Government Finance Officers Association of Texas
Certified Government Finance Officer
Program Study Guide
For Accounting and Financial Reporting
Revised February 2017
John J. DeBurro, CPA
Originally Developed by Center for Public Management
University of North Texas
Accounting and Financial Reporting Study Guide
Table of Contents: Introduction ……. .......................................................................................... 1
Funds: The Building Blocks of the Governmental Accounting System ....... 6
Interfund Activities ………………………………. ..................................... 12
Accounts: The Building Blocks of Funds. .................................................... 13
Recording and Reconciling Transactions……………………………. ........ 17
Measurement Focus ......................................................................................22
Financial Reporting ...................................................................................... 26
Other Topics ................................................................................................ 34
Recent GASB Statements. ........................................................................... 37
Additional Sources ....................................................................................... 38
Endnotes ....................................................................................................... 38
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Accounting and Financial Reporting Study Guide (Revised February 2017)
Whereas the operating and capital budgets represent the legislatively-sanctioned plans for
spending and expected revenues needed to meet those outlays, the accounting system provides
the record keeping framework in which to record (in journals) the transactions authorized by the
budget and to reconcile (in ledgers) their cumulative financial impact. In both public and private
organizations, the two most important financial documents are the budget and annual financial
report. And in both, the accounting system links the two together by providing the framework for
processing financial transactions.
operating and capital accounting comprehensive annual budgets ∃ system ∃ financial report
Figure 1. The centrality of the accounting system
In business the financial report is the more important of the two documents given its role
in informing investors of the profitability of the firm. In government the budget is the more
important since it defines a government's scope and level of activity. The budget provides a basis
of accountability at the policy (values), programmatic (outcomes), and performance (efficiency)
levels.1 The accounting and financial reporting system are best suited to providing accountability
at the process (flow of resources) and compliance (comparison of budget with actual) levels.
Whereas accountability is the cornerstone of financial controls, the accounting system
seeks to provide financial information that is understandable, reliable, relevant, comparable,
consistent, and timely.2 These six goals of accounting also form the conceptual basis for the
standards -- called generally accepted accounting principles (GAAP) -- adopted by the
accounting profession that guide the recording, reconciling, and reporting of transactions in the
accounting system. As a result of GAAP’s general acceptance among state and local
governments, the recording and reporting of accounting information is much more standardized
than is the case of budget information.
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The Governmental Accounting Standards Board (GASB), the seven-person body of
accounting professionals, is the primary source of such standards, interpretations, and technical
bulletins for state and local governments. Since GASB's creation in 1984, considerable
discussion has ensued concerning GAAP, particularly those concerned with the basis of
accounting and the treatment of fixed assets and long-term debt. In June 1999, GASB adopted
Statement No. 34, “Basic Financial Statements – and Management’s Discussion and Analysis –
for State and Local Governments,”3 which introduced sweeping changes to the structure of the
basic financial statements for state and local governments and the way in which accounting
information is recorded and reconciled. These changes are discussed throughout this chapter. The
table on page 5 summarizes the 13 basic accounting principles that apply to state and local
governments.
One benefit of standardizing the accounting system is that comparisons can be made
across governments and conclusions drawn on the relative financial health of each. Another
benefit is that users can interpret financial reports more easily. The most important benefit,
however, comes in assuring users that a common set of rules is being applied to reporting the
results of financial operations. An external auditor can more easily verify the accuracy of a
financial report if it has been prepared on the basis of GAAP. The widespread acceptance of
GAAP also fulfills the accounting profession's goals for accuracy, reliability, and consistency in
reporting the results of operations.
However, the GAAP adopted for use by government differs considerably from that used
in the private sector. For example, whereas a business combines the results of the operations of
all its subsidiaries into one consolidated report, governments report their results by groups of
funds (the accounting entity). A fund is a fiscal and accounting entity with a self-balancing set of
accounts,4 meaning that each fund functions like a self- contained business with its own set of
accounts and financial report. As a result, many transactions occur just between funds.
