SU 11: Proprietary Funds Flashcards
Types of proprietary funds
- enterprise funds
- internal service funds
Enterprise funds primary purpose
provide services to the general public
When must a government use an enterprise fund
If:
1) activity is financed solely with revenue-related debt instead of government-obligation debt (so not financed with taxes), or
2) cost of providing services is recovered by fees and charges, or
3) pricing polices are designed to recover costs
Primary purpose of internal service funds
to provide services to government departments
may also provide services to the public but that is not the main beneficiary
Financial statement focus for proprietary funds
- operating net income
- changes in net assets
What does it mean that funds coming in to a internal service fund are “revolving”
Funds are not expendable for other government purposes but rather go into the continued operation of the fund’s enterprise
are budgets required for proprietary funds?
No, legislative approval for funding is not required. But they are likely to have budgets anyway
Revenue sources for proprietary funds
- ordinary revenue (payments for services)
- internal & external capital contributions
- non-routine receipts
What sort of non-routine receipts might a proprietary fund receive?
- tap fees (hook-up fees)
- impact fees
- opportunity fees
- external subsidies (grants)
- internal subsidies
- debt forgiveness
Type of accounting used for proprietary funds
accrual
means no adjusting journal entries required to convert to gov-wide statements
classification inflows and assets intended solely for proprietary fund’s use
Restricted
net position related to proprietary fund is also restricted
What type of funds are usually used for landfills/ should be used for landfills?
Enterprise funds
GASB statements for landfill remediation
18 and 49
Types landfill remediation costs
Closure
Post-closure
segregated for accounting purposes
Costs included in landfill pollution remediation costs
- Estimated cost of equipment (closure & post-closure)
- Estimated cost for final cover (closure)
- Estimated cost for post-closure monitoring and maintenance
landfill Closure pollution remediation costs
- Estimated cost of equipment
- estimated cost for final cover
Post-closure landfill pollution remediation costs
- Estimated cost of equipment
- estimated cost for post-closure monitoring and maintenance
Allocation of estimated landfill remediation costs
allocated to the years the landfill accepts waste
- recognize expense and increase liability
Amount of annual landfill remediation expense and liability to recognize
= (estimated total remediation costs * % of landfill used) - amounts previously recognized
what remediation estimates must be updated annually
- total estimated remediation costs
- landfill capacity
- % of landfill used
Accounting treatment of recoveries for landfills
deducted from estimated remediation expense/ liability
Is the funding for landfill remediation expense/ liability regulated
No
Accounting effects if landfill is accounted for in governmental fund (vs enterprise fund)
- no annual expense/ liability journal entries
- no LT liabilities shown in fund (only government-wide)
- Expenditures are recorded only when current financial resources are used
Enterprise fund AJE to record landfill liability and expense
DR Landfill Expense
CR Liability- Landfill costs
Recording closure costs when they occur
DR Liability- landfill costs (rather than an expense account)
Weighted average approach to pollution remediation costs for pollution caused by operations
Sum of each potential estimate of remediation costs x probability of that cost
(total probabilities must = 100%)
When to recognize pollution remediation costs as an expense/ liability
- when pollution is known or reasonably believed
- government is responsible for costs
- a reasonable estimate is possible
Amount of estimated cost to record as pollution remediation expense/ liability
Present value of weighted average estimated cost
reduced by any recoveries from other parties
estimates should be updated as new information warrants
Accounting treatment of pollution remediation costs incurred with the purchase of an asset
Capitalize estimated remediation costs to the asset
Where do most revenues for internals service funds come from?
Other government or proprietary funds
Revenue account used for ISFs
Billings to Departments
Treatment of capital assets in ISFs
Depreciate
Accounts used to close ISF revenues and expenses accounts at year end
either
- Excess of Net Billings to Departments over Costs
or
- Excess of Costs over Net Billings to Deparments
Effect of government-wide consolidation on ISF funds
All activity between ISF and other GOV departments must be eliminated in Gov-wide statements
Are resources from ISFs usually restricted from sponsoring Government’s other resources?
No
ISF Journal Entry to establish ISF
DR Cash
CR Non-reciprocal transfer in from general fund
Receivable account used by ISF
Due from X Fund
DR when billed, CR when payment received
Basic philosophy of an internal service fund
The ISF should break even with regard to the sponsoring entity it serves
How many ISFs should a government have
Separate ISF for each major, identifiable activity
Calculating the break-even for ISF
does not include revenues and expenses from outsider’s are not part of the “break-even” for the sponsoring entity
ISF investment and interest income on financial statements
included in ISF financial statement’s but not on those of the sponsoring entity
Consequences in GOV-wide financial statements if ISF transactions are not eliminated
- Revenues double counted (by ISF + by GOV in the purchase from ISF)
- Costs double counted (by ISF + by GOV in the purchase from ISF)
- Depreciation
(more than double counted!)
distorts overall comparability of ISF vs other government funds
Costing models
- full direct and indirect costs (both variable and fixed)
- direct costs only (variable and fixed)
- variable costs only (assumes fixed costs are already covered)
Cost-reimbursement approach
breakeven approach to ISF pricing for other government departments, services at cost so creates no profit.
(but then have to define cost)
How can ISF pricing be used to manipulate picture of government finance
- lower ISF pricing: reduces GOV fund expenditures, increases fund balances and decreases liabilities
- Higher ISF pricing: increases GOV Fund expenditures etc… can be used to stash excess cash in ISF
Full cost calculation
Fixed costs per month / cost basis per month = fixed costs/ basis + variable costs / basis = total cost / basis
downside of full cost calculation
Fixed costs are often covered by standard operations and fill cost pricing may discourage other government departments from USING the ISF if the pricing isn’t competitive
ergo special order jobs should be based on variable costs only
Service concession arrangements
Government contracts an outside operation to use infrastructure or government assets to provide services
Financial arrangements of service concession arrangements
Government receives either up-front payment or a series of payments over time
government can set the rates charged for the services
Accounting for service concession arrangements
- Government capitalizes cash up-front payments OR the preset value of future payments as an asset
- Government recognizes PV of future costs as a liability
- any gain booked to deferred inflow and amortized to revenue over the period of the contract
- new assets (purchased or built by operator) on government books and depreciated as usual
Options for terminating an internal service fund
- transfer the ISFs assets to another fund to continue same activity (Non-reciprocal transfer out to gov fund)
- terminate the activity and distribute assets in kind to another fund/ funds
- convert ISF’s assets to cash and distribute to other fund(s)
