Section 2, Chapter 4 - accounting and reporting for specific asset and liability transactions

Question 1

What does cash include?

Answer 1

• Cash on hand
• Cash in transit
• Cash on deposit with financial institutions

Question 2

Where are most investments reported?

Answer 2

The statement of net position or balance sheet at fair market value 

Question 3

What’s the notes to the financial statements say about investments?

Answer 3

It should summarize the investments by typing such as:
- United States government securities
- repurchase agreements
- Equity securities
- Fixed securities

Briefly describe their deposit or investment policies related to custodial credit risk, concentration of credit risk, interest rate risk, or foreign currency risk

Question 4

What type of investments should not be aggregated into a single investment type?

Answer 4

Dissimilar investments, such as US treasury, bills, and US treasury strips

Question 5

What are note disclosures for cash and investments required to describe?

Answer 5

The restrictions on their use and legal and contractual provisions

Question 6

What does GASB Codification Section C20, Cash Deposits with Financial Institutions do?

Answer 6

It specifies the note disclosure related to cash deposits with financial institutions

The disclosures are intended to benefit financial statement users to assess the risks, a government entity, and investing public funds. Professional judgment is required to determine the level of detail to provide.

Question 7

What should disclosures on cash deposits take in to consideration?

Answer 7

• Whether they apply to the primary government, including its blended component units, and for governmental and business type activities
• risk exposures at the fund level.

Question 8

When should risk exposures be disclosed?

Answer 8

Whenever the risk exposures are specifically greater than the deposit and investment risk of the primary government, they should be disclosed.

Example: although a government entities, total investments may not be exposed to concentration risk, if the government entity has a capital project fund that has all of its investments in one issue of corporate bonds,, the funds exposure to a concentration of credit risk should be disclosed

Question 9

If required, what should exposure risk disclosures include?

Answer 9

• legal or contractual provisions for deposits
• Deposits as of the balance sheet date and during the period

Significant violations during the period of legal or contractual, provisions for deposits, and actions taken into address violations should be disclosed

Question 10

What is a custodial credit risk?

Answer 10

For deposits, it is the risk that in the event of failure of a depository financial institution, a government will not be able to recover deposits, or will not be able to recover collateral securities are in the position of an outside party

Question 11

When are deposits exposed to custodial risk?

Answer 11

If they are not covered by the depository insurance, and the deposits are:
- uncollateralized
- Collateralized with securities held by the pledging financial institution
- collateralized with securities held by the pledging financial institutions, trust department or agent, but not in the depositor- governments name

Question 12

If a government has deposits, exposed to custodial risk at the end of the period, what should it disclose?

Answer 12

• The amount of these bank balances
• The fact that the balances are uninsured
• Whether the balances are exposed, be on either (previous card)

Question 13

What GASP codification contains the most accounting and financial reporting standards support investments?

Answer 13

Modification section I50

Specific guidance, for types of investments is contained in the following sections:
- D40 derivative instruments
- I55 reverse re-purchase agreements
- I60 investments - securities lending
- I70 irrevocable split interest agreements
- In5 investment pools (external)

Question 14

How are note disclosures for investments similar to notes for cash deposits?

Answer 14

The underlying principles of restrictions, legal or contractual provisions, risk and separation of disclosures for the primary government, separated from the disclosures for the component units, apply to investments

However, statutory requirements for investments are usually more complex than provisions for cash deposits. Therefore, the paragraph outlining the legal and contractual provisions should include per requirements for investments.

Question 15

How should investment disclosures be organized?

Answer 15

By investment type

Question 16

What should risk disclosures be made for?

Answer 16

The primary government and its component units

Question 17

How should disclosures be made when the funds have taken together fiduciary fund types or the deposit and investment risks of the primary government for the governmental and business type activities??

Answer 17

The disclosures should then be provided at that level

Question 18

What is the determination of which disclosures to make for component units??

Answer 18

Professional judgment is used

Question 19

Disclosures are required for specific categories of risk. When are investments exposed to custodial risk?

Answer 19

When the securities are uninsured and not registered in the name of the government and are held by either:
- the counterparty
- the counterparty’s trust department or agent, but not in the government’s name

Question 20

Investment securities exposed to custodial risk at the end of the period should be disclosed. What should the disclosures include?

Answer 20

• The type
• Amount
• how the investments are held

Question 21

What method can be used so governments can disclose information about the interest rate risk?

Answer 21

• segmented time distribution
• Specific identification
• Weighted average maturity
• Duration or simulation model

Question 22

When our disclosures about the concentrations of credit risk required?

Answer 22

When investments represent 5% or more of total investments. Except for those issued or explicitly guaranteed by the US government, investments in mutual funds, and external investment pools.

Question 23

How should investments exposed to foreign currency risk be disclosed?

Answer 23

Using the US dollar balances organized by currency denomination, and if applicable, investment type

Question 24

Can disclosures for cash deposits and investments be combined in a single disclosure?

Answer 24

Yes

Question 25

How are most investments required to be valuated at on the statement of that position or balance sheet?

Answer 25

Fair value

Required by GASB Stmt No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools; GASB Stmt No. 72, Fair Value Measurement and Application; and other authoritative literature

Question 26

How can investments in mutual funds and in private equity, or in private credit funds be reported?

Answer 26

They may be reported at net asset value

However, governmental entities, other than external investment pools, generally are permitted to report non-participating investment contracts, and certain money market investments at amortized costs

Question 27

How should all investment income, including changes in the fair value of investments be reported?

Answer 27

As revenue in the operating statement

The statement also requires specific disclosures about investments, including the fair value of the investments at year end

Question 28

Disclosures have been added by GASB 72, fair value measurement and application. Depending upon the type of government, making the disclosure, the additional notes may be streamlined or complex complex entities including post, employment, benefit, plans, disclosures, similar to for profit, entities, segregating investments into what 3 levels of hierarchy?

Answer 28

1. Level one inputs are quoted prices (unadjusted) in active markets for identical, assets or liabilities. These may be publicly traded securities, such as stocks and similar financial instruments.
2. Level two inputs or inputs other than quoted prices, included within level one are observable for the asset or liability, either directly or indirectly. These may be swap contracts and certain certificates of deposit.
3. Level three inputs are unobservable inputs such as management, assumption of the default rate, among underline mortgages of a mortgage security. Examples may be commercial real estate.

Question 29

Can disclosures for cash deposits and investments be combined in a single note disclosure?

Answer 29

Yes

Question 30

What is a derivative instrument?

Answer 30

A financial instrument or other contract that has all of the following characteristics:
1. Settlement factors.
2. Leverage.
3. Net Settlement.

Question 31

What are settlement factors?

Answer 31

One or more reference rates, and one or more notional amounts or payment, provisions or both. These terms determine the amount of the settlement or settlements, and in some cases whether a settlement is required.

Question 32

What is a reference rate?

Answer 32

A specified interest rate, security rate, commodity price, foreign exchange rate, index of prices or rates, and other variable.

It may be a price or rate of an asset or liability, but it is not an asset or liability itself, and maybe any variable that has observable changes or otherwise objectively verifiable

Question 33

What are some common reference rates?

Answer 33

• structured overnight financing rates (SOFR)
• The securities interest and financing market association (SIFMA) swap index
• AAA general obligations index published by municipal market data
• Commodity pricing point

Question 34

What is notional amount?

Answer 34

The number of currency units, shares, bushels, pounds or other units specified in the derivative instrument

The notional amount and reference rate our key factors of a derivative instruments settlement payment

Question 35

When is leverage required?

