FAR CPA Lessons 237-247 Flashcards
Governmental Accounting Concepts
- Measurement focus and basis of accounting
- Fund accounting concepts and application
- Budgetary process
Governmental financial statements have 3 categories for net position:
- Net investment in capital assets
- Restricted
- Unrestricted
Governmental financial statements have 5 types of Fund balance
- Nonspendable
- Restricted
- Committed
- Assigned
- Unassigned
Types of State and Local Governments (SLGs)
General-purpose governments (cities, states, and counties)
limited or special-purpose governments (school districts, transit authorities, and municipal utility districts)
various agencies and commissions (e.g., employment commission, economic development commission, etc.).
The governmental GAAP hierarchy is established by
GASB Statement No. 76 for fiscal years beginning after June 15, 2015. Statement No. 76 superseded GASB Statement No. 55.
Primary authority for state and local governments
GASB
Two categroies in GASB Statement No. 76 for sources of accounting principles
Category A: Officially established accounting principles; that is, GASB Statements and Interpretations.
Category B: GASB Technical Bulletins, GASB Implementation Guides, and literature of the AICPA cleared by the GASB.
GAAP Hierarchy for state and local governments
- GASB Statements and Interpretations
- GASB Technical Bulletins
- GASB Implementation Guides
- literature of the AICPA cleared by the GASB (GASB Concept Statements)
highest level of authority for setting GAAP for nongovernmental not-for-profit organizations
FASB
financial resources unique to governmental entitie
proceeds from taxation
GASB Concepts Statements
The concepts statement does not establish financial reporting standards—it establishes the conceptual framework to be used by GASB in evaluating existing standards and establishing future standards.
The citizenry
Those to whom government is primarily accountable (e.g., taxpayers, voters, service recipients, the media, advocate groups, public finance researchers)
Legislative and oversight bodies
Those who directly represent the citizens (e.g., state legislatures, county commissions, city councils, board of trustees, school boards)
Investors and creditors
Those who lend or participate in the lending process (e.g., institutional investors, underwriters, bond rating agencies, bond insurers, financial institutions)
Governmental Entities uses of financial reports
- Comparing actual financial reports with the legally adopted budget
- Assessing financial condition and results of operations
- Assisting in determining compliance with finance-related laws, rules, and regulators
- Assisting in evaluating efficiency and effectiveness
important in establishing authoritative guidance by GASB
Accountability and Interperiod equity
Accountability GASB
This is based on the belief that the taxpayer has a “right to know” and is accomplished by providing information to assist users in determining whether the government was operated within the legal constraints imposed by the citizenry.
Interperiod equity GASB
This is a significant part of accountability by showing whether current-year revenues are sufficient to pay for current-year services or whether future taxpayers will be required to assume burdens for services previously provided.
Characteristics of information in financial reporting
TRUCCR
- Timeliness
- Relevance
- Understandability
- Comparability
- Consistency
- Reliability
Service Efforts and Accomplishments Reporting
assists users in assessing accountability and making better informed decisions. However, SEA is voluntary.
Elements of SEA Performance
- Measures of service efforts (inputs)
- Measures of service accomplishments (outputs and outcomes)
- Measures that relate service efforts to service accomplishments (efficiency)
- GASB states that SEA performance information should focus on measures of service accomplishments (outputs and outcomes) and measures that relate service efforts and service accomplishments (efficiency).
Five Elements of the Statement of Financial Position (GASB)
- Assets
- Liabilities
- Deferred outflow of resources
- Deferred inflow of resources
- Net position
Outflow of resources
Consumption of net assets by the government that is applicable to the reporting period
Inflow of resources
Acquisition of net assets by the government that is applicable to the reporting period
Resource
An item that can be drawn on to provide services to the citizenry.
Accounting for changes in fair values of hedging derivative instruments
GASB requires that changes in fair values of hedging derivative instruments be reported as either deferred inflows or deferred outflows of resources
11 types of funds used by governmental entities
C-PIPP DRIP the CEG
- Debt service funds
- special Revenue funds
- Internal service funds
- Permanent funds
- Capital projects funds
- Enterprise funds
- General fund
- Custodial funds
- Pension trust funds
- Investment trust funds
- Private Purpose trust funds
Governmental funds are the consonants; D, R, P, C, and G, in DRIP-CEG, Proprietary funds are the vowels; I and E, in DRIP-CEG.
