements
b) Fund financial statements
c) Notes to the financial statements
3. Other required supplementary information
ACFN 2121 1 - 127

Summary: Required Content of Governmental Financial Reports
ACFN 2121 1 - 128

Financial Reporting Entity
Consists of
1. Primary Government
2. Organizations for which the primary
government is financially responsible
3. Other organizations whose exclusion from the
report would cause it to be incomplete
ACFN 2121 13 - 129

Financial Reporting Entity-Government
(Principle 13 )
 Financial Reporting Entity consists of the Primary government
(PG-General or special purpose)- the Nucleus, & Component
Units (CU):
* Organizations for which the PG is financially accountable
* Other organizations whose omission would cause financial
statements to be misleading
 In business, parent companies generally include subsidiaries as
part of consolidated statements in order to see the whole picture
 Likewise, if a primary government is financially accountable for
another entity the “component unit” must be included as part
of the primary government’s report
 This requirement prevents governments from creating separate
units that hide part of the government debt or resources
ACFN 2121 1 - 130

Component Units (CU)
 Entities that are economically intertwined with the
government albeit legally separate
 Criteria to determine whether a primary government (PG)
is financially accountable for another government.
(1) PG appoints a voting majority of unit’s governing body
(2) A majority of unit’s governing body is composed of PG’s officials
(3) The PG is able to “impose its will” upon the unit
(4) Unit can cause the PG financial benefits or burdens
 If it meets these criterion, then unit is a CU of PG.
 Two Presentations of CU
(1) Blended – CU consolidated with PG in government-wide
statements
Presented this way if CU “provides services exclusively or almost exclusively
for the city”
(2) Discrete – CU shown in a separate column in government-wide
statements
ACFN 2121 1 - 131
(Principle 13 )
 Conditions for Assessing Accountability
1. Financial Benefit or Burden (Fiscal Dependence): specifies
inclusion when a primary government appoints a voting majority
of the component unit's governing body and either bears a
financial burden or receives a financial benefit from the
component unit. The primary government may have guaranteed
the component unit’s debt or agreed to subsidize its operations.
Example: “School Board…operates the public education system in
the City for grades kindergarten through twelve. The City appoints
a majority of the board members, approves the budgetary request
of the School Board … and provides a significant amount of
funding.”
ACFN 2121 1 - 132

(Principle 13 )
2. Imposition of Will :exists when the primary government
appoints a voting majority of the component unit's governing
body and is able to impose its will on the organization. The
primary government may have the power to hire and fire the
component unit’s management, for example.
Example:
“ The Board of Supervisors appoints all members of the Children
and Families First Commission. The Board can remove
appointed members at will.”
ACFN 2121 1 - 133

Reporting Entity’s Financial Statements
 Government-wide Financial Statements
– Provide information about the reporting government
as a whole
– Distinguish between primary government (composed
of Governmental Activities and Business-Type
Activities) and discretely presented component units
− Report on activities as a whole
− Assess operational accountability (use of resources
efficiently & effectively in meeting operating
objectives)
− Focus on all economic resources
− Utilize accrual accounting
− Comparable to ‘corporate’ accounting
ACFN 2121 13 - 134

Overview of Basic Financial Statements
(Principle 13 )
− Primary government financial information reported in
two columns—Governmental Activities and Business-
type Activities
− Internal service fund information is usually reported
in the Governmental Activities column. Why?
− Fiduciary activities are not reported in the
government-wide financial statements. Why?
− Why government-wide financial statements are
prepared?
ACFN 2121 1 - 135

Why Government-wide Statements
(Principle 13 )
 While the fund-basis statements present an in-depth record of
individual activities of the government, it is difficult for the
financial statement user to pull this disaggregated information
together and form an overall view of the government’s
finances. For that reason, governments are required to
present government-wide financial statements. The
government-wide statements combine the governmental and
business-type activities of the government for the purpose of
presenting an overall picture of the financial position and
results of operations of the government. An important feature
of the government-wide financial statements is that they are
prepared using a common measurement focus and basis of
accounting.
ACFN 2121 1 - 136

