1 Governmental Accounting (Part 2) - Heading 2 Governmental Funds - Heading Chapter 16: Governmental Funds, Proprietary Funds & Fiduciary Funds Governmental Funds 3 Governmental Funds - 1 4 Governmental Funds - 2 Remember that Gs have a General Fund & can set up other funds for other G activities that are common G can set up: Special Revenue Funds Permanent Funds Capital Projects Funds Debt Service Funds Special Revenue Funds Law or donor restricts on what operations Special Revenue funds can spend money G can spend all of the Special Revenue Funds But, only for specified purposes 1
5 Governmental Funds - 3 6 Governmental Funds - 4 E.g.s of Special Revenue Funds: Hotel room taxes Promote tourism State Lottery Funds Education Gasoline tax revenues Highway maintenance Resources for food stamp programs Food stamps Golf fees charged at a city golf course Golf course maintenance Special Revenue Funds Use budgets & vouchers FSs: BS Statement of Revenues, Expenditures & Changes in Fund Balances 7 Governmental Funds - 5 8 Governmental Funds - 6 If more than one Special Revenue Fund. Non-major Special Revenue Funds can be shown in one statement. Separate columns for each fund A total column Called Combining FSs Major Special Revenue Funds can be shown together in one statement Separate columns for each One column for all Non-major Special Revenue Funds A total column Called Combined FSs Combined FSs (Major Funds & Summary of Minor Funds): Major Fund 1 Major Fund 2 Combining FSs (Non-Major Funds): Individual Fund 1 Individual Fund 2 Major Fund 3 Individual Fund 3 Total Other Governmental Funds Total Total Governmental Funds 2
9 Governmental Funds - 7 10 Governmental Funds - 8 If Special Revenue Fund has legal budget Need to show Actual spending & revenues Budgeted spending & revenues Budget variances Permanent Funds Permanent Funds also known as Public Purpose Trusts Earnings can spend for a specified purpose Principal - not expendable. If you could spend all of fund Fund would be a Special Revenue Fund If for benefit of individuals/private parties Fund would be a F fund 11 Governmental Funds - 9 12 Governmental Funds - 9 Permanent Funds benefit A G program or function, or Citizens rather than an external individual, organization or G E.g.s include trust funds to support Park Cemetery Library Some other G program G often sets up a Permanent fund & a Special Revenue fund to work together Permanent fund holds the principal & earns revenue thereon Permanent fund transfers revenue to Special Revenue fund to make expenditure for specified purpose 3
13 Governmental Funds - 10 14 Governmental Funds - 11 If > one Permanent Fund Use Combined FSs for major funds Use Combining FSs non-major funds Capital Projects Fund Capital Projects Funds account for major, general capital assets Purchase Construction Capital lease Doesn t include capital assets of P Funds & F Funds Account for their own LT assets & LT liabilities 15 Governmental Funds - 12 Funds for capital projects transferred from various sources Bond offering General Fund Actual capital project cost probably different from estimated cost Deficiency usually is covered by extra funds from General Fund Money left over after completion of a project generally transferred to General Fund Debt Service Fund 16 Governmental Funds - 13 If > one capital project Major funds presented in Combined FSs Non-major funds presented in Combining FSs 4
17 Governmental Funds - 14 18 Governmental Funds - 15 Debt Service Funds Account for payment principal & interest on general G obligation Interest & principal recognized when due Budget entries are seldom used In Debt Service Funds Amounts of principal & interest are known No need to compare actual & budget numbers Serial Bonds Redeemed in a series of installments Most popular method of raising LT resources Term Bonds Due at one time Now extremely rare 19 Governmental Funds - 16 20 Governmental Funds - 17 Resources to cover debt service can come from several sources: A portion of property tax levy May go directly into Debt Service Fund Transfers to Debt Service Fund from other funds Debit - Cash Credit - Other Financing Sources All of Debt Service Fund is used for paying debt Any Fund Balance is Reserved for debt service No Unreserved & Undesignated Fund Balance 5