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Principle #1. Requires that accounts be maintained on a GAAP basis and demonstrate compliance with finance-related legal requirements.
Principle #2. Specifies that funds must be the basis for maintaining accounting records.
Principle #3. Identifies and defines the eleven basic types of funds used in governmental accounting.
Principle #4. Governments should maintain a minimum number of funds and only those required by law.
Principle #5. A distinction should be maintained in the accounting records among the capital assets of proprietary funds, fiduciary funds, and those of governmental funds.
Principle #6. The historical cost of capital assets (land, buildings, equipment, infrastructure) and long-term debt should be maintained in the accounting records.
Principle #7. Depreciation of capital assets should be recorded in the accounting records.
Principle #8. The accounting records should maintain a clear distinction between long- term liabilities attributable to a specific fund and those to the general government.
Principle #9. The accrual basis of accounting should be used for the government-wide financial statements. The fund-specific financial statements should use the modified accrual basis for governmental funds and the accrual basis for proprietary and fiduciary funds.
Principle #10. An annual budget should be adopted, budgetary control is provided by the accounting system, and an annual comparison of budget with actual results of operations should be made.
Principle #11. Interfund transfers must be recognized and reported depending on whether the transfer involves reciprocity or not.
Principle #12. A common terminology and classification system should be used throughout all financial records.
Principle #13. Interim financial reports should be prepared and the format of the comprehensive annual financial report (CAFR) should follow a specified format.
Table 1. The 13 generally accepted accounting principles. Source: Robert J. Freeman and Craig D. Shoulders, Governmental and Nonprofit Accounting. Upper Saddle River, NJ: Prentice Hall Publishers, Inc., 2003: pp. 33-54.
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The segregation of accounts into funds has led to different methods of recognizing
accounting transactions, depending on the type of fund. Whereas in the private sector only the
accrual method of accounting is used, in government the modified accrual method is used for
certain types of funds. The use of separate funds combined with these differential bases of
accounting make governmental accounting much more complex than its counterpart in the
private-sector. This complexity reflects the public sector's obligation to provide accountability to
various stakeholders – citizens, city councils, and investors in bonds and other creditors such as
banks – with their particular information needs.
This section summarizes the accounting cycle and how financial information is entered
into that system. It also provides an introduction to the elements of fund accounting and the role
of budgetary accounts in that system. It concludes with a brief introduction to double-entry
record keeping and the accrual basis, the hallmarks of contemporary accounting practice.
Funds: The Building Blocks of the Governmental Accounting System
The use of funds by governments initially emerged as a budgetary innovation and was
adapted by the governmental accounting system as it evolved in the early part of the 20th
century.5 Although some in the accounting profession have called for the elimination of funds,
they have become so institutionalized that GASB accepts them as part of the accounting
framework.
Although a fund is formally defined as a fiscal entity with a set of self-balancing
accounts, conceptually a fund may be viewed as a legal entity that receives inflows and incurs
outflows of financial resources. If the inflows exceed the outflows, the fund accumulates a
balance; conversely a net outflow results in a reduction in fund balance. Each fund contains the
same basic types of accounts, described in the following section, but receives revenue from
different sources. Funds are almost always created by law or by executive fiat. A government
may have anywhere from less than 10 to several hundred funds.
Table 2 identifies the eleven basic types of funds specified by GAAP for governmental
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budgets and accounting records and the three broad categories in which they are grouped -
governmental, proprietary, and fiduciary. The primary operating fund, the General Fund, is
usually the largest and most important in terms of the operating budget. It is "general" because it
“should be used to account for and report all financial resources not accounted for and reported
in another fund”. [GASBS 54, ¶29]. In most cases, governments will refer to it as the General
Fund in their budget and financial reports, although the state of Texas, for example, refers to it as
the General Revenue Fund.