Answer 35

Leverage requires no initial net investment, or a smaller initial investment then would be required for other types of contracts that would be expected. Do I have more response to changes in market factors

Question 36

How is leverage achieved?

Answer 36

By either a small or no initial net investment to allows for the derivative instrument to have changing cash flow or fair values that replicate an instrument that normally would require a much larger investment

For example, an interest rate swap would require no initial net investment. The swap value, however, will change if the holder of the swap has made in initial investment in for example of fixed rate instrument with a principal amount, equal to swaps notional value.

Question 37

How is a net settlement readily settled?

Answer 37

By means outside the contract or provides for delivery of an asset and put in the recipient in a position, not substantially different from the net settlement

Question 38

When does a financial instrument or other contract meet the settlement characteristics?

Answer 38

If it’s settlement provisions allow for cash settlement or a settlement that is like cash such as a delivery of a US treasury bill

Question 39

Where should derivative instruments be reported?

Answer 39

On the statement of net position or balance sheet

The classification depends on whether they represent assets or liabilities

Question 40

How should derivative instruments be valued?

Answer 40

Fair market value

Question 41

How is the fair market value of a derivative measured?

Answer 41

By the market price if there is an active market for the derivative instrument

If market rate is not available, a forecast of expecting cash flow may be used, provided that the expected cash flows are discounted

Question 42

When should governments provide a summary of their derivative instruments?

Answer 42

During the reporting period and balances at the end of the reporting period, in the notes to the financial statements

Question 43

How should information disclosed to be organized?

Answer 43

By governmental activities, business type activities, and fiduciary activities

The information should be divided into the following categories:
- hedging Derivative instruments (distinguishing between fair value hedges and cash flow hedges)
- investment derivative instruments

Within each category, derivative instruments should be aggregated by type

Question 44

What information should be presented in the summary?

Answer 44

• notional amount
• changes in fair value during the reporting period and the classification in the financial statements where those changes in fair value are reported.
• Fair values as of the end of the reporting period and the classification in the financial statements, where those fair values are reported. Derivative instrument values are based on other than quoted market prices, methods and significant assumptions used to estimate those fair values should be disclosed
• fair Values of derivative instruments reclassified from a hedging derivative instrument to an investment derivative instrument. They also should be disclosure of the deferral amount that was reported within instrument revenue upon reclassification.

Question 45

What does hedging accounting require?

Answer 45

The changes in fair value of hedging derivative instruments be reported as either deferred inflows or deferred outflows

Question 46

What note disclosure requirements should be presented for all hedging derivative instruments?

Answer 46

1. objectives. - governments should disclose their objectives for entering into those instruments, context needed to understand those objectives, the strategies of achieving those objectives, and the types of derivative instruments entered into
2. Terms. - significant terms, including notional amount, reference rates, embedded options, the date with the hedging instrument was entered into, and when it was scheduled to terminate or mature, the amount of cash paid or received, if any, afford, contract, or swap was under contract
3. Risks - for hedging instruments, governments disclose, if applicable, they’re exposure to the following risks that could give rise to monetary loss: credit risk, interest rate risk, basis risk, termination risk, roll over risk, market access risk, or foreign currency risk

Question 47

What should governments disclose for investment derivatives?

Answer 47

Their exposure to credit risk, interest, rate risk, foreign currency risk

Question 48

What are securities lending transactions?

Answer 48

Transactions where governmental entities transfer their securities to broker dealers and other entities return of the collateral for the same securities in the future

Question 49

What Is required to be reported on the statement for securities lending transactions?

Answer 49

Governmental entities are required to report securities lent (the underlining securities) as assets in their balance sheets

Question 50

How should cash received from securities lending transactions be reported?

Answer 50

As collateral on securities lending transactions and investments made with that cash should be reported as assets

Question 51

When should securities receive as collateral be reported as an asset?

Answer 51

Only if the governmental entity can pledge or sell them without a borrower default

Liabilities. Resulting from these transactions should be reported in the balance sheet.

Question 52

Should securities lending transactions collateralized by letters of credit, or by securities that the government entity does not have the ability to pledge or sell unless the borrower defaults be reported as assets or liabilities?

Answer 52

No

Question 53

What is impact on reporting cash and fair value investments on the measurement focus and basis of accounting used?

Answer 53

There is no impact

Question 54

How should investments of each fund that participates an internal investment pool report its share?

Answer 54

As a component unit

Note disclosures should distinguish between the primary government and discreetly presented component units

Question 55

When are accounts receivable established?

Answer 55

When a state or local government has a claim to cash or other assets

Question 56

For resources reported in governmental funds, what is the difference in recognizing receivables between the accrual basis of accounting and the modified accrual basis of accounting?

Answer 56

There is no difference

The modification to the basis of accounting relates only to the recognition of revenue for the associated receivable

Question 57

When does an exchange transaction occur?

Answer 57

When each party receives and gives up something of value, and the value is presumed to be equal

Question 58

When do exchange transactions occur in the government?

Answer 58

When there is a charge for a service and often when there is a fee

Question 59

When is revenue recognized for an exchange?

Answer 59

At the time of the exchange unless payment is not made at the time of the exchange.

If payment is not made at the time the exchange takes place, a receivable is established and revenue is recognized

Question 60

What is an exchange like transaction?

Answer 60

Transaction when the value may not be equal, and the direct benefits may not be exclusively for the parties to the transaction. However the characteristics of the transaction are strong enough to justify treating the transaction as an exchange for accounting purposes. Therefore the difference between an exchange, and an exchange like transaction as a matter of degree

For example, the government charges a fee associated with a license or permit to do something in exchange for something of value.

Question 61

What is the difference in recognizing a receivable and revenue for an exchange and exchange like transaction?

Answer 61

There is no difference in recognizing receivable and revenue between an exchange and an exchange like transaction. However, governments must ensure they do not classify an exchange-like transaction as a non-exchange transaction.

Question 62

Governments have a number of transactions that do not involve an exchange. What are four ways a non-exchange class transaction can be classified?

Answer 62

1. Derived tax revenue transactions.
2. Imposed non-exchange revenue transactions.
3. Government mandated non-exchange transactions.
4. Voluntary non-exchange transactions

Question 63

Where do derived tax revenue transactions result from?

Answer 63

The governments ability to impose taxes

The tax is imposed on an exchange transaction

For example, a sales tax is imposed at the time a sale takes place. The amount of taxed depends on the amount of the sale. An income tax is imposed when an individual exchanges labor for wages, or otherwise earns income. Gasoline taxes are imposed on each gallon of fuel that is sold.

Question 64

Many derived tax revenue transactions are taxpayer assessed. What does this mean?

Answer 64

Employers withhold federal and state, income taxes and file returns at the appropriate time. Merchants collect sales tax and file returns at appropriate times.

Question 65

When does the government recognize derived tax revenue transactions?

Answer 65

They would recognize a receivable and revenue when the underline exchange takes place

Question 66

What are imposed non-exchange revenue transactions?

Answer 66

When governments impose tax based on something other than an exchange. Resources are required to be transmitted to the government be on an act committed, or omitted by the provider.

For example, a property tax is assessed on property owned by the provider. Another example is a fine being levied when the provider fails to adhere to a legal requirement.

Question 67

For imposed non-exchange revenue transactions, when is a receivable and revenue recognized?

Answer 67

In the period when the government has an enforceable legal claim

Question 68

When does an enforceable legal claim occur for property taxes?

Answer 68

When the government places the lien on the property, which is usually called “the lien date”

Other governments may use a different term for that event, such as that assessment or levy date. if this is prior to the start of the fiscal year, a deferred inflow of financial resources would be recognized. A revenue would be recognized at the start of the fiscal year.