Annual Financial Reports (Principle 13 )
6-137
 Fund Financial Statements

− Present primary government’s major funds individually and
nonmajor fund in aggregate
− Funds and component units that are fiduciary in nature
reported only at this level
− Focus on specific activities
− Primary measurement focus is on flow and amount
of current resources
− Utilize modified accrual accounting
− Assess fiscal accountability (whether the
government has raised & spent resources in
accordance with budget plans & in compliance with
laws & regulations)
ACFN 2121 1 - 137
Fiduciary
Funds are not
included in
government-
wide
ACFN 2121 1 - 138

ACFN 2121 1 - 139
CAFR (Principle 13 )
1.Introductory Section
 Unaudited
 Includes
– Title page
– Table of contents
– Letter of transmittal
– Miscellaneous items such as organizational chart or
names of chief government officers
2.Financial Section
 Management discussion and analysis (MD&A)
– Paragraph format summary of most important issues
during the year. Reviewed by auditor.
 Auditor’s report (when audited)
ACFN 2121 1 - 140
 Financial Statements and Notes (audited)
 Required Supplementary Information (RSI)
(reviewed by auditor)
 Combining statements — more details of main
statements if needed
 Combining and individual fund statements
(SRF1+SRF2+…+SRFn)
 Schedules
ACFN 2121 1 - 141

3. Statistical Section
 Not audited
 Information is often not financial in nature
 Generally presents 10 years of information
 GASB Statement No. 44 indicates five categories of information:
– Financial Trends
– Revenue Capacity
– Debt Capacity
– Demographic and Economic
– Operating
ACFN 2121 1 - 142

 Notes to the Financial Statements

 Notes are considered an essential part of the
financial statements. Not GAAP without them.
 The first note is called Summary of Significant Accounting
Policies
 Explains which funds use accrual and which use modified
accrual basis
 Gives the choice made whenever more than one approach
is allowed
 Explains what is included in the financial statements
 Others
ACFN 2121 1 - 143

 Required Supplementary Information (RSI)
 Major RSI items:
– Budgetary Comparison Schedule
– Information about infrastructure assets
if modified approach is used
– Information about pension funding
progress
– Schedules for external risk pools
ACFN 2121 1 - 144

 Budgetary Comparison Schedule
 Shows the original budget and the final revised
budget after revisions during the year. Variance
column is useful, but optional.
 The ‘actual’ figures may not be the same as those
shown on the Statement of Revenues and
Expenditures. The Actual column should reflect the
basis of accounting assumed in the budget.
 Need to show a reconciliation when budget basis is
not the same as that on fund statements.
ACFN 2121 1 - 145

Overview of Basic Financial Statements
(Principle 13 )
 Government-wide Statements
– Nonfiduciary activities.
– Statement of Net Assets/Position
 Similar to business balance sheet
 measures assets and liabilities using the economic resource
measurement focus, similar to business balance sheets
– Statement of Activities
 Similar to business income statement
 measures revenues and expenses using the accrual basis,
similar to business income statements
 Fund Financial Statements
– Detailed reports of governmental, proprietary, and fiduciary
activities
ACFN 2121 1 - 146
Overview of Fund Basis Statements
(Principle 13 )
• Governmental Funds have
– Balance Sheet
– Statement of Revenues, Expenditures and Changes in Fund
Balance (operating statement)
– Required supplementary Budgetary Comparison (optional)
• Proprietary Funds have
– Statement of Net Assets (Net Position for June 30, 2013)
– Statement of Revenues, Expenses and Changes in Fund Net
Assets/Position
– Statement of Cash Flows
• Fiduciary Funds have
– Statements of Net Assets (Net Position for June 30, 2013)
– Statement of Changes in Fund Net Assets/Position
– Not included in government wide financial statements
ACFN 2121 1 - 147
Reporting
ReportingModel:
Model:Minimum
MinimumInformation
InformationRequired
Required
Government-wide Fund Financial Statements
Statement of net assets Governmental funds:

