Encumbrances and Other Transactions Flashcards
What are encumbrances?
open purchase orders represent an encumbrance or commitment of the available appropriations of a government; in order for governmental managers to effectively monitor the degree to which they have used their budgetary appropriations, governmental accounting systems must reflect not only the expenditures but also the obligations to spend (purchase orders); this is done to prevent overspending of appropriations
an encumbrance should not be viewed as a GAAP expenditure; similarly, the budgetary control account that offsets the encumbrance is not a liability; the budgetary control entry acts as a limitation or constraint that reduces the available fund balance
JE to set up the encumbrance and budgetary control in budgetary accounts in the general fund:
DR encumbrances
CR budgetary control
JE to reverse estimated encumbrances in budgetary accounts:
DR budgetary control
DR encumbrances
JE to record the actual expenditures:
DR expenditures
CR vouchers payable
encumbrances are recorded for spending/appropriations control purposes, especially in the general and special revenue funds; encumbrances are not generally used for recurring expenditures, such as salaries; they are more commonly recorded when a purchase order is issued
Encumbrances outstanding at year-end (and the following year)
if an encumbrance (purchase order) is still outstanding at year-end and appropriations do not lapse (government will honor outstanding purchase orders), reverse the JE and include outstanding encumbrances in an appropriate fund balance classification; usually encumbrances would be included in “fund balance, committed” or “fund balance, assigned”
outstanding encumbrances at year-end will be carried forward within the appropriate fund balance classification with a corresponding reduction of unassigned fund balance, if the appropriations do not lapse; encumbrances will not be specifically detailed on the face of the financial statements but may be disclosed if material; encumbrances that will be liquidated with restricted, committed, or assigned resources have no effect on the classification of fund balance
JE to close outstanding encumbrances at year-end and reserve the fund balance:
DR budgetary control
CR encumbrances
DR unassigned fund balance (year-end surplus)
CR fund balance, committed
in the following year, the use (spending/expenditure) of these amounts will be recorded as an expenditure
JE to record the receipt of last year’s item and pay for it:
DR expenditure - prior year
CR vouchers payable
the outstanding encumbrance at year-end is treated as a component of an appropriate classification of fund balance (generally committed or assigned); in the following ear, when the item is received and paid, it is not reported as an expenditure in the budget and actual comparison schedules because it is not a charge against current period appropriations
remember to close the budget, activity, and encumbrances separately; do not net them; the rule is:
budget is booked –> budget is closed for same amount
activity is booked –> activity is closed for actual amount
encumbrances are booked –> encumbrances are reversed for same amount
What is interfund activity?
it represents the flow of resources between funds and between the primary government and its component units; the accounting associated with interfund activity can be classified as follows: reciprocal interfund activity or nonreciprocal interfund activity; interfund activity is subject to specific requirements related to financial statement display and disclosure
reciprocal interfund activity includes exchange-type transactions between funds
interfund loans - they represent temporary extensions of credit to other funds that are expected to be repaid and are accounted for as interfund receivables and payables (due from/due to); unrealizable balances are reclassified as transfers
interfund services provided and used - they represent sales and purchases between funds at external pricing; example includes sale of water/sewer services by an enterprise fund to the city and internal service fund activities; transactions of this type are accounted for as revenues and expenses/expenditures
nonreciprocal interfund activity represents non-exchange transactions between funds
interfund transfers - flows of assets between funds without the exchange of equivalent value represent interfund transfers; payments in lieu of taxes made by a proprietary fund to the general fund or the budgeted transfer of pledged revenues from a special revenue fund to a debt service fund to meet bond covenant requirements are examples of interfund transfers; transfers are normally displayed as other financing sources and uses after nonoperating revenues and expenses
interfund reimbursements - payments of expenses made by one fund on behalf of another fund are accounted for as reimbursements; the expenditure originally made is reimbursed by the fund actually responsible for the disbursement; interfund reimbursements serve to reclassify the expenditure or expense associated with the original transaction to the fund ultimately responsible for the obligation satisfied; interfund reimbursements are not displayed as interfund transactions
What are special items?
they are items under the control of management that are either unusual or infrequent but not both
special items are distinguished from extraordinary items by their characteristics; most significantly, extraordinary items must be both unusual in nature and infrequent in occurrence, while special items must only be unusual in nature or infrequent in occurrence but not both
What are deferred inflows/outflows?
deferred inflows/outflows of resources result from the acquisition or consumption of net assets (a fund or government’s equity) in one period that are applicable to future periods
transactions unique to government as well as unusual transactions typically associated with other comprehensive income in commercial settings (derivative accounting, pension accounting, etc.) are accounted for as deferred inflows/outflows
deferred outflows of resources have a positive effect on net position and are reported following assets but before liabilities
deferred inflows of resources have a negative effect on net position and are reported following liabilities but before equity
Derivative instruments and hedge accounting
derivative instruments are used by state and local governments to manage specific risks or to make investments; derivatives are reported at fair value; changes in the fair value of derivatives are reported as follows:
changes in value of derivatives used as investments are displayed within the investment revenue classification
changes in value of derivatives used for hedging activities are reported as either deferred outflows or deferred inflows of resources
What is fund balance and its categories?
fund balance is “equity” in the balance sheets of the governmental funds and is equal to assets (and deferred outflows) minus liabilities (and deferred inflows)
governmental fund balances are reported in a hierarchy that shows up to 5 degrees of constraint (limitations on use) associated with the current equity of the fund; constraints, in order, are as follows:
1) nonspendable fund balance - current equity in the fund balance generally comprises available, spendable resources; to the extent that the equity of a governmental fund is represented by current assets that cannot be spent (prepaid expenditures, inventories, etc.), the fund balance should be displayed as nonspendable
2) restricted fund balance - fund balance resources associated with assets restricted by external authorities (legislation, grantors, creditors, etc.) are classified as restricted
3) committed fund balance - fund balance resources associated with assets obligated by a formal action of the government’s highest decision-making authority (resolutions by a city commission, encumbered appropriations, etc.); encumbered appropriations are not specifically identified on the face of a government’s financial statements but may be disclosed
4) assigned fund balance - fund balance resources associated with assets that the government intends to obligate (designations) but has not formally committed; assignments are not possible if unassigned fund balances are negative
5) unassigned fund balance - fund balance resources associated with spendable assets that are neither restricted, committed, nor assigned; unassigned fund balance is a residual equity classification for the general fund; only the general fund should have a positive unassigned fund balance; other governmental funds might have negative unassigned fund balances if expenditures incurred for specific purposes exceed the amounts restricted or committed to those purposes
What is net position?
net position is reported in the government-wide and proprietary fund balance sheets and represents net equity (the difference between assets plus deferred outflows and liabilities plus deferred inflows)
net position must be reported in 3 categories that focus on the accessibility of the underlying funds: net investment in capital assets, restricted, and unrestricted