Question 69

When does an enforceable legal claim occur for fines?

Answer 69

When the period to contest the claim expires, or, if contested, when the court rules in favor of the government

Question 70

When does a government mandated non-exchange transaction occur?

Answer 70

When are government one level, including the federal government, provides resources to a government at another level, and requires the government to use the resources for purposes established by the provider. The provider established purpose restrictions and may also establish time restrictions. For a transaction to occur, the recipient must meet the providers requirements.

Question 71

When is a receivable and revenue recognized for government mandated non-exchange transactions?

Answer 71

A receivable and revenue are recognized by the recipient government when it meets all the eligibility requirements established by the provider.

Question 72

When does the provider of a government mandated non-exchange transaction recognize a liability?

Answer 72

When the recipient government meets the eligibility requirements.

Question 73

What are the eligibility requirements of a recipient government for government mandated non-exchange transactions?

Answer 73

1. Recipient and secondary recipient, if applicable, must meet characteristics specified by the provider. For example, to receive a law enforcement grant, the recipient must be law enforcement agency
2. Time requirements specified by the provider must be met. For example a federal grant may allow spending to take place from October 1 to September 30. Any spending prior these days would not be eligible. Therefore, revenue should not be reported before the period begins
3. The provider specifies the resources will be available only on a reimbursement basis, also known as “expenditure driven grant”
4. The provider may specify contingencies that must be met such as the recipient must match the funds.

Question 74

What are voluntary non-exchange transactions?

Answer 74

When two or more parties will enter into an agreement either through legislation or by contract. The transactions are not imposed by the provider to the recipient. However, there may be eligibility requirements have to be met by the recipient.

Examples include entitlements, shared revenues, and donations

Question 75

When are receivables and revenues recognized for voluntary non-exchange transactions?

Answer 75

When the recipient meets all eligibility requirements

A payable is recognized by the provider when the recipient meets all eligibility requirements

Question 76

Does the government have the authority to make loans available to individuals and organizations?

Answer 76

Yes some governments.

Question 77

What should governments do prior to making loans available to individuals and organizations?

Answer 77

Evaluate the collectibility of the loan, and establish allowances based on experience

For example, small business loans have a high default rate. The allowance should be established to allow for the probability of default

Question 78

How should receivables be reported?

Answer 78

Net of allowances and discounts

Question 79

What does GASP statement 38, certain financial statement note disclosures, require for disclosure of receivables?

Answer 79

Components of significant receivables must be disclosed in the notes of the financial statements, if they are aggregated on the face of the financial statements

For example, if the government reports “ taxes receivable” on the face of the statements which is made up of property tax, sales tax, income tax and other taxes, the notes should provide disaggregated disclosures regarding receivables from property taxes, sales taxes, income taxes, and other

Governments should also disclose any significant receivables that are not expected to be collected within one year

Question 80

Governments have activity that takes place among funds. How can the activity be classified?

Answer 80

1. Reciprocal.
2. Non-reciprocal.

Question 81

What is a reciprocal activity?

Answer 81

An exchange transaction

Question 82

What are the two types of reciprocal transactions?

Answer 82

1. Interfund loans.
2. Interfund services provided and used.

Question 83

What are the two types of non-reciprocal activity?

Answer 83

1. Interfund transfers
2. Interfund reimbursements

Question 84

Of the four types of reciprocal and non-reciprocal activities, what is the only type to involve assets and liabilities?

Answer 84

Interfund loans

Question 85

Which type of loans affect the balance sheet or statement of net position?

Answer 85

Only loans between funds affect the balance sheet or statement of net position of the respective funds. There is no impact on the operating statement.

Question 86

What does the fund making the interfund loan record?

What does the fund receiving the interfund loan record?

Answer 86

Making: Records an asset—due from other funds

Receiving: records a liability— due to other funds

Question 87

A fund often doesn’t have sufficient cash to meet its obligations. This is particularly true of grant funds awaiting reimbursement from the grantor agency. How should this be recorded?

Answer 87

If a government has an internal investment pool, then a negative cash balance should not be reported. Instead alone should be made from another fund to bring the balance to zero and a “due from” and “due to” should be recorded

Question 88

If an interfund repayment is not expected within a reasonable period, what should be recorded?

Answer 88

The transaction should be reported as a transfer between funds

Question 89

What are governments required to disclose about interfund activity?

Answer 89

They are required to disclose the loans between funds in the notes to the financial statements. The details about the paying funds and receiving funds and the amount involved should be presented.

Question 90

What are the two methods for reporting inventory?

Answer 90

1. Consumption method.
2. Purchase method.

Question 91

What are inventories most associated with?

Answer 91

Proprietary funds and business-type activities

Question 92

What is the consumption method?

Answer 92

Governments maintain goods in inventory until requested by the customer. In this instance, the inventory is an asset until it is used

For example, a government provides office supplies to other departments and maintains a supply inventory. The activity is accounted for as an internal service fund. Office supplies are assets until orders are filled. At that time, an expense is recorded.

Question 93

What is the purchases method?

Answer 93

Governmental funds often do not maintain an inventory. Instead, when goods are purchased, an expenditure is recorded.

However, there is an exception for governmental funds. They can elect to use the consumption method for reporting the value of inventory.

Question 94

What are the reporting requirements for governmental funds even if the purchases method is used?

Answer 94

The amount of inventory is required to be reported if there are significant goods on hand

For example, governments in the colder climates may have supplies of salt on hand. The value at December 31 could be significant.

Question 95

For the consumption method, what is done in inventory purchases were made during the current fiscal year?

Answer 95

The expenditure would be reduced and an inventory account established

Question 96

The value of salt on hand at December 31 was $200,000 and was considered significant. The purchase had been made during the past three months. What would the journal entry be to report accumulated inventory for salt?

Answer 96

DR: inventory $200,000
CR: expenditures— public services $200,000

Question 97

The government should set aside an equal amount of fund balance in the governmental fund, since the asset is not in expendable form and is not available for appropriation. What would the entry be to report non-spendable fund balance for inventory?

Answer 97

DR: unassigned fund balance, $200,000
CR: nonspendable fund balance $200,000

Question 98

What should be disclosed for inventory?

Answer 98

The method used to value the inventory

Question 99

What is required if the government changes the inventory valuation method?

Answer 99

It’s required to restate its beginning balances

Question 100

What do governmental funds commonly use for prepaid items?

Answer 100

The purchases method

However, GAAP allows the option to use the consumption method. Thus, prepaid items would be reported similarly to inventory items.

Question 101

How are the issuance costs including, but not limited to, insurance cost (net of rebates from refunded old debt, if any), financing costs (such as rating agency fees), and other related costs (such as printing, legal, administrative, and trustee expenditures) treated?

Answer 101

They are expensed

Question 102

What should be disclosed for prepaid items?

Answer 102

Governments disclose the method used to amortize prepaid items in the notes in the summary of significant accounting principles, if material

Question 103

What do governments need to determine for capital assets?

Answer 103

They needed to determine the capitalization level for the capital assets and define the level in a capitalization policy

Question 104

What is the capitalization level used for capital assets?

Answer 104

Different capitalization levels may be used for different classes of capital assets

Question 105

What do capital assets include?

Answer 105

The right to use assets related to a lease

Question 106

What funds do not report capital assets?

Answer 106

Governmental funds do not report capital assets

Capital assets are reported for governmental activities, business type activities, proprietary funds, and fiduciary funds

Question 107

What are the major classes of capital assets?

Answer 107

1. Land.
2. Buildings.
3. Improvements, other than buildings.
4. Machinery and equipment.
5. Works of art and historical treasures.
6. Intangible assets.
7. Infrastructure.
8. Construction in progress

Question 108

What does the cost of land include?

