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FUND ACCOUNTING

Chapter Two

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Learning Objectives

After studying Chapter 2, you should understand: The nature of funds. The hierarchy classification of fund balances. The three basic fund types of a state or local

government:

-Governmental funds,

-Proprietary funds, and

-Fiduciary funds The main components of a CAFR. The primary F/S issued by governments. The difference between the “current” and the “old” accounting

models.

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Business

One company “Fund” used as an informal term (multiple meanings).

May refer to working capital (current net assets)May refer to cash or investments availableMay have other definitions

The company is a single fiscal and accounting entity.

A = L + E (“E” usually called “Owners’ Equity”)

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GovernmentalMultiple “entities”

--“Fund” used as a formal term (single meaning)

“Fund is a fiscal and an accounting entity with a self-balancing set of accounts.”

Each fund is like its own “entity”

--In other words, a fund is an entity with its own set of books (i.e., chart of accounts , general journal, general ledger, trial balances, and financial statements)

Fund accounting uses the equation:

Assets = Liabilities + Fund balance (often referred to as net assets)

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GASB Statement No. 54

In February 2009, the GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, to improve the usefulness, and understandability of governmental fund balance information.

– The statement is effective for years beginning after June 15, 2010. (i.e. June 30, 2011 year ends)

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Brief Summary• Fund balances of governmental type funds

are now to be reported based on a hierarchy in five different classifications:

• Nonspendable

• Restricted

• Committed

• Assigned

• Unassigned

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GASB 54 -- Exhibit 1

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GASB 54—Exhibit 2

GASB 54 -- Cont’dFund Balance should be identified between Nonspendable

resources and Spendable resources: Nonspendable resources include amounts that are not in spendable form or are

required to be maintained intact.– Inventories and prepaids (also includes assets held for sale and long-term

receivables)

Spendable resources is the remaining balance and is to be reported in a hierarchy of classification (4 categories) based on the extent to which the government is bound by restrictions/constraints on those funds:

--Restricted (most constraint)

--Committed

--Assigned

--Unassigned (no constraint)

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Spendable Resources

1- Restricted (most constraint) includes amounts constrained to specific purposes by their providers, through constitutional provisions, or by enabling legislation.

Externally imposed constraints by :--creditors, bondholders,

--grant providers, contributors, or

--imposed by law through constitution or enabling legislation .

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2- Committed fund balance—here the constraints are imposed by a formal action of the government’s highest level of decision-making authority.

--These funds cannot be used for any other purpose unless the government removes or changes the specified use by taking the same formal action that originally imposed the constraint.

--Committed funds include contractual obligations for which existing resources in the fund have been specifically committed for use.

Note: In contrast to fund balance that is restricted by enabling legislation, amounts in the committed fund balance can be redeployed for other purposes with appropriate due process.

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3- Assigned fund balance –Government’s intent to use the funds for a specific purpose. Here INTENT is the key.

--Intent can be expressed by the governing body itself or another body that has the delegated authority.

--Fund Balance in other governmental funds (except General Fund) that is not restricted or committed is considered as Assigned FB in those funds. In other words it is the residual balance of these funds.

-- However, the general fund should be used to account for and report all financial resources that are not accounted for or reported in another fund.

Note: the authority for making an assignment does not have to be made by the government’s highest level of decision-making authority. Thus, constraints imposed on assigned amounts can be more easily removed or modified than those that are classified as committed.

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5- Unassigned fund balance –this is the residual classification of the General Fund.

--includes amounts that are available for any purpose.

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Not-for-profit• NFP may use fund accounting internally to ensure control of

funds, but they do not report these funds externally.

• Classifies Net Assets into 3 groups:--Unrestricted--Temporarily restricted – used for specific purpose.--Permanently restricted -explained further on later slides.

• FASB regulates NFP reporting for nongovernmental organizations and only requires 6 totals – Total assets– Total liabilities – Total net assets– Total unrestricted net assets– Total temporarily restricted net assets– Total permanently restricted net assets.

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BASIS OF ACCOUNTING AND MEASUREMENT FOCUS

•Basis of accounting determines when transactions and events are given accounting recognition.• For instance, if an entity adopts the full accrual basis, a transaction is recognized when it has its substantive economic impact, irrespective of when cash is received or paid. •If, on the other hand, it adopts the cash basis, the transaction is recognized only as the related cash is received or paid. •An entity’s measurement focus determines what is being reported upon—which assets and liabilities are given accounting recognition and reported on the balance sheet.