Accounting equation for government entities
Assets + Deferred Outflows of Resources = Liabilities + Deferred Inflows of Resources + Fund Balance
Purpose of a fund
- To improve management accountability and control
2. To meet legal requirements.
Governmental funds
Nonexchange revenues such as taxes, intergovernmental revenues, and grants provide resources for the majority of general government expenditures
Proprietary funds
Governmental entities sometimes engage in activities in which they operate much like for-profit organizations. Public utilities, convention centers, motor pools, and airports are common examples of these activities.
Fiduciary funds
Governmental entities frequently manage and/or process resources on behalf of other entities or individuals. Since these resources do not truly belong to the governmental entity, they are recorded separately in a group of funds called fiduciary funds.
Encumbrance Accounting
To ensure that the entity does not order more goods than it has the authority to purchase, an estimate of expenditures is recorded at the time an order is placed rather than waiting until the goods are received.
Governmental entities produce two distinct sets of financial statements
- the fund statements
2. the government-wide (or entity-wide) statements
The fund statements include three separate sets of financial statements
- Governmental funds—Modified accrual basis
- Proprietary funds—Full accrual basis
- Fiduciary funds—Full accrual basis
Objective of Governmental Accounting
- Assess the availability of current-period resources to finance current-period expenditures (interperiod equity);
- Assess the service efforts and accomplishments of the governmental entity; and
- Demonstrate compliance with the legal authorization to expend.
Explain General Funds
The general fund accounts for ordinary operations of the government
This is the only required fund of a governmental unit
Revenues typically come from taxes, licenses, fines, fees, etc.
Explain special revenue funds
Account for the proceeds of specific revenues from taxes, grants, entitlements, or other earmarked sources that are restricted or committed to expenditures for specified purposes other than debt service or major capital projects
(e.g., a gasoline tax that must be spent on road maintenance, private foundation grants that must be used to provide training opportunities for disadvantaged workers).
Explain capital project funds
Account for monies designated for acquisition or construction of significant capital items (land, buildings, and equipment).
Capital project funds are short-lived and are closed after acquisition or construction.
Explain debt service funds
Account for monies set aside to pay interest and principal on the governmental unit’s long-term general obligation debt.
Explain permanent funds
Account for resources received by the governmental entity with the stipulation that the principal amount remain “intact” but that earnings must be spent, for purposes that benefit the governmental entity (endowments)
(i.e., purchase of library books, park improvements, and cemetery maintenance).
Explain when an activity must be reported as a proprietary fund
Activities that are self-supporting—that is, in which 50% or more of costs are covered by fees—must be accounted for as proprietary funds.
If the intent is to cover 50% or more than they may be proprietary as well
Explain Enterprise funds
Account for activities that provide goods and services to the general public as well as to the governmental entity itself
(i.e., utilities, transit services, golf courses, etc.).
Explain Internal service funds
Account for activities that provide goods and services only to other government agencies and departments
(i.e. depreciation, motor pools, printing services, data processing services, central supplies, etc.).
Explain the Fiduciary fund category
These funds account for monies and other resources held by the governmental unit in a trustee or agent capacity.
Explain Pension trust funds
account for contributions made by or on behalf of government employees to provide them with retirement income and postretirement benefits and for the actual expenditures made to retirees and terminated employees.
Explain Custodial funds
Account for monies for which the governmental unit serves as merely an agent in the process of distributing/delivering the monies to their rightful recipient; that is, when the governmental unit acts as a clearing house, collecting monies for other units and then remitting them as appropriate, usually for a small fee.
Explain Private purpose trust funds
Account for trust arrangements for which other entities (i.e., external organizations or individuals and other governmental entities) are the beneficiaries rather than the governmental unit itself
Explain Investment trust funds
Account for monies received into an investment pool created through a formal legal trust or similar arrangement from other governmental agencies to be included in the governmental entity’s investment pool
General fixed asset account group (GFAAG)
Used to record fixed (long-term) assets purchased by any of the governmental funds (principally the general fund, special revenue fund, and the capital projects fund), as well as items donated to the governmental unit.