Answer 108

• purchase price
• legal and title fees
• Surveying fees
• Appraisal and negotiation fees
• damage payments
• site preparation cost
• demolition of unwanted structures
• Any other outlays incurred to prepare the land for its intended use

Question 109

What does the classification of buildings include?

Answer 109

Permanent structures that house persons, or property and fixtures that are permanently attached to and are part of buildings

Question 110

What is included in the cost of buildings (and improvements other than buildings)?

Answer 110

• Purchase price
• Contract price or job order cost
• Fees of architects, attorneys, appraisers, and financial advisors
• Damage payments
• Cost of attached fixtures
• Insurance
• Any other outlays required to prepare, or improve the building for its intend to use

Question 111

What do improvements other than buildings include?

Answer 111

Improvements made to enhance land, such as grading, paving, sidewalks, permanent playground equipment, and other outlays required to bring the improvements to their intended use

Question 112

How should works of art and historical treasures be capitalized?

Answer 112

They should be capitalized at historical cost to the government or fair value when donated

However, governments are not required to capitalize collections if they are held for a public exhibition, education or research, rather than financial gain; protected, cared for, preserved, and kept unencumbered; and subject to a policy that requires proceeds from sales of collection, items to be used to acquire new items for the collection

Question 113

What are some characteristics of intangible assets?

Answer 113

• it lacks physical substance, such as a right of way easement
• Is non-financial in nature (not a monetary form, or represents neither a claim nor right to assets in monetary form)
• has an initial useful life extending beyond a single reporting period

Question 114

What are infrastructure assets?

Answer 114

Long lived capital assets that normally are stationary and nature, and could be preserved for significantly greater number of years than most capital assets

Examples include: roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems

Question 115

What is construction in progress classification?

Answer 115

A temporary capitalization of direct labor and materials, equipment, and incremental overhead cost of a construction project

When the project is completed, these costs are classified to one of the other major asset classes

Question 116

What do additions to assets do?

Answer 116

Extend the life or expand the capacity of capital assets

Question 117

What determines which transactions should be capitalized, and which should be treated as maintenance or repairs when it comes to additions and preservation?

Answer 117

The governments capitalization policy determines this

Question 118

What is capitalized when the transaction not only restores the asset to its original condition, but also results in it betterment?

Answer 118

The excess amount over what is required to restore the assets

Question 119

What does preservation apply to?

Answer 119

Applies to infrastructure and applies to costs, incurred to restore infrastructure to its original condition

For example, 10 lane miles of road are constructed. The original 2 Lane Rd. is replaced by a new two lane road.

Question 120

When are preservation costs capitalized? When are they expensed?

Answer 120

If the government does not use the modified approach for infrastructure assets then preservation costs are capitalized

If the government uses the modified approach, then the preservation costs are expensed

Question 121

When should an intangible asset be recognized in a statement of net position?

Answer 121

Only if it is identifiable

Question 122

What conditions must be met for an intangible asset to be considered identifiable?

Answer 122

1. The asset is separate. It is capable of being separated or divided from the government and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, lease, asset, or liability
2. The asset arises from contractual or other legal rights, regardless of whether those rights are transferable, or separate from the entity, or from other rights and obligations

Question 123

Intangible assets are not commonly held for income or profit. What are they considered if they are?

Answer 123

They are considered investments

Question 124

Are leases, and Goodwill considered intangible assets?

Answer 124

No

Question 125

What are some examples of intangible assets?

Answer 125

• Easements for powerlines
• Waterlines and sewer lines
• Right of way
• copyrights
• conservation easements
• water rights
• Operating licenses for utilities and radio stations

Question 126

When are intangible assets considered internally generated?

Answer 126

When they are created or produced by the government, or an entity contracted by the government

Or if they are acquired from a third-party, but require more than minimal incremental effort on the part of the government to begin to achieve their expected level of service capacity

Question 127

Outlays incurred, related to the development of an internally generated intangible asset, should be capitalized, only if what of the following occur?

Answer 127

1. Determination of the specific object of the project, and the nature of the service capacity that is expected to be provided by the intangible asset upon completion of the project.
2. Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity
3. Demonstration of the current intention, ability and presence of effort to complete, or, in the case of a multi year project, continue development of the intangible asset.

Question 128

Only outlets incurred, after meeting the above criteria, should be capitalized. Outlet incurred prior to meeting those criteria should be expensed. The criteria is only met if what occurs?

Answer 128

1. The activities in the preliminary project stage are completed.
2. Management implicitly or explicitly authorizes and commits to funding, at least currently in the case of a multi project, the software project.

Question 129

When is computer software considered internally generated?

Answer 129

• If it is developed by the government’s personnel or by a third-party contractor on behalf of the government
• commercially available software purchased or licensed by the government and modified using more than minimal incremental effort before being put into operation

Question 130

What stages are involved in developing installing internally generated computer software?

Answer 130

1. Preliminary project stage.
2. Application development stage.
3. Post implementation/operation.

Question 131

What are the activities in the preliminary project stage?

Answer 131

• Conceptual formulation and evaluation of alternatives
• determination of the existence of needed technology
• Final selection of alternatives for the development of the software

Question 132

What are the activities in the application development stage?

Answer 132

-Design of the chosen path, including:
- Software configuration and software interfaces
- Coding
- Installation to hardware
- Testing, including parallel processing phase

Question 133

What activities does the post implementation/operating stage include?

Answer 133

Application training, and software maintenance

Question 134

Which stage does data conversion fall into?

Answer 134

Data conversion should be considered inactivity of the application development stage, only to the extent that is determined to be necessary to make the computer software operational

Otherwise, data conversions should be considered an activity of the post implementation/operation stage

Question 135

What should be done to outlays associated with activities in the preliminaries project stage?

Answer 135

They should be expensed as incurred

Question 136

What should be done to outlays related to activities in the application development stage?

Answer 136

They should be capitalized

Question 137

What should be done to outlays associated with activities in the post implementation/operation stage?

Answer 137

They should be expensed as incurred

Question 138

Outlays associated with an internally generated modification of computer software already in operation should be capitalized if the modification results in what?

Answer 138

• An increase in the functionality of the computer software
• An increase in the efficiency of the computer software
• An extension of the useful life of the software

Question 139

What should the useful life of an intangible asset arising from contractual or other legal rights not exceed?

Answer 139

they should not exceed the period to which the service capacity of the asset is limited by contractual, or legal, provisions

Renewal periods related to such rights may be considered in determining the useful life of the intangible asset. If there is evidence, the government will seek and be able to achieve renewal, and that anticipated outlets to be incurred, as part of achieving the renewal, or no, in relation to the level of service capacity, expected to be obtained through the renewal

Question 140

When should an intangible asset be considered to have an indefinite useful life?

Answer 140

If there are no legal, contractual, regulatory, technological, or other factors, that limit the useful life of the asset

A permanent right of way easement is an example of an intangible asset that should be considered to have an indefinite useful life

Question 141

How should outlay associated with intangible assets be reported when incurred in financial statements, prepared using the current financial resources measurement focus?

Answer 141

As an expenditure

Question 142

When is the capital asset considered impaired?

Answer 142

When it service utility has declined significantly and unexpectedly

An example of this is a building, destroyed by fire, tornado damage, or hurricane, environmental and technical factors, or a change in the manner or use of a capital asset, such as closing of a building by a school board

Question 143

How should impaired capital assets that will no longer be used to be reported?

Answer 143

At the lower of carrying value or fair market value

Question 144

What are the methods for measuring impairment?