Governmental Funds: Examples: 1. General Fund General Fund 2. Special Revenue Hotel/Motel Tax Fund 3. Debt Service Funds 2016 Series Debt Service Fund 4. Capital Projects Funds Eagle Street Improvement Fund 5. Permanent funds Oaklawn Cemetery Perpetual Care Fund
Proprietary (Business-type) Funds: 6. Enterprise Funds Water/Wastewater Fund 7. Internal Service Funds Motor Vehicle Pool Fund
Fiduciary Funds: 8. Investment Trust Funds Countywide Cash Investment Fund 9. Private-purpose Trust Funds Employees’ Tuition Savings Fund 10. Pension Trust Funds Municipal Employees Retirement Fund 11. Agency Funds Local Sales Tax Fund
Table 2. The eleven basic fund types
Whereas a city government has only one General Fund, it may have several special
revenue funds, each with a particular name, such as the Hotel/Motel Tax Fund. Such funds are
established to account for the proceeds of specific revenue sources that have been committed or
restricted to expenditure for specified purposes other than debt service or capital projects
[GASBS 54, ¶30]. For example, a state or local hotel/motel occupancy tax may be restricted to
use in promoting tourism, historic preservation, and economic development. Often, local
governments account for grants received, which are restricted for particular purposes, in special
revenue funds. These funds enable governments to segregate revenue that may have restricted
uses from that used for general operations and provide a means for verifying that it was used for
purposes specified in law. For most special revenue funds, the operating budget will provide the
authorization on the use of funds.
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A third type of governmental fund is the debt service funds. Local governments may have
one or more such funds depending on their accounting preferences. Debt service funds account
for and report financial resources that are restricted, committed, or assigned to expenditure for
principal and interest [GASBS 54, ¶34] of long-term, general debt, such as the annual debt
service required on a general obligation (GO) bond. Sometimes, governments establish a
separate fund for each GO bond series. Years ago, they were called "sinking funds" in reference
to the process of sinking (retiring) a debt obligation. Local governments, when adopting a
property tax rate, typically levy two distinct rates – one for general operations (the M&O rate),
which is accounted for in the General Fund, and one or more rates for debt service (the I&S rate),
which are deposited in the appropriate debt service fund. (See the sample tax rate ordinance in
Figure 2 on the following page.) The annual operating budget will also provide the authorization
for the use of resources from these funds.
The fourth type of governmental fund – capital projects funds – account for and report
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 [GASBS 54,
¶33]. For example, a city council may choose to create a separate fund – Eagle Street
Improvement Fund – for the reconstruction of this thoroughfare. Revenues flowing into the fund
may include GO bond proceeds that were authorized for the project, state and federal grants, and
intergovernmental revenue. The outflow of the fund, called expenditures or the value of goods
and services delivered, are typically for the services of contractors for the design and
construction phases of the project. Once the project is complete, the fund may be closed out and
the remaining balance transferred to other capital project funds or to a committed or restricted
account in the General Fund. Authorization for the resources and expenditures of these funds
originates with the capital budget, which provides detail on each project's sources and uses of
funding.
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Figure 2. City of Bedford, Texas, Tax Rate Ordinance, 2016 – 2017
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The final governmental fund type, permanent funds, are used to account for and report
resources that are restricted to the extent that only earnings, and not principal, may be used for
purposes that support the reporting government‘s programs—that is, for the benefit of the
government or its citizenry [GASBS 54, ¶35]. These funds constitute endowments in which the
principal is protected from use and only the income is available for expenditure, such as a fund
established for the perpetual care of a city cemetery.
Unlike Governmental Funds, Proprietary Funds account for the more business-like
activities of government. For example, enterprise funds account for services that derive a portion
of their income through user charges. Typically, water and wastewater service is accounted for in
an enterprise fund as are other utilities or quasi-business activities of government including toll
roads, airports, public transit system, docks, golf courses, and even government-owned radio and
television stations. Inflows to the fund include the fees charged to users of the service. Outflows
include the labor and operating costs incurred in providing the service. Even if not fully self-
supporting, maintaining the service in a separate enterprise fund provides managers and councils
with information on the amount of subsidy required to support the service.