General long-term debt account group (GLTDAG)
Used to record general obligation long-term debt of the governmental unit, including bonds, notes, and capital leases. As the debt matures (becomes current) the liability is removed from the GLTDAG and placed in a debt service fund for repayment.
List the Governmental funds
General fund Special Revenue funds Debt service funds Capital project funds Permanent funds
List the Proprietary funds
Enterprise funds
Internal service funds
List the Fiduciary funds
Custodial funds
Pension trust funds
Investment trust funds
Private Purpose trust funds
major concern for governmental entities
that they have received sufficient financial resources to cover their financial expenses
measurement focus for changes in resources for modified accrual accounting
the flow of financial resources: that is, on cash inflows and outflows.
major concern of proprietary entities
over the long run, they earn a sufficient return to cover the full cost of providing goods and/or services
The measurement focus of changes for full-accrual basis accounting
the flow of economic resources, income determination, or capital maintenance.
60-day rule
A governmental entity may recognize monies received during the first 60 days of a new fiscal period as revenue of the old fiscal period.
Revenues that are subject to accrual include:
- Property taxes
- Interest and penalties on delinquent taxes
- Investment revenue
- Regularly billed charges for services
- Taxes collected by other government units but not yet remitted
Accounting for general long-term debt
not recorded until it is actually due. Due in this instance means on the due date.
**All others are accrued
Appropriations represent
legal spending limits prescribed by the entity’s governing body
encumbrances
goods still on order that have not yet been received
encumbrances balance - debit or credit?
Debit - the credit goes to the budgetary fund account associated with the expense. Once the goods or services are received then the encumbrance is credited and the fund account is debited
Other names for - Fund Balance; Unreserved Fund Balance; Unreserved, Undesignated Fund Balance
Nonspendable, Restricted, Committed, Assigned, or Unassigned.
encumbrances at year end
Close them out to the budgetary fund balance then is reversed at the beginning of the next year
Year End: Debit - Budgetary Fund balance Credit - Encumbrances Debit - Unassigned Fund Balance Credit - Fund Balance - Assigned for encumbrances
How to calculate the unencumbered, unexpended Appropriation
+ Appropriate
- Encumbrances
- Expenditures
= unencumbered, unexpended Appropriation
Governmental-Wide Statement of Net Position Equation
(Asset + Deferred Outflows of Resources) - (Liabilities + Deferred Inflows of Resources) = Net Position
Governmental Fund Balance Sheet Equation
(Current Assets + Deferred Outflows of Resources) - (Current Liabilities + Deferred Inflows of Resources) = Fund Balance
Proprietary Fund Statement of Net Position Equation
(Asset + Deferred Outflows of Resources) - (Liabilities + Deferred Inflows of Resources) = Net Position
Fiduciary Fund Statement of Net Position Equation
(Asset + Deferred Outflows of Resources) - (Liabilities + Deferred Inflows of Resources) = Net Position
Types of Deferred Outflows and Deferred Inflows of Resources
- Derivatives (Changes in the fair value of derivatives used for hedging activities are reported as either a deferred outflow (loss in fair value) or a deferred inflow (gain in fair value))
- Service concession arrangements
- Items previously reported as assets and liabilities
Consistent critical terms method
If the critical terms of the hedgeable item and the derivative instrument are the same, or very similar, the changes in cash flows or fair values of the derivative instrument will substantially offset the changes in the cash flows or fair values of the hedgeable item.
Dollar-offset method
This method evaluates effectiveness by comparing the expected cash flows or fair values of the derivative instrument with the changes in the expected cash flows or fair values of the hedgeable item. If the changes of either the hedgeable item or the derivative instrument divided by the other falls in the range of 80% to 125%, these changes substantially offset and the derivative instrument is considered to be an effective hedge.