Statement of activities Balance sheet
Statement of revenues, expenditures,
and changes in fund balances
Reconciliation to government-wide
statements
Proprietary funds:
Balance sheet or statement of net assets
Statement of revenues, expenses,
and changes in net assets
Statement of cash flows—direct format
Fiduciary funds:
Statement net assets
Statement of changes in net assets
ACFN 2121 1 - 148

Fund Balance Classifications (GASB 54)
 There are five classifications of governmental fund

balances:
1. Nonspendable – amounts not in spendable form,
such as inventories, or endowment principal
2. Restricted – amounts may only be spent for purposes
designated by outside authority
3. Committed – amounts may only be spent for
purposes designated by government authority
4. Assigned – amounts to be used for a specific purpose
as determined by operating units
5. Unassigned – all other spendable fund balances
ACFN 2121 1 - 149
Fund Balance Classifications (GASB 54)
Fund Balance should be identified between Nonspendable
resources and Spendable resources
 Nonspendable resources include amounts that are not in spendable form
or are required to be maintained intact.
– Inventories and prepaids (also includes assets held for sale and long-term
receivables)
– The principal (corpus) of a Permanent Fund
• Spendable resources is the remaining balance and is to be reported in a

hierarchy of classification (4 categories) based on the extent to which the
government is bound by restrictions/constraints on those funds
--Restricted (most constraint)
--Committed
--Assigned
--Unassigned (no constraint)
ACFN 2121 1 - 150

Spendable Resources
Restricted (most constraint) includes 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 (imposed by law) authorizes the government to
assess, levy, charge, or mandate payments of resources and includes a
legally enforceable requirement that the resources be used only for the
specific purpose.
Thus the level of constraint on restricted fund balance is equivalent to the
level of constraint on Net Assets-Restricted in proprietary funds and
the government-wide statement of net assets.
151
ACFN 2121
Spendable Resources (Cont’d)
Committed fund balance—here the constraints are imposed by a formal
action of the government’s highest level of decision-making authority
(for ex. 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.
152
ACFN 2121
Assigned fund balance –Government’s intent to use the funds for a
specific purpose. Here INTENT is the key.
--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 of the government itself.
--Fund Balance in other governmental funds (except General Fund)
that is not restricted or committed is considered as Assigned FB 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.
Thus, constraints imposed on assigned amounts can be more easily
removed or modified than those that are classified as committed.
ACFN 2121 1 - 153

Unassigned fund balance –this is the 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).
ACFN 2121 1 - 154

END!
CH.3
ACFN 2121 1 - 155

Aggregation Issues in Reports (principle 13)
 The financial statements of the reporting entity should
provide an overview of the entity, yet allow users to
distinguish between the primary government and its
component units
 Assume the City Library Authority meets the requirements
for inclusion as a component unit. How should the library
information be shown in the overall CAFR?
– In most cases it will appear as a separate column … the
technical term for this is “discrete presentation”
– In some cases, the library information will be blended,
which means intermingled with the regular governmental
fund columns. This approach is used if the library has very
strict oversight from the city with no genuine separate
financial existence. (Blended Presentation)
ACFN 2121 1 - 156
Special Purpose Governments (principle 13)
 Some governments have only business-type or only
government-type activities. So, the general approach
is modified ….i.e.
 For a government with only business-type or only

government-type activities, the fund and government-
wide statements would be repetitive. Therefore, do not
need both
 While some public colleges will report as government

and business, and others as government only, most
have the characteristics of business only activities
ACFN 2121 1 - 157