21 Governmental Funds - 19 22 Governmental Funds - 20 GASB recommends keep number of Debt Service Funds to a minimum Can have one Debt Service Fund for numerous liabilities Sometimes law requires a debt needs separate Debt Service Fund May require no commingling of debt funds Debt Service Funds FSs BS Statement of Revenues, Expenditures and Changes in Fund Balances If > one Debt Service Funds Major Debt Service Funds presented in Combined FSs Non-major Debt Service Funds are presented in Combining FSs 23 Governmental Funds - 21 24 Proprietary Funds - Heading G entities often issue new LT debt to pay off old LT debt Called Defeasance Proceeds may Retire the old debt, or Be placed in escrow to pay the interest & principal of the old debt as they become due Once old debt is provided for Old debt taken off books of the General LT Debt Account Group, & Replaced with new debt Proprietary Funds 6
25 Proprietary Funds - 1 26 Proprietary Funds - 2 P Funds used when G acts like a business If G provides goods & services to private parties Enterprise Fund G provides goods & services to other G entities Internal Service Fund P Funds: Use accrual method Very similar to businesses Record expenses not normally recorded by G funds E.g., depreciation 27 Proprietary Funds - 3 28 Proprietary Funds - 4 Transactions between P Funds & G Funds treated as external transactions Billing from P Fund to G Fund Treated as Revenue by P Fund Treated as Expenditure by G Fund Expenditure in G Fund: D. Expenditure $20,000 C. Cash $20,000 Revenue in P Fund: D. Cash $20,000 C. Revenue $20,000 7
29 Proprietary Funds - 5 Enterprise Funds Goods or services provided by G unit for a fee to General Public E.g.s: Utilities Public housing Public parking Municipal solid waste landfills Airports 30 Proprietary Funds - 5 G entities must use an Enterprise Fund if one of the following criteria are met: Activity financed solely with Revenue from specific activity Debt secured by such Revenue Laws require activity s cost must be recovered by fees and charges rather than general taxes Pricing policies of activity designed to recover its costs These requirements are designed to include all activities that are supposed to be self-supporting 31 Proprietary Funds - 5 32 Proprietary Funds - 6 Enterprise Funds FS show if activity are in fact self supporting If more than one business activity each activity must be reported separately To show each activity is self supporting E.g., Utility has following activities: Natural gas, Water, and Electricity utility services Budgets are not recorded in subsidiary accounts of Enterprise Funds Enterprise Funds are like businesses 8
33 Proprietary Funds - 7 34 Proprietary Funds - 8 Enterprise Funds often have Restricted Assets Restricted Assets are assets available only for designated purposes Shown as a class of assets E.g.s of Restricted Assets Customer deposits Proceeds from LT debt for construction Monies set aside for bond interest or principal redemption Enterprise Fund LT debt Reported within Enterprise Fund Don t use General LT Debt Account Group Enterprise Fund capital assets Reported within Enterprise Fund Don t use General Fixed Assets Account Group 35 Proprietary Funds - 9 36 Proprietary Funds - 10 Set up of Enterprise Fund BS: Enterprise Fund BS Current Assets Current Liabilities Restricted Assets Current Liabilities Payable from Restricted Assets Non-Current Assets Long-Term Liabilities Equity Equity Called Net Assets. Book likes this term Also called Retained Earnings More popular Net Assets are divided into Net Assets Invested in Capital Assets Restricted Net Assets Like Restricted RE for business Unrestricted Net Assets Like Unrestricted RE for business 9
37 Proprietary Funds - 11 38 Proprietary Funds - 12 Enterprise Fund accounting method Very similar to businesses Called Statement of Revenues, Expenses & Changes in Net Assets/Retained Earnings If > one Enterprise Fund Use Combined/Combining FSs If One Enterprise Fund With different identifiable activities Present separate information to prevent misleading FS 39 Proprietary Funds - 13 40 Proprietary Funds - 14 GASB requires Statement of Cash Flows for Enterprise Funds Using the direct method The change in cash flows Divided into 4 parts Not 3 parts like businesses Extra part comes from dividing Financing into: Capital financing activities & Non-capital financing activities The 4 parts of the Statement of Cash Flows are as follows: Cash flows from operating activities Cash flows from investing activities Cash flows from non-capital financing activities Cash flows from capital and related financing activities 10