Regression analysis method
This method evaluates effectiveness by considering the statistical relationship between the cash flows or fair values of the derivative instrument and the hedgeable item. The changes in cash flows or fair values of the derivative instrument substantially offset the changes in the cash flows or fair value of the hedgeable item, if ALL of the following criteria are met:
a. The R-squared of the regression analysis is at least 0.80. b. The F-statistic calculated for the regression model demonstrates that the model is significant using a 95% confidence level. c. The regression coefficient for the slope is between−1.25 and –0.80.
Synthetic instrument method
Sometimes a government will combine an interest-bearing hedgeable item with a derivative instrument to create a third synthetic instrument. This method is limited to cash flow hedges in which the hedgeable items are interest bearing and carry a variable rate. Under this method, the derivative instrument is effective if the actual synthetic rate is substantially fixed. The hedge is considered substantially fixed if the actual synthetic rate is within 90% to 111% of the fixed rate.
How are deferred outflows reported on the statement of net position?
As a separate section following assets
Fund Balance Classifications
- Nonspendable
2. Spendable
Nonspendable
amounts that cannot be spent because they are either not in spendable form (e.g., inventory, long-term receivables, or property held for resale) or the government is legally or contractually bound to maintain the amount (e.g., endowments in a permanent fund).
Spendable
There are four classifications for amounts that are in spendable form
- Restricted fund balance
- Committed fund balance
- Assigned fund balance
- Unassigned fund balance
Restricted fund balance
Amounts that are restricted to a specific purpose when constraints are placed on the use of resources that are either (1) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments or (2) imposed by law through constitutional provisions or enabling legislation.
Committed fund balance
Amounts that are committed for a specific purpose by formal action of the government’s highest level of decision-making (e.g., by city council resolution).
Assigned fund balance
Amounts that are intended by the government to be used for specific purposes that are not classified as restricted or committed. Intent is usually expressed by the governing body, a committee or group (e.g., finance committee), or an official to which the governing body has delegated the authority to assign amounts for specific purposes.
Unassigned fund balance
The residual classification for the general fund for amounts not classified as restricted, committed, or assigned.
Special revenue funds guidance
This is a revenues-based approach. Governments that use an activity-based approach (e.g., street maintenance expenditures) will need to examine whether the resources in the fund are restricted or committed amounts.
Capital projects funds guidance
These must be capital, rather than operating expenditures, in addition to nonroutine such as buildings, major building improvements, and infrastructure assets. Nonproject, routine expenditures such as buses, fire trucks, and computers should not be accounted for in a capital project fund.
Debt service funds guidance
Used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest payments.
three categories of net position
- Net investment in capital assets
- Restricted net position
- Unrestricted
Net investment in capital assets
the fund’s net investment in capital assets and is calculated as the fund’s gross capital assets less accumulated depreciation and less the outstanding balance of any capital asset related debt (e.g., mortgages, bonds, and other borrowings).
Restricted net position
At the fund level, this category indicates the amount of restrictions in excess of noncapital related debt and liabilities directly associated with those restricted assets.
Unrestricted
This category represents the remainder of the fund’s net position that does not meet the definition of the other two categories.
restrictions may be imposed:
a. Externally by creditors (e.g., debt covenants), grantors, contributors, or laws and regulations of other governments;
b. By constitutional provisions; or
c. By enabling legislation of the government that authorizes it to assess, levy, charge, or otherwise mandate payment of resources externally and places a legally enforceable purpose restriction on those net resources.
Budgetary Accounting Requirements
special budgetary accounts, recording of budgetary entries, and preparation of reports that compare budget amounts to actual amounts.
Estimated revenues—Normal balance
Debit - budget set by the budget office
Appropriations—Normal balance
Credit - budget set my legislative body
Estimated other financing sources—Normal balance
Debit - estimates the inflow of funds that are not properly categorized as revenues (operating transfers from other funds, proceeds of bond issues, etc.)
Estimated other financing uses—Normal balance
Credit - estimates the outflow of funds that are not properly categorized as expenditures (operating transfers to other funds, etc.).
Budgetary fund balance
This is an offset account used to balance the budgetary entry; as such, it does not have a normal balance but is debited or credited as necessary to make debits equal credits within the budgetary entry.