Answer 144

1. Restoration cost approach.
2. Service units approach.
3. Deflated depreciated replacement cost approach.

Question 145

What is done for impairment under the restoration cost approach?

Answer 145

The amount of the impairment is derived from the estimated cost to restore the utility of the capital asset. The estimated restoration cost can be converted to historical cost, either by restating the estimated restoration cost using an appropriate cost index or by applying a ratio of estimated restoration cost over estimated replacement cost to the carrying amount of the asset.

Question 146

What does the service unit approach do?

Answer 146

It isolates the historical cost of the capital asset that cannot be used due to the impairment event or changes in circumstances. The amount of the impairment is determined by evaluating the service provided by the asset before and after the event or change in circumstances.

Question 147

What does the deflated depreciated replacement cost approach do?

Answer 147

It replicates the historical cost of the service produced. The current cost for an asset to replace the current level of service is estimated. This estimated current cost is depreciated to reflect the fact that the capital asset is not new, and, then, is deflated to convert it to historical cost dollars.

Question 148

How should impairment of assets with physical damage generally be measured?

Answer 148

They should generally be measured using a restoration cost approach

Question 149

When should the service units approach be used?

Answer 149

For impairments from environmental or technological factors or obsolescence

Question 150

How are changes in manner or duration of use generally measured?

Answer 150

Using either the deflated depreciated replacement, cost approach or the service units approach

These approaches will identify the portion of cost that is to be written off

Question 151

What should be done to descriptions and amounts that are not apparent from the phase of the financial statements?

Answer 151

They should be disclosed in the notes

Question 152

What should any insurance recovery associated with the asset be netted with?

Answer 152

The impairment loss

Question 153

How should restoration or replacement of the asset using insurance recoveries be reported?

Answer 153

It should be reported as a separate transaction

Disclosure of insurance recoveries is required, if it is not apparent from the face of the financial statements

Question 154

What disclosures are required for capital assets?

Answer 154

• capitalization policies for capital assets should be disclosed in the summary of significant accounting policies
• Schedule changes in capital assets should be disclosed
• depreciable and non-depreciable capital assets should be presented separately
• Information about major classes of assets should be included

Question 155

How are governmental and business type activities, governmental and propriety funds, and certain resource inflows that are not earned recorded?

Answer 155

As advances

Question 156

The grantor agency provides funding to a government prior to the start of the grant period. How would the transaction to record advanced grant revenue received be recorded?

Answer 156

DR cash
CR: advances— grants

Question 157

Governmental funds report revenues that are not available. For example, a property taxpayer has not made payment by the end of the fiscal year. How would the government initially record property taxes as?

Answer 157

DR: accounts receivable
CR: revenue— property taxes

Question 158

If the availability period for revenue is 60 days and payment has not been made within that period. What journal injury would be needed to report property tax revenue that is not available?

Answer 158

DR: revenue— property taxes
CR: deferred inflow of resources— property taxes

Question 159

When are resources recognized?

Answer 159

In the period of the taxpayer pays the liability

Question 160

When are governments required to disclose the availability period?

Answer 160

For governmental revenues

Question 161

Are advances the same as deferred inflows and outflows of resources?

Answer 161

No

Question 162

What period do deferred inflows and outflows of resource relate to?

Answer 162

The future period not the current period

Question 163

When are deferrals of inflows and outflows recognized?

Answer 163

Governments do not recognize referrals, other than when required by those statements

GASB pronouncements

Question 164

What are some deferred outflows of resources that are recognized by GASB?

Answer 164

1. Changes in fair value of hedging derivative instruments.
2. Resources provided in government mandated non-exchange or voluntary non-exchange transactions before time requirements are met, but after all eligibility requirements are met
3. Certain changes in net pension liabilities, or assets.
4. Certain changes in net OPEB liabilities or assets.
5. Asset retirement obligations.
6. Certain bond refunding transactions
7. Government operators relating to a public private or public public partnership.

Question 165

What are some deferred inflows of resources that are recognized by GASB?

Answer 165

1. Changes in fair value of hedging derivative instruments.
2. Resources received in government mandated non-exchange or voluntary non-exchange transactions before time requirements are met, but after all eligibility requirements are met
3. Certain changes in net pension liabilities, or assets.
4. Certain changes in net OPEB liabilities or assets.
5. A government’s interest in some irrevocable split interest agreements.
6. Contracts where a government is a lessor.
7. Certain bond refunding transactions
8. Transferor governments receiving installment payments, and other payments relating to a public-private or public-public partnership

Question 166

What are compensated absences?

Answer 166

Significant long-term liabilities

Question 167

When should a liability for vacation leave and compensated absences with similar characteristics, attribute to service, already rendered be accrued?

Answer 167

It should be accrued as employees earn the rights to the benefits, if it is probable that the employer will compensate the employee for the benefits

For example, if an employee is entitled to be paid for all accumulated vacation leave at the time of termination, and it is probable that the employer will compensate the employee for the benefits, a liability for the value of the accrued vacation time should be recognized at the end of the fiscal period.

Question 168

When should compensated absences related to future services, or that are contingent upon a specific event, outside of the control of the employer and the employee be accounted for?

Answer 168

In the period those services are rendered or in the period those events take place

According to GASB codification C60, certain types of compensated absences, such as parental leave, military leave and jury duty leave should not have a liability recognized until the leave commences. Specific types of compensated absences should not have a liability recognized until the leave is used.

Question 169

Employers will often pay for accumulated sickleave upon retirement. How is the liability determined?

Answer 169

The employer must first determine how many employees are likely to retire. Then, the employer must determine the hours of sickleave to be compensated. The hours are then multiplied by the employees’ pay rate to determine the liability

Question 170

What do governmental funds report for compensated absences?

Answer 170

They report the portion of the liability that will be liquidated by using expendable available financial resources in the appropriate governmental fund. Thus, an employee who has retired on the last day of the fiscal year would be entitled to be paid for accumulated vacation leave as of the retirement date. Although the actual payment may not be made until later in the new fiscal year, the amount would be reported in the fund as a liability.

Question 171

How do governmental and business type activities and proprietary funds report compensated absences?

Answer 171

They report the entire liability for compensated absences as a long-term liability

Question 172

How is the liability determined when governments allow employees to use vacation leave as soon as they have an available balance?

Answer 172

They multiply the accumulated hours times the employees rate of pay, including salary-related benefits

Question 173

If an employee has 10 hours of accumulated balance at the end of the year. The employees pay rate is $10 per hour. Salary related benefits are 15% of the employees rate of pay. What would the liability for this employee be?

Answer 173

$10 times 10 hours = $100 (the value of vacation leave)
$100 times 15% = $15 (salary related payments)
$100 plus $15 = $115 (the vacation liability)

Question 174

How is the liability determined if the employer has a policy that leave cannot be used or paid until until the employee has worked six months or one year?

Answer 174

The employer would have to estimate the number of employees on the payroll at the end of the year, who are expected to terminate employment before reaching six months or one year of employment. That amount would be subtracted from the total value of the benefit to determine liability that is to be reported.

Question 175

Many employers pay unused sickleave only upon retirement, and may pay at it at a reduced rate, such as one hour of pay for four hours of accumulated leave. How is the liability determined?

Answer 175

The employer would be required to estimate the employees who will eventually retire, and the value of their sickleave. The final estimate involves the determination of the liability for employees that will terminate within one year. The amount due within one year is required to be reported separately from the portion considered to be long-term for governmental activities, business activities and proprietary funds

Question 176

What are termination benefits? What did they include?