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•The two concepts are closely related; the selection of one implies the selection of the other.

Ex., if an entity adopts a cash basis of accounting, its measurement focus is upon cash. Only cash is reported on its balance sheet. Correspondingly, measurement focus also determines whether the entity reports net profit (the net increase in all economic resources) OR merely the net change in selected resource flows (current financial resources, e.g., cash, short-term receivables, and short-term investments).

•If an entity adopts a full accrual basis of accounting, its measurement focus is automatically upon all economic resources, and its balance sheet reports on all assets and liabilities, both current and noncurrent.

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•Because GNPs may be primarily concerned with the assets needed to satisfy current-year obligations, they may adopt a modified accrual basis of accounting and a measurement focus will be on short-term financial assets and liabilities for many of their funds.

• Under the modified accrual used by governments, revenues are recognized on a cash or near-cash basis; expenditures are recognized on a full accrual basis.

•Under the modified accrual basis, because the measurement focus is on current financial resources, capital assets and long-term liabilities are excluded from the balance sheet, and net changes in short-term financial assets and liabilities are recognized as revenues or expenditures.

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Summary

Full Accrual: Revenues recognized when earned; expenses recognized when incurred.

Cash: Revenues recognized when available; expenses/expenditures recognized when paid.

Modified Accrual: revenues are recognized when measurable and available; expenditures when incurred.

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Measurement Focus

Economic resources measurement focus

-Report on the determination of net income, financial position, and cash flows (i.e. capital maintenance).

Current financial resources measurement focus

-Report on the inflows and outflows of current financial resources (i.e. cash or other items expected to be converted into cash during the current period).

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Activities of Government

Most general purpose governments engage in three broad categories of activities:

1) Governmental activities are those financed predominantly through taxes and intergovernmental grants.

2) Business-type activities are those financed predominantly through user charges.

3) Fiduciary activities are those for which the government acts as a trustee or agent for individuals, external organizations, or other governments.

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Types of FundsGovernments classify funds into three broad categories:

1)Governmental Funds (5) General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent Funds

2)Proprietary Funds (2) Internal Service Funds Enterprise Funds

3)Fiduciary Funds (2) Agency Funds Trust Funds

• Pension (and other employee benefit) • Investment Trust Funds• Private purpose Trust Funds

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Definition of Fund Types Governmental Funds

A generic classification used by GASB to refer to all funds other than proprietary or fiduciary.

No guarantee that the funds will be reimbursed for services rendered.

Proprietary Funds Government generally makes initial contribution but

thereafter the fund is expected to “pay its own way” through fees for services rendered. Also referred to as business-like or commercial-type funds.

Fiduciary Funds Any fund held by a government in a fiduciary capacity. Simply, the gov’t. holds someone else’s money

in trust and acts as a custodian. Since it is not the government’s money, it is not expendable for the government’s own programs.

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Governmental Funds Basis of Accounting:

--Modified Accrual Measurement Focus:

--Current Financial ResourcesOther names: “financial flow” focus or spending focus.Only current assets and liabilities are generally included on their

balance sheet (i.e. Capital assets and long-term liabilities are not included).

Reports expenditures (not expenses) of appropriations.

Fund Balance (net current assets) measures “available spendable resources” Fund Balance = Current Assets – Current Liabilities. Increased by revenues and other financing sources. Decreased by expenditures and other financing uses. Governmental fund operating statements present these increases and

decreases in net current assets.

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(1) - General Fund (GF) The general fund should be used to account for and report all

financial resources that are not accounted for or reported in another fund.

in essence, it accounts for all unassigned resources. Only one per government and is the most significant single

fund.

General Activities of city government (ex. Fire, police, street maintenance, sanitation, and administration)

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(2) - Special Revenue Funds (SRF) To account for and report the proceeds of specific revenue

sources that are restricted or committed for specified purposes other than debt service or capital projects (e.g., gas tax revenues required to be used for road repairs, private donations that must be used to maintain parks).

Ex. City of Houston maintains over 17 SRF

-Examples include Public Safety Special Fund (9-1-1 Emergency Network)

Public Works Special Fund Health and Housing Special Fund Parks and Recreation Special Fund Other Special Revenue Fund (Cable Television)

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(3) - Capital Projects Funds (CPF) Accounts for financial resources that are

restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets, such as buildings, highways, and equipment.

Governments often issue bonds to finance a specific project. The resources received must be placed in a capital projects fund and expended for that project.

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(4) - Debt Service Funds (DSF)

Accounts for financial resources that are restricted, committed, or assigned for the payment of interest and principal on long-term debt.