Entries for budgetary accounting
- Entry to setup the budget at the beginning of the year
- Entry to close the budget at teh end of the year
-offset account used to balance the entry is Budgetary Fund Balance.
Entry to Close the Budget
If there have been no changes to the budget during the year, the entry to close the budgetary accounts at the end of the fiscal period simply reverses the original entry.
hat funds do budgetary comparisons need to be presented in connection with the basic financial statements
General Fund and major special revenue funds for which a budget is legally adopted
General fund revenue recognized when billed
property taxes & fines and penalties assessed on unpaid taxes - all others are recognized when revenue is received - uncollectible accounts are created as well
Long-Term Debt Proceeds
Other Financing Sources, not as revenue
direct expenditures
They are recorded as expenditures immediately without going through the encumbrance process.
- Bills for services rendered
- monthly billing in irregular amounts (utilities)
- purchases in a retail environment
Capital Expenditures entry
Debit - Expenditures
Credit - Cash/Vouchers Payable
Special Revenue Funds
Funds used to account for monies restricted or “earmarked” for specific types of general government expenditures
Restricted resources that cannot be accounted for in special revenue funds
- Monies restricted to debt service (these are accounted for in a debt service fund)
- Monies restricted for capital projects (these are accounted for in a capital projects fund)
- Monies that are permanently restricted (e.g., endowments—these are accounted for in a permanent fund)
Special revenue funds receive most of their resources from:
- Monies transferred to them from the general fund
- Intergovernmental transfers
- Voluntary grants
Eligibility requirements
Revenue can be recognized only when all eligibility requirements have been met. Most eligibility requirements for entitlements and shared revenues are generic (e.g., they “must provide for the safety of its citizens”) and can usually be assumed to be met.
Entries in capital projects funds record:
- Receipt of the resources used to finance the project;
- Expenditures to construct or acquire the capital asset;
- Transfers of excess resources are made when the project is complete
Entries in permanent funds are usually limited to recognition of:
- Receipt of the endowment principal
- Receipt of investment earnings
- Transfer of net expendable earnings
Accounting for Receipt of Endowment Principal
Must be recognized as Revenue when received.
Investment earnings have two components:
- periodic income (i.e. interest and dividends)
2. capital gains (gains and losses on the sale of investments).
Net Expendable Earnings—
Determined by deducting management fees and other charges necessary to maintain the principal from periodic investment income (interest and dividends).
Accounting for Internal Service Funds
Use full accrual accounting
- Carry their own fixed assets and long-term debt
- Record depreciation expense
- Use standard accounting terminology
When to use internal service funds
only if the reporting government is the predominant customer in the activity, otherwise an enterprise fund should be used.
the general pricing policy in establishing user fees for services and goods provided by internal service funds
to achieve break-even of user fees compared to operating expenses.
Accounting for transfers from general fund to internal service funds
Internal service funds most often receive transfers from the General Fund to provide capital for the initial start-up of the fund or for later expansion. These transfers are reported as Transfers (In) by the internal service fund and as Other Financing Uses—Transfers (Out) by the General Fund.
Accounting for Transfers from the general fund may also subsidize the day-to-day operations
These transfers are reported as Transfers (In) by the internal service fund and as Other Financing Uses—Transfers (Out) by the general fund.
Where do other financing uses accounts get closed out to at year end?
Net potion accounts
If a gain - Excess of Net Billings to Departments over Costs
If a loss - Excess of Costs over Net Billings to Departments
Quasi-External Transactions
When the internal service fund charges fees to other departments for goods and services
Accounting for Quasi-External Transactions
the internal service fund recognizes operating revenue and the recipient fund recognizes an expenditure (or expense, as appropriate for the fund)
Accounting for money from another fund that is expect to be repaid
crediting “Advances from (fund name),” which is a liability account.