Answer 176

Benefits provided by employers to employees as an inducement to hasten the termination of services, or because of voluntary early termination (voluntary termination benefits) or as a consequence of the involuntary early termination (involuntary termination benefits)

They include early retirement, incentives, severance, benefits, and other termination related benefits

Question 177

Are termination benefits different from salaries and benefits, including post employment benefits?

Answer 177

Yes

Question 178

How should the employer determine whether the nature of the benefit arrangement to provide benefits in exchange for the early termination of services (a termination benefit) or to provide benefits in exchange for employee services (a pension benefit)?

Answer 178

Professional judgment should be applied considering factors, including:
- The employers intent
- The way in which the employees generally view the benefits
- Whether the benefit is conditioned termination of employment prior to normal retirement age
- The length of time for which the benefits have been made available

Question 179

How should employer measure the cost of healthcare related termination benefits, including healthcare, continuation under COBRA?

Answer 179

By calculating the discounted present value of expected future benefit payments that considers the projection of benefits, the healthcare cost trend rate, and the discount rate

Question 180

How should an employer measure the cost of germination benefits that are not healthcare related?

Answer 180

1. If the benefit terms establish an obligation to pay specific amounts on fixed or determinable dates, the cost of non-healthcare related termination benefits should be calculated at the discounted present value of expected future benefit payments, including an assumption regarding changes and future cost levels during the period covered by the employers commitment to provide the benefits
2. The benefit terms do not establish an obligation to pay specific amounts on a fixed order determinable deeds, the cost of the non-healthcare related benefits should be calculated as either 1) the discounted present value of the expected future benefit payments, including assumption regarding changes and future cost levels during the period covered by the employers commitment to provide the benefits or 2) the undiscounted total of estimated future benefit payments at current cost levels

Question 181

When should an employer recognize a liability and expense for voluntary termination benefits?

Answer 181

When the employees accept the offer, and the amounts can be estimated

Measurement of the liability should be updated, and any incremental liability and expense should be recognized at the end of the subsequent reporting periods

Question 182

What does a plan of involuntary termination benefits include?

Answer 182

1. Identifies, at a minimum, the number of employees to be terminated, the job, classifications or functions that will be affected and their locations, and when the terminations are expected to occur.
2. Establishes the terms of the termination benefits in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated.

Question 183

What does a plan of involuntary termination benefits include?

Answer 183

1. Identifies, at the minimum, the number of employees to be terminated, the job, classifications or functions that will be affected and their locations, and when the terminations are expected to occur.
2. Establishes the terms of the termination benefits in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated.

Question 184

When should an employer recognize both liability and expense for involuntary termination benefits?

Answer 184

When the plan of termination has been approved by those with the authority to commit the employer to the plan, the plan has been communicated to the employees, and the amounts can be estimated

Measurement of the liability should be updated, and any incremental liability and expense should be recognized as of the end of the subsequent reporting periods

Question 185

If a plan of involuntary termination requires the employee to render future service to receive termination benefits, when would all liability and expense for the portion of involuntary termination benefits be recognized?

Answer 185

A liability and expense for the portion of involuntary termination benefits that will be provided. Only after completion of future service should be recognized ratably over the future service period 

Question 186

In governmental fund statements (modified, accrual basis, financial statements), when should liabilities and expenditures for termination benefits, be recognized?

Answer 186

They should be recognized, if available, financial resources will be used to liquidate the liabilities

Question 187

What note disclosures are required for termination benefits?

Answer 187

• The employer should disclose in the notes, a description of the termination benefit arrangements in the period in which the employer becomes obligated for termination benefits, and in any additional periods in which employees are required to render future services to receive involuntary termination benefits
• In the period in which they employer becomes obligated for termination benefits, the cost of benefits should be disclosed if that information is not otherwise identifiable from information displayed on the face of the financial statements
• The employer should disclose the significant methods and assumptions used to determine the liabilities in all periods in which determination benefits are reported
• The employers to disclose if a termination benefit meets the recognition criteria and is not recognized because the expected benefits are not estimable

Question 188

What funds does GAAP allow to account for risk financing activities?

Answer 188

The general fund or an internal service fund

Question 189

Why do some governments prefer to use an internal service fund over a general fund for risk financing activities?

Answer 189

• They believe the transaction detail is more flexible if the information is outside the general fund
• They believe it is easier to analyze the financial condition of the risk financing activities if the transactions are segregated from the general fund
• Risk financing will probably cover activities or employees in funds other than the general fund

Question 190

The internal service fee may use any basis it considers appropriate to charge other funds of the entity. What conditions must be met?

Answer 190

1. The total charge of the internal service fund to other funds for the period is calculated in accordance with claim recognition principles.
2. The total charge by the internal service fund to other funds is based on an actuarial method or historical cost information and adjusted over a reasonable period of time so that internal service revenues and expenses are approximately equal.
3. The total charge by the internal service fund to other funds may also include a reasonable provision for expected future catastrophic losses.

Question 191

An internal service fund may generate surplus is that are reserved for future, catastrophic losses, or errors in estimates for current claims. If the general fund is used, when should claim expenditures and liabilities be recognized?

Answer 191

Only to the extent that they are payable with current financial resources

Question 192

An internal service fund may generate surplus is that are reserved for future, catastrophic losses, or errors in estimates for current claims. If the general fund pays for claims for all funds,, when should claim expenditures and liabilities be recognized?

Answer 192

The government may use any method. It chooses to allocate expenditures to other funds.

However, if the total amount charged to other funds exceeds the total expenditures, the excess should be reported as transfers

Question 193

Government entities often purchase insurance to cover some portion of losses. The reporting will vary depending on the type of coverage purchased. what general principles apply to this type of risk financing?

Answer 193

1. Report insurance premiums as expenditures/expenses.
2. Analyze the potential for additional premiums or loss expenditures, and report adjustments or contingencies, as appropriate.
3. Consider the level of risk transferred to the issuer to determine the disclosure or display, necessary for contingencies associated with additional losses.

Question 194

What does the act of providing or offering insurance coverage create even though services for third-party, may be combined with the entities risk financing activities?

Answer 194

A public entity risk pool is often created

Question 195

For entities other than pools, what should happen to estimated recoveries on settled claims?

Answer 195

They should be deducted from the liability for unpaid claims

Question 196

If the entity is a predominant participant, where should the activity be reported? Where should it be reported if they are not a predominant participant?

Answer 196

In the general fund or an internal service fund

If the entity is not the predominant participant, the fund is a public entity risk pool, and is reported as an enterprise fund

Question 197

How should claim servicing functions report amounts collected from other participants?

Answer 197

As a net asset or liability using the accrual basis of accounting

Question 198

What statement are claims servicing revenue, and administrative costs included on?

Answer 198

The operating statement

Question 199

What is a pollution remediation obligation?

Answer 199

An obligation to address the current, or potential detrimental effects of existing pollution by participating in pollution remediation activities

For example, obligations to clean up spills of hazardous waste or substances, and obligations to remove contamination, such as asbestos, our pollution remediation obligations

Question 200

What do pollution remediation obligations include?

Answer 200

1. Pre-cleanup activities, such as the performance of site, assessment, site investigation, and corrective measures feasibility study, and the design of a remediation plan
2. Clean up activities, such as neutralization, containment, or removal and disposal of pollutants
3. External government oversight and enforcement related activities, such as work performed by an environmental regulatory authority, dealing with the site and chargeable to the government.
4. Operation and maintenance of the remedy, including required monitoring of the remediation effort (post remediation monitoring)

Question 201

What do pollution remediation obligations not include?