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(5) - Permanent Funds

Accounts for resources provided that are legally restricted, so that only earnings, not principal, may be used to support the government’s programs.

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Proprietary Funds Basis of Accounting:

Full AccrualOperated like a “normal for-profit” business.

--ex. City of Houston operates its Airports under a Proprietary fund. Measurement Focus:

Economic Resources

All assets and liabilities (both current and noncurrent) are included in the balance sheet

Accounts for expenses (not expenditures)--Depreciation expense is reported.

Fund Equity (Total Net Assets) Net Assets = Assets – Liabilities. Increased by revenues and other financing sources. Decreased by expenses and other financing sources.

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Required Financial Statements

Similar to those of for-profit entities

Statement of Net Assets

Statement of Revenues, Expenses, and Changes in Net Assets (i.e. operating statement)

Statement of Cash Flows

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(1) - Internal Service Funds (ISF)

• Internal service funds account for the provision of goods or services to other departments within the same government (or, occasionally, to other governments).

• They bill the receiving departments at rates intended to cover the cost of the goods or services. The following are examples:

• A maintenance and repair service for the cars and trucks of the police department, fire department, sanitation department, etc.

• A store that sells office supplies to the other government departments.

• A print shop that provides government-wide printing services.

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(2) - Enterprise Funds (EF) Accounts for activities in which

goods or services are provided to the general public for a charge.

Reported as business-type activities in the government-wide financial statements.

Examples include electric and water utilities, airports, parking garages, transportation systems.

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Fiduciary Funds - Agency Funds

Accounts for financial resources in which the government is acting in an “agency” capacity

Agent - Government holds assets on behalf of another government

Accounting is simple: assets = liabilities.

No revenue and expense to accrue

Examples are tax agency funds, certain special assessment funds, and pass-through agency funds.

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Both Trust funds and Agency funds account for assets held by the City in a trustee capacity or as an agent for individuals, private organizations, other governments.

Therefore, the government cannot include these funds in the government-wide statements.

Basis of Accounting:Full Accrual

Measurement Focus:Economic Resources

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Required Financial Statements

Statement of Fiduciary net assets

Statement of Changes in Fiduciary net assets

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Trust Funds

Each trust is classified for accounting measurement purposes as either a governmental fund or a proprietary fund (ex. Houston Firefighters Relief and Retirement and Police Officers’ Funds).

Funds can be either expendable or nonexpendable.

Three types of trust funds: (i) Pension (and other employee benefits)

Trust Funds (one or more) (ii) Investment Trust Funds (iii) Private Purpose Trust Funds

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(i) Pension (and other employee benefits) Trust Fund

Accounts for financial resources in which the government (or other designated trustee) is acting in a trustee capacity for the employees of the government to provide retirement benefits.

Uses business-type accounting practices.

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(ii) Investment Trust Funds

Accounts for external investment pools in which the assets are held for other (external) governments, along with funds of the sponsoring government.

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(iii) Private-purpose Trust Funds

Includes all trust funds other than pension and investment trust funds.

To account for and report resources held for individuals or external organizations (e.g., a scholarship fund for employees’ children, funded by a donation from a citizen).

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Measurement Focus and Basis of Accounting

Measurement Focus

Basis of Accounting

Government-wide statements (GASB 34)

Economic resources

Accrual

Governmental fund statements

Current financial resources

Modified accrual

Proprietary fund statements

Economic resources

Accrual

Fiduciary fund statements

Economic resources

Accrual

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GASB Statement No. 34

Government-wide Statements1)Statement of Net Assets

2)Statement of Activities Address questions that have not been easily answered

by fund accounting “What do government services really cost, e.g., public

safety or recreation?” “How much debt for current services are we shifting to

the next generation?” “ How much of the cost of government is borne by

citizens in the form of general revenues?”

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Comprehensive Annual Financial Report - CAFR

Review from Ch. 1The CAFR is the recommended annual report of

a governmental unit. It has 3 sections. Introduction section Financial section Statistical section

The minimum requirements for general purpose external reporting include:

MD&A Basic financial statements RSI other than MD&A

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Summary

Fund financial statements for governmental funds utilize the modified accrual basis of accounting and a current financial resources measurement focus.

GASB Std. # 34 requires both government-wide financial statements and fund financial statements.

Government-wide financial statements and fund financial statements for proprietary and fiduciary funds follow the full accrual basis of accounting and the economic resources measurement focus (similar to commercial accounting).