41 Proprietary Funds - 15 42 Landfill Operations As Enterprise Funds - Heading Enterprise Fund Interest Expense Treated as financing activity Not operating activity like business Cash Flow Statements Interest Revenue Classified as investing activity Not operating activity like business Cash Flow Statements Landfill Operations As Enterprise Funds 43 Landfill Operations As Enterprise Funds - 1 44 Landfill Operations As Enterprise Funds - 2 Landfill operations Often treated as Enterprise funds if selfsupporting Closure and post-closure costs Are accrued in years of operation Not when they are paid Therefore, in each year of landfill s operation Recognize an expense & liability for these future costs The current expense (and liability) is based on The percentage of landfill actually used up during current period, multiplied by The total estimated cost of closure and postclosure care. Current Year % x Total Closure Costs 11
45 Landfill Operations As Enterprise Funds - 3 46 Internal Service Funds - Heading Capital assets associated with the landfill Depreciated over shorter of Asset s useful life or Useful life of the landfill Internal Service Funds 47 Internal Service Funds - 1 48 Internal Service Funds - 2 Internal Service Funds Provides goods or services to Related funds, departments, agencies, G units Unrelated G units E.g.s: Computer center Printing department Central purchasing department Central garage Internal Service Funds use accrual method Accounting method very similar to businesses Budgetary accounts are not used 12
49 Internal Service Funds - 3 50 Internal Service Funds - 4 The FSs of Internal Service Funds consist of: BS, Statement of Revenues, Expenses & Changes in Retained Earnings Statement of Cash Flows If > one Internal Service fund Use Combined/Combining FSs 51 Fiduciary Funds - Heading Fiduciary Funds 52 Fiduciary Funds - 1 F Funds Are also called Private Purpose Trust Funds Primary beneficiaries are external individuals, organizations or other Gs F Funds are not: Special Revenue Funds & Permanent Funds These funds do not benefit individuals or organizations or Gs These funds benefit public in general Maintaining public parks, libraries & museums that are open to the public 13
53 Fiduciary Funds - 2 54 Fiduciary Funds - 3 E.g.s of Fiduciary Funds Scholarship funds to benefit external individuals Endowments held to benefit needy employees or their families Funds holding escheat property Investment Trust Fund Investment pool managed by the G for other Gs and not-for-profit organizations Pension Trust Funds F Funds Use accrual method very similar to businesses Depreciation expense needed to replenish the principal Revenue items are separated from principal items Common to use 2 F funds Revenue kept in one F fund & Principal kept in another F fund Like pairing a Permanent Fund & a Special Revenue Fund 55 Fiduciary Funds - 4 56 Fiduciary Funds Agency Funds - Heading F Funds FSs: Statement of Fiduciary Net Assets Equity section called Net Assets Held in Trust. Statement of Changes in Fiduciary Net Assets Fiduciary Funds - Agency Funds 14
57 Fiduciary Funds Agency Funds - 1 Agency fund are F Funds G receives funds from 3 rd parties, & Pays those funds to others G acts as collection agent G merely transmitting funds No direct financial interest in cash transmitted 58 Fiduciary Funds Agency Funds - 2 E.g. of an Agency Fund County tax collector receives property tax payments Forwards to various local Gs A G entity collecting special assessments for payments of debt used to finance improvements that benefited property owners (where no G liability on debt) Collecting from property owners & Remitting them to the special assessment bond holders 59 Fiduciary Funds Agency Funds - 3 60 Special Assessments - Heading Agency funds Usually have no end-of-the-period balances Money is transferred prior to the end of the period If money has not been forwarded Has a liability to the ultimate recipient There is no fund equity Only FS is BS Listing the assets held & related liabilities Special Assessments 15
61 Special Assessments - 1 62 Special Assessments - 2 Special Assessments Involve capital improvements & services Benefit particular group of property owners Repaid partially or totally by the property owners The assessment (repayment) Charged to property owners on their property tax bills E.g.s of special assessments Service-type -- snow plowing & brush clearance Capital-type -- build sidewalks & street lights Accounted for in the fund that best reflects the nature of the transaction 63 Special Assessments - 3 64 Special Assessments - 4 Special Assessment financed with different kinds of debt G can have no liability G can have some liability (e.g., a guarantee) G unit can have primary responsibility for its repayment If any type of G liability use General LT Debt Account Group If no G liability Don t use Debt Service Fund & General LT Debt Account Group Use Agency Fund G acting as agent for the property owners Collecting funds and paying non-g debt 16