GASB 34 required that an activity be accounted for in an enterprise fund if it is financed
with debt that is backed by fees generated by that activity.6 (Activities that are backed by a full-
faith-and-credit pledge in addition to the activity’s revenue stream are not required to be
accounted for in an enterprise fund.) This expanded rule for the use of enterprise funds caused
more activities previously accounted for in the General Fund to be moved into an enterprise
fund.
Occasionally, an enterprise fund will generate "excess revenues" that exceed operating
costs. For example, in cities with a large state or federal presence such as a state university, the
city may own the electric utility distribution service. A common means for shifting some of the
cost of local services to these otherwise tax-exempt properties is to set electric rates such that
they generate a "profit" with the excess returned to the city's General Fund to subsidize activities
financed by this fund.
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One final point concerns the distinction between enterprise and special revenue funds.
Enterprise funds involve a fee-for service levied on customers of a public service. Special
revenue funds may include some service charge revenue but it is not used as collateral for
Revenue Bonds used to finance the fee-for-service activity. For example, a city-owned cable
television service should be accounted for through an enterprise fund. The gross receipts tax
levied on a private cable company, however, may be accounted for in a special revenue fund if
the revenue is committed or restricted to a particular purpose.
Whereas enterprise funds account for services provided by government to the public,
internal service funds account for services provided by one department of government to another,
i.e. services internal to the organization or in some cases by one unit of government to another.
For example, a Motor Pool Fund accounts for the use of state-owned vehicles by various
departments and agencies. The Motor Pool Department may by fully funded by the charges
levied on other agencies. Its rates may include both operating and capital costs, such as the cost
of replacing vehicles. State agencies, in turn, include in their operating budget a line item for the
use of motor pool vehicles. Payments to the Motor Vehicle Department are made through an
interdepartmental transfer (IDO) of cash.
One advantage of an internal service fund is that it provides a mechanism for encouraging
greater efficiencies in the use of such services. If data processing is provided at "no charge" to
agencies in the organization, the tendency is to over use this seemingly free service. In such
cases, the service is financed through the General Fund with no means of rationing the service to
internal users. On the other hand, charging agencies for the cost of technical support and
accounting for technology services in an internal service fund will make users more cognizant of
the cost of these services and limit their use.
The four types of fiduciary funds account for resources that governments hold in trust for
individuals, such as a pension fund, or other governments.7 Investment trust funds, for example,
account for resources that are commingled by several governments and are held in trust by a
sponsor, such as a county. A Countywide Investment Pool Fund may contain the cash
investments of several cities and other local governments, which are commingled and then
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invested by the county. Private-purpose trust funds are similarly fiduciary in nature, but in this
case the resources are held in trust by a government on behalf of individuals, private
organizations, or even other governments.
Pension funds are resources held in trust by a local government for payment of employee
retirement benefits. Finally, governments act as custodians of resources on behalf of other
governments, such as a state that collects sales taxes on behalf of its cities. Such taxes are held in
an agency fund and periodically remitted to the local government. An agency fund is also used to
report the debt service transactions of a special assessment issue for which the government is not
obligated in any manner rather than a debt service fund to reflect the fact that the government’s
duties are limited to acting as an agent for the assessed property owners and the bondholders.
Interfund activities
One of the potential trouble spots in financial accountability concerns the treatment of
interfund transactions. GASB Statement 34 classifies these activities as either reciprocal or
nonreciprocal interfund activities.8 The first involves interfund loans and reimbursable services
provided by one fund to another. In both cases, the exchange involves reciprocity, i.e. a fund
reimburses another for the benefits it receives from the latter much as if it had purchased that
service or incurred a loan from a source outside the government. Payment for the use of water
through fire hydrants from the General Fund to the Water Utility Fund also represents such an
exchange.