Major Fund Reporting (principle 13)
 GASBS 34 requires that financial statements prepared for
governmental funds and enterprise funds include a separate
column for each major fund. An additional column is
provided in each statement for the total amounts for all
nonmajor funds of that type—governmental or enterprise,
as applicable.
 Determination of Major Funds
 By its nature the General Fund of a government is always
a major fund. In addition, any fund that a government
considers of significant importance to financial statement
users can be reported as major. Otherwise, GASBS 34
requires that any fund that meets the following size
criteria be designated as major:
ACFN 2121 1 - 158

a. Total assets, liabilities, revenues, or expenditures/

expenses of that governmental or enterprise fund are at
least 10 percent of the corresponding element total
(assets, liabilities, and so forth) for all funds of that
category or type (that is, total governmental or total
enterprise funds), and (emphasis added)
b. The same element that met the 10 percent criterion in (a)
is at least 5 percent of the corresponding element total
for all governmental and enterprise funds combined.
* It is important to note that the same element of a fund
must meet both criteria for mandatory reporting as a
major fund.
ACFN 2121 1 - 159

ACFN 2121 1 - 160

 Summary
 Must show column for General Fund
 Separate column for other MAJOR funds
–Fund has 10% of the total assets, liabilities, revenues, or
expenditures in the GOVT category, and
– 5% of total the total assets, liabilities, revenues, or
expenditures of GOVT + ENTERPRISE amounts
• Remaining funds are added together and shown in one
column
• Use total column
• Report Categories for Fund Balance as Reserved or
Unreserved
ACFN 2121 1 - 161

Pupic

Uploaded by

Copyright:

Available Formats

You might also like

Pupic

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Pupic

Uploaded by

Copyright:

Available Formats

GOVERNMENT & NONPROFIT

ACFN 2121 1-1

ACFN 2121 1-2

Nonbusiness organizations are economic

ACFN 2121 1-4

- Often cannot be met by profit-seeking firms as the

ACFN 2121 1-6

ACFN 2121 1-7

 Use of Accrual Basis of Accounting-

ACFN 2121 1-9

– No automatic resource allocation

2. Proprietary-these activities resemble commercial activities

II. Objectives of Financial Reporting

Business Non- State & Local Governmental Federal govt.

 How Do GASB’s Objectives Differ from Business

 GAAP and legal compliance (1)

 Rationale for use of Fund (Why?)

 Diversity & legal considerations requires multiple

(*) General government accounting entities

 Governmental non-fund accounts

 Proprietary funds (Nonexpendable)

THE GASB PRINCIPLES

1. Governmental 2. Proprietary funds

TYPES OF FUNDS - Governmental

 Use funds necessary to ensure:

Reporting Capital Assets

Valuation of Capital Assets

 Depreciate over useful lives unless:

Depreciation of Capital Assets

Accounting for Long-term Liabilities

Measurement Focus & Basis of Accounting (MFBA)

Government-wide Economic Full

Governmental fund Current financial Modified accrual

Proprietary fund Economic Accrual (except

ACFN 2121 2 - 100

ACFN 2121 2 - 101

ACFN 2121 1 - 102

ACFN 2121 1 - 104

ACFN 2121 1 - 105

General Administration Criminal

Highways & Traffic Control Vice control Personnel

General Public Safety Fire Crime Control & Patrol Supplies

Health & Training Records & Other services

Economic Support Youth Land

Parks & Custody of Buildings

Loans Liability Receivable

Interfund Services Revenue Expenditure / Expense

Reimbursements Reduce Expenditure / Expenditure / Expense

Transfers Transfers In (“Other Transfers Out (“Other

ACFN 2121 1 - 110

ACFN 2121 1 - 111

ACFN 2121 1 - 114

ACFN 2121 2-118

EXPENDITURES: OPERATING EXPENSES:

Excess (Deficiency) of Revenues XX Operating Income (Loss) XX

OTHER FINANCING SOURCES (USES): NONOPERATING REVENUES (EXPENSES):

ACFN 2121 2 - 120

Common Terminology & Classification