Answer 201

Pollution, prevention, or control obligations, with respect to current operations, such as obligations to install smoke stack, scrubbers, treat effluent or use environmental friendly products

Question 202

What do pollution remediation outlays include?

Answer 202

All direct outlays attributable to pollution remediation activities, and may include estimated indirect outlays

Question 203

When are outlays related to natural resource damage included as part of the pollution, remediation effort?

Answer 203

Only if incurred as part of the pollution, remediation effort

Question 204

What outlay are not part of performing pollution remediation, and should not be included?

Answer 204

• Fines
• Penalties
• Toxic torts
• Product and process safety outlays
• Litigation support associated with potential recoveries
• Outlays borne by society at large rather than a specific government

Question 205

How are outlays for operation and maintenance of remedial action, including post remediation, monitoring, required by a remedial action plan, for pollution remediation?

Answer 205

They are part of pollution remediation rather than a separate future service obligation

Post remediation estimates should consider that such outlays are not likely to extend indefinitely

Question 206

What does the framework for recognition and measurement of liabilities incorporate for pollution remediation activities?

Answer 206

• obligating events
• Recognition benchmarks
• Measurement
• Capitalization of pollution, remediation outlays
• Display
• Disclosures

Question 207

When a government knows, or reasonably believes, a site is polluted, the government should determine whether one or more components of a pollution remediation obligation are recognizable as a liability when what events occur?

Answer 207

• The government is compelled to take remediation action, because pollution creates an eminent endangerment to public health or welfare of the environment, leaving it little or no discretion to avoid remediation action
• The government is in violation of a pollution prevention related permit or license
• The government is named or evidence indicates it will be named by a regulator as a responsible party, or potentially responsible party for remediation, or as a government responsible for sharing costs
• The government is named, or evidence indicates it will be named, in a lawsuit to compel the government to participate in remediation
• The government commences, or legally obligates itself to commence, cleanup, activities or monitoring, or operation and maintenance of the remediation effort

Question 208

When should pollution remediation liabilities be recognized?

Answer 208

As the ranges of their components become reasonably estimable

Question 209

In some cases, the government may have insufficient information to reasonably estimate the ranges of all components of its liability. What should the government do to recognize pollution remediation liabilities?

Answer 209

The government should recognize pollution, remediation liabilities as the range of each component of the liability becomes reasonably estimable

In other cases, a government will be able to reasonably estimate a range of all components if it’s liability early in the process because the site situation is common in, or is similar to, situations at other states, which the government has experience

Question 210

At minimum, the estimates of a pollution remediation liability should be evaluated at what benchmarks?

Answer 210

• receipt of an administrative order
• Participation in the site assessment or investigation
• Completion of a corrective measures feasibility study
• Issuance of an authorization to proceed
• Remediation design and implementation, and including operation and maintenance, and post remediation monitoring

Question 211

What is an administrative order?

Answer 211

A government receives an administrative order compelling it to take a response action at a site or risk penalties.

The ability to estimate outlays resulting from administrative orders, vary with factors, such as site complexity, and the nature and extent of the work to be performed

Question 212

What occurs at the participation in the site assessment, or investigation benchmark??

Answer 212

At this stage, the government has been identified as a responsible party, and has agreed to pay all, or part, of a study that will investigate the extent of the environmental impact of the release, or threatened release, of pollutants, and to identify site remediation alternatives.

The total outlays associated with the site assessment or investigation, generally, is estimable within a reasonable range. As as the site investigation proceeds, the governments estimate of its shares, and the site investigation can be refined.

Question 213

When is the corrective measures feasibility study considered substantially complete.?

Answer 213

No later than the point, at which the responsible party recommends a proposed course of action to the regulatory authority

All components of the liability should be recognized by this time, even if uncertainties remain

Question 214

What occurs at the issuance of an authorization to proceed?

Answer 214

At this point, regulatory authority has issued its determination specifying a preferred remedy. The governments estimate can be refined based based on the specified remedy and a preliminary allocation of the total remediation outlays

Question 215

What does GASB state that a liability arises from?

Answer 215

A contractual obligation to pay cash (or other assets that may be used in of cash) in one or more payments to settle an amount that is fixed at the date that the contractual obligation is established

Question 216

What does debt not include?

Answer 216

Leases, except for contracts reported as a financed purchase of the underlying asset or accounts payable.

A government should separate information and debt disclosures regarding direct borrowings and direct placements of debt from other debt

Question 217

What are notes?

Answer 217

• Short term of financing instruments
• Usually one year or less

Question 218

What is are tax anticipation notes?

Answer 218

Governments rely on property taxes and may need funds for cash flow purposes. Since property taxes are often only received twice a year, a government may have a cash flow problem.

Therefore, the government would issue a TAN redeemable after the property taxes are received

Notes can also be issued in anticipation of grants or other revenues

Question 219

What is the most common use of notes?

Answer 219

The financing of capital projects

Question 220

What is a bond anticipation note?

Answer 220

Used to provide cash to undertake a project prior to selling eventual long-term debt

It would not be unusual to issue several notes since some projects require long periods to complete. The government would roll over the note, taking out a new note, and paying off the old one plus interest with part of the proceeds. When the project is near completion or completed, the government would issue a bond

Question 221

What is used to retire bond anticipation notes?

Answer 221

From proceeds of a long-term financing source when the bonds are issued

As a result, they have characteristics of long-term obligations their first reported as short term obligations, and then reported as long-term obligations when the legal steps have been taken to refinance the BAN and the ability to consummate the refinancing is demonstrated

Question 222

What are bonds?

Answer 222

long-term debt instruments

Question 223

What are some of the legal provisions restricting the length of time for a bond to mature?

Answer 223

no longer than the life of the asset being constructed or purchased

Question 224

What are general obligation bonds?

Answer 224

The whole faith and credit of the government is available to pay bondholders

Taxes, and most other revenues are essentially pledged to pay dead services

Question 225

What are revenue bonds?

Answer 225

Limited obligations

Holders of the bond typically can only rely on the revenue stream generated by the enterprise for the repayment of the debt

Question 226

What are certificates of participation?

Answer 226

When a government may not be able to, or desire to issue general obligation debt for the project

The government contacts several financial institutions(bank, and insurance companies) and a pool is formed. Each participant in the pool receives a certificate of participation. The is financed by using the resources in the pool, and the resulting facilities is leased to the government. Each participant receives the share of the service based on the participation in the pool.

Question 227

Why do governments issue refunding bonds?

Answer 227

To take advantage of declines in interest rates

For example, in the past the government may have issued bonds with an interest rate of 8% Because of the declines in long-term rates, bonds can now be issued with the rate of 5%. The proceeds of the new issue used to call the 8% bonds with 5% bonds. As a result, the government realizes substantial savings and interest.

Question 228

What can government do if they cannot call the entire order issue because of covenant restrictions?

Answer 228

Advance refunding bonds may be issued

The proceeds are placed in escrow to buy other securities. Earnings are used to service the original bonds until the call date is reached.

Question 229

What are the alternatives of selling in a competitive or negotiated sale in the open market?

Answer 229

Governments can agree to direct borrowings or direct placements

Question 230

What is the purpose of direct borrowings and direct placements?

Answer 230

To lessen issuance and administrative costs

However, these transactions have been in risk due to cross collateralization with more general forms of debt. The financial situation in the commonwealth of Puerto Rico is a prime example of what can happen to a government is instruments are used.

Question 231

What are direct borrowings?

Answer 231

When a government enters into a loan agreement with an investor, typically a mutual fund or hedge fund

Question 232

What are direct placements?

Answer 232

When a government issues a debt security directly to an investor, typically a mutual fund or hedge fund

Question 233

What is a lease?