By contrast, nonreciprocal transactions include interfund transfers and interfund
reimbursements. In both cases, reciprocity is not required. Both of these payments would have
originally appeared as items in the operating budget, with the transaction authorized once the
budget was approved. For example, governments often provide a transfer from the General Fund
to a newly created internal service fund to provide start-up capital for the new venture. There is
no expectation that the transfer will ever be repaid. Similarly, an interfund reimbursement may
be required by charter or by an ordinance of council, such as a reimbursement for overhead from
a utility fund to the General Fund.
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Accounts: The Building Blocks of Funds
While funds constitute the basic building blocks of governmental accounting, accounts
form the basic components of funds. An account is defined as "a separate financial reporting unit
for budget, management, and/or accounting purposes." 9 Funds are made up of accounts. Each
account is given a number that identifies the fund in which the account is found and the type of
account (cash, supplies, taxes receivable, accounts payable, etc.). In a budgeting context,
accounts are of two types – revenues and expenditures. Revenues may be property taxes to
interest income, each of which is an account. Each taxpayer or utility user, in turn, has an
"account" in one of the revenue subsidiary ledgers. Expenditures may be salaries to travel, with
each type of expenditure given a separate account number.
While estimated revenues and appropriations represent budgetary accounts, the
accounting system has five additional types of accounts that form the basic accounting
equation. For governmental funds, the equation is:
Assets + Deferred Outflows of Resources = Liabilities + Deferred Inflows of
Resources + Fund Balance
While for proprietary funds and government-wide financial statements, the equation is:
Assets + Deferred Outflows of Resources – Liabilities – Deferred Inflows of
Resources = Net Position
Assets:
Asset accounts, such as cash or taxes receivable, represent things of value. A fund
accumulates assets through its transactions. The levying of a property tax creates an asset in the
form taxes receivable, which has potential economic value for the fund. Once the taxes are paid,
the receivable becomes cash, a more liquid form of the asset. In a typical classification, assets are
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ranked according to their liquidity -- how easily they can be converted to cash -- with the most
liquid ranked first. Current assets represent those assets that can be converted to cash within the
current year. Capital assets, on the other hand, represent the least liquid assets such as land,
buildings, equipment, and other improvements and are recorded based on their historical cost.
Capital assets are reported in both the government-wide statement of net position and the
proprietary funds statement of fund net position.
Deferred Outflows of Resources:
Deferred outflows of resources represent a consumption of net position that applies to a future
period(s) and so will not be recognized as an outflow of resources (expenses /expenditures) until
then. Examples of deferred outflows include deferred charges on refundings and pension
contributions made after the measurement date.
Liabilities:
On the other side of the equation, liability accounts represent legal obligations that require the
eventual transfer of assets. Liabilities are ranked in order of the time they are due, with current
liabilities, such as accounts payable or wages payable, ranked first and long term liabilities
(which like capital assets, are only recorded in the proprietary funds and government-wide
statements of net position), such as outstanding revenue bonds, ranked last. The delivery of a
piece of equipment or the services of an employee for a day creates a liability for the fund that at
some point must be paid with an asset, usually cash. Conversely, the delivery of the piece of
equipment creates an asset, which is recognized by the accounting system.
Deferred Inflows of Resources:
Deferred inflows of resources represent the acquisition of net position/fund balance that applies
to a future period(s) and so will not be recognized as an inflow or resources (revenue) until that
time. A City may report certain deferred inflows such as those related to pensions on the
government-wide statement of position and unavailable tax revenues at the fund level.
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Fund Balance:
In an accounting context, fund balance is the difference between assets plus deferred outflows of
resources and liabilities plus deferred inflows of resources for the five governmental funds. In the
two proprietary funds and four fiduciary funds, this difference represents net position, analogous
to the wealth that a business accumulates as a result of its operations. However, in the case of
governmental funds accumulation of wealth is not the objective; rather they exist to deliver
services.