Three principal accounts of the equity section on the balance sheet
- Let Investment in Capital Assets
- Restricted Net Position
- Unrestricted Net Position
The Statement of Cash Flows has four categories
- Operations
- Noncapital financing
- Capital financing
- Investing
Explain the operations section of the statement of cash flows
From the production of goods and services only using the direct method
Explain the Noncapital financing section of the statement of cash flows
from debtor activities not clearly related to capital transactions
Explain the Capital financing section of the statement of cash flows
from the acquisition or disposal of capital assets or borrowing and repayment clearly related to capital activities
Explain the Investing section of the statement of cash flows
from gains and losses on investments and creditor activities and interest
Enterprise Funds
These funds account for entities that provide goods and services to the general public
GASB requires activities to be reported as enterprise funds if any one of the following criteria is met
- The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity (e.g., revenue bonds)
- Laws or regulations require that the activity’s costs of providing services including capital costs be recovered with fees and changes, rather than with taxes or similar revenues
- The pricing policies of the activity establish fees and charges designed to recover the costs, including capital costs (such as depreciation or debt service).
Liabilities payable from Restricted Assets
These are reported separately from current liabilities - such as Refundable Customer Deposits
Accounting for Custodial Fund Transactions
recognizes a liability when the monies are received and a reduction in liabilities when the monies are disbursed.
Five entries are commonly made in the tax collection custodial fund
- Recognizing the tax levy
- Recording payments
- Recognizing amounts payable to specific taxing entities
- Recognizing processing fees
- Disbursing the cash payments
Special Assessment Custodial Funds
Special assessment projects are often financed with debt issues. Though the debt is to be repaid from special assessments levied on the property owners, the governmental entity usually assumes secondary liability for the debt in the event that the property owners default on their payments.
Three entries are commonly made in the special assessment custodial fund
- Levy of the special assessment
- Receipt of payments from the property owners
- Payment of interest and principal to bondholders
Valuation of the investment pool assets
Reported at fair value and revalued anytime an entity adds or withdraws funds and when investment income is distributed
Accounting for investment polls
because these resources do not belong to the governmental entity, they are reported on the financial statements as Additions and Deductions, respectively.
- Common items listed under Additions include Contributions and Investment Earnings.
- Common items listed under Deductions include Withdrawals and Management Fees.
defined contribution plans
the employer and the employee make contributions to the plan, which are invested and earn a return
defined benefit plans
the employer promises the retiree a defined future benefit over a future time period and the employer bears the risk associated with unknown future economic factors.
Public Employee Retirement Systems
States frequently provide a plan that is available to all the employees of any governmental entity within its jurisdiction
multiple-employer plans
in an effort to provide better-quality, lower-cost plans to their employees, smaller employers band together and jointly create a retirement plan that covers all of their employees.
reporting requirements for defined benefit pension trust funds
Two financial statements are required: (1) Statement of Fiduciary Net Position and
(2) Statement of Changes in Fiduciary Net Position
Statement of fiduciary net position
This statement is required for all types of pension plans. The most distinctive feature of the statement is the title of the net position section: Net Position Held in Trust for Pension Benefits.
Statement of changes in fiduciary net position
prepared for both defined contribution and defined benefit plans. Note that the statement presents Additions and Deductions rather than Revenues and Expenses.
Annual pension expense includes the following items:
Benefits earned during the year
+ Interest on the total pension liability
+/– Changes in benefit terms
– Projected earnings on plan investments
+/– Changes in plan net position from other than investments
Measuring total pension liability is a three-step process:
- Projection of the future benefit payments
- Discount rate
- Attributing the present value to specific time periods
Schedule of Changes in Net Pension Liability
This is a 10-year schedule of changes in the net pension liability, presenting for each year; the beginning and ending balances of total pension liability, the pension plan’s fiduciary net position, and net pension liability
The funded ratio
the plan fiduciary net position divided by total pension liability
Schedule of Employer Contributions
This schedule presents the actuarially determined contribution, the amount actually contributed by the government, the difference between the two, and the percentage of the amount that was actually contributed to the actuarially determined contribution amount.
Private Purpose Trust Funds
Funds used to account for any resources managed in trust by the governmental entity, where the beneficiaries are outside of the governmental entity itself. The beneficiaries may be individuals, private organizations or businesses, or other governmental entities.