Answer 233

A contract that can phase control of the right to use another entities non-financial asset (underlying asset) as specified in the contract for a period of time in an exchange or exchange like transaction

Question 234

What must be done for a contract to be effective?

Answer 234

Government must have control of the right to use the underlining asset for the contract to be effective

Evidence of control includes the right to determine the nature and manner of use of the asset in accordance with the contract

Question 235

What are embedded leases?

Answer 235

Contracts that fit the definition of a lease, but do not contain the word rent or lease

Question 236

What do GAAP lease provisions not apply to?

Answer 236

• contracts transfer ownership
• leases of intangible assets
• Leases of biological assets (trees, plants, timber)
• Contracts that meet the definition of a service concession arrangement
• Leases in which the underline asset is financed with outstanding conduit, unless both of the underlying asset of the conduit debt are reported by the lesser
• Supply contracts, such as power purchase agreements

Question 237

What is short-term lease?

Answer 237

A lease at the commencement of lease term has a maximum possible term under the lease contract of 12 months or less including any options to extend. Regardless of the probability of being exercised.

Question 238

What is the max possible term for a lease that is cancelable by either the lessee or the lessor such as a rolling month to month lease or a year to year lease?

Answer 238

Noncancelable period including any notice periods

Question 239

How are short-term leases reported?

Answer 239

Lessor: receivable, and a deferred inflow of resources, as ownership of the underlying asset remains with the government less or

Lessees: all liability, and a right to use an asset for the discounted present value of the payments is to be made during the lease term.

Question 240

What are some ways that property escheats to the government?

Answer 240

• if a person dies without a will, and there are no known hairs at the time of the estate settlement
• individuals who leave deposits for utilities and other services that remain unclaimed

Question 241

What are some ways that property escheats to the government?

Answer 241

• if a person dies without a will, and there are no known hairs at the time of the estate settlement
• individuals who leave deposits for utilities and other services that remain unclaimed

Question 242

How is escheat property reported if the abandoned property results from deposit with the government?

Answer 242

It’s reported in the appropriate governmental or proprietary fund as revenue

However, a liability should be established based on the amount of refund if any which may be claimed. In all other cases, the facts and circumstances of the fund received should be considered in determining the fund to be used.

Question 243

How is escheat property reported if the abandoned property results from deposit with the government?

Answer 243

It’s reported in the appropriate governmental or proprietary fund as revenue

However, a liability should be established based on the amount of refund if any which may be claimed. In all other cases, the facts and circumstances of the fund received should be considered in determining the fund to be used.

Question 244

What does the government use for unclaimed or abandon property? How is it reported

Answer 244

It’s often used for public purposes

The government to estimate the amount that might be claimed and establish a liability

Question 245

What are some types of government combinations?

Answer 245

1. Government merger.
2. Government acquisition.
3. Transfer of operations.

Question 246

What are some types of government combinations?

Answer 246

1. Government merger.
2. Government acquisition.
3. Transfer of operations.

Question 247

What is considered a government combination?

Answer 247

The arrangement should result in the continuation of a substantial portion of services provided by the previously separate entities, and their operations after the transaction has occurred

Question 248

What is considered a government combination?

Answer 248

The arrangement should result in the continuation of a substantial portion of services provided by the previously separate entities, and their operations after the transaction has occurred

Question 249

What is the government merger?

Answer 249

When two or more governments cease to exist as legally separate entities, and are combined to form one or more new governments

Or one or more legally, separate entities ceased to exist, and their operations are provided by one or more continuing government, and no significant consideration is exchanged

Question 250

When is the date of merger for a new government? What should the new government recognize?

Answer 250

The date on which the combination becomes effective

Assets, deferred outflows of resources, liabilities, or deferred inflows of resources of the merging entities. The beginning net position of the merged government results from combining the caring values of the assets, deferred outflows or results from combining the caring values of the assets, deferred, outflows or resources, liabilities, or deferred inflows of resources of the separate entities.

Question 251

What is the merging date for continuing government merger? What should the continuing government recognize?

Answer 251

The date of the reporting period in which the combination occurs regardless of the actual date of the merger

The continuing government should recognize the combined assets, deferred outflows, liabilities, or deferred influence of resources of the merging entities

Question 252

What is the merging date for continuing government merger? What should the continuing government recognize?

Answer 252

The date of the reporting period in which the combination occurs regardless of the actual date of the merger

The continuing government should recognize the combined assets, deferred outflows, liabilities, or deferred influence of resources of the merging entities

Question 253

What is a government acquisition?

Answer 253

A situation where government acquires another entity or the operations of another entity in exchange for significant consideration

Question 254

What is the acquisition date?

Answer 254

The date on which the acquiring government obtains control of the assets and becomes obligated for the liabilities

Question 255

What should the acquiring government recognize on the acquisition date?

Answer 255

The assets, deferred, outflows, liabilities, and deferred inflows acquired and assumed

Question 256

How should consideration provided by the acquiring government be measured? And what does consideration include.?

Answer 256

You should be measured as of the acquisition date, and is the sum of the values of assets, remitted or liabilities incurred to the former owners of the acquired entity

Consideration may include
- Financial and non-financial assets (cash, investments, capital assets)
- Liabilities incurred may represent an obligation to provide consideration to the former owners of the acquired entity, such as a note payable

Question 257

What should the acquiring government report when the consideration provided exceeds the net position acquired?

Answer 257

They should report the differences as a deferred outflow of resources and attributed to future periods in a systematic and rational manner

Question 258

What should the acquiring government do when the consideration provided is less than that position acquired?

Answer 258

They should eliminate the access by reducing the acquisition, values assigned to the non-current assets, unless the conditions of the arrangement indicate that a contribution should be recognized by the acquiring government

Question 259

How should acquisition cost incurred to the effect of an acquisition be recognized?

Answer 259

As an expense/expenditure in the periods in which the costs are incurred and services are received

Question 260

What is a transfer of operations?

Answer 260

A situation involving the operations of an entity rather than the combination of legally separate entities in which no significant consideration is exchanged

Operations may be transferred to another existing entity or to a new entity

Question 261

When does a transfer of operations to an existing entity occur?

Answer 261

When a government transfers, one or more operations to another existing government

The transfer may result from arrangement such as re-organizations, redistricting and annexing, in which operations are combined through jurisdiction. It can also result from shared service arrangement in which governments agreed to combined operations

Question 262

When does a transfer of operations to a new government occur?

Answer 262

And shared service arrangements in which government agrees to combine operations and transfer assets and liabilities to a new government

The transfer to a new government occurs when an operation of a single government is re-organized as a new government to provide those services

Question 263

A disposing government should recognize again or loss on the disposal of operations if applicable. Where should the gain or loss be reported?

Answer 263

It should be reported as a special item in the period in which the disposal occurs

Question 264

What note disclosures are required for all government combinations?

Answer 264

• A brief description of the combination,
• the date of the combination
• a description of the primary reasons for the combination

Question 265

What note disclosures should be for government, mergers, and transfers of operations?

Answer 265

• the amount recognized for total assets
• Total deferred outflows of resources
• total liabilities
• Total deferred influence of resource
• total net position by component

Question 266

What note disclosures are required for acquisitions?

Answer 266

• a brief description of the consideration provided
• the total amount of net position acquired
• a brief description of contingent arrangements, including the basis for determining the amount of payments that are contingent

Question 267

What notes are required for the disposals of government operations?

Answer 267

• identification of the operations in a brief description of the facts and circumstances leading to the disposal of the operations
• Identifying and disclosing the total expenses and revenues, distinguishing between operating and non-operating and the total government fund revenues and expenditures, if applicable