Like assets and liabilities, the fund balance is composed of a number of accounts that are
classified as nonspendable, restricted, committed, assigned or unassigned. Nonspendable - the
nonspendable fund balance classification includes amounts that cannot be spent because they are
either (a) not in spendable form or (b) legally or contractually required to be maintained intact.
The “not in spendable form” criterion includes items that are not expected to be converted to
cash, for example, inventories and prepaid amounts. It also includes the long-term amount of
loans and notes receivable, as well as property acquired for resale [GASBS 54, ¶6].
Restricted - includes amounts that can be spent only for the specific purposes stipulated by
external resource providers either constitutionally or through enabling legislation or because of
constraints that are externally imposed by creditors, grantors, contributors or the laws or
regulations of other governments [GASBS 54, ¶8].
Committed - amounts that can only be used for specific purposes pursuant to constraints imposed
by formal action of the government‘s highest level of decision-making authority should be
reported as committed fund balance. Those committed amounts cannot be used for any other
purpose unless the government removes or changes the specified use by taking the same type of
action (for example, legislation, resolution, ordinance) it employed to previously commit those
amounts [GASBS 54, ¶10].
The formal action of the government‘s highest level of decision-making authority that commits
fund balance to a specific purpose should occur prior to the end of the reporting period, but the
amount, if any, which will be subject to the constraint, may be determined in the subsequent
period [GASBS 54, ¶12].
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Assigned – amounts that are constrained by the government‘s intent to be used for specific
purposes, but are neither restricted nor committed, should be reported as assigned fund balance,
except for stabilization arrangements. Intent should be expressed by (a) the governing body itself
or (b) a body (a budget or finance committee, for example) or official to which the governing
body has delegated the authority to assign amounts to be used for specific purposes [GASBS 54,
¶13].
Unassigned - the residual classification for the general fund. This classification represents fund
balance that has not been assigned to other funds and that has not been restricted, committed, or
assigned to specific purposes within the general fund. The general fund should be the only fund
that reports a positive unassigned fund balance amount. In other governmental funds, if
expenditures incurred for specific purposes exceeded the amounts restricted, committed, or
assigned to those purposes, it may be necessary to report a negative unassigned fund balance
[GASBS 54, ¶17].
Whereas fund balance is used in governmental funds, the difference between assets plus
deferred outflows of resources and liabilities plus deferred inflows of resources in proprietary
and fiduciary funds is called net position. Net position should be reported in three components:
• Net investment in capital assets,
• Restricted (distinguishing between major categories of restrictions), and
• Unrestricted [GASB 63, ¶8]
Net investment in capital assets – consists of capital assets, net of accumulated depreciation,
reduced by the outstanding balances of bonds, mortgages, notes, or other borrowings attributable
to the acquisition, construction, or improvement of those assets. If there are significant unspent
related bond proceeds at the end of the reporting period, the portion of the debt attributable to the
unspent amount should not be included in the calculation of net investment in capital assets.
Restricted net position – is similarly defined as restricted fund balance, however, the balances
may be different due to the different measurement focuses and bases of accounting used in
government-wide statement of net position and the government funds balance sheet.
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Unrestricted net position – the net amount of the assets, deferred outflows of resources,
liabilities, and deferred inflows of resources that are not included in the determination of net
investment in capital assets or restricted net position.
The link between the budget and accounting system is budgetary accounts – estimated
revenues and appropriations. These accounts form the cornerstone to the accounting records. All
other accounts ultimately derive their existence from these budgetary accounts. Once the budget
is approved, the information is then entered into the accounting records. The detailed information
in the budget, such as the line item amounts of appropriation by department, match the detailed
records maintained in the accounting system. A complication arises whenever appropriations are
made in lump sums and the total does not match the line item detail provided in the budget. In
such cases, council direction is critical to knowing how to enter the information into the
accounting system.
To facilitate common terminology as required by GAAP, the accounting department
maintains a chart of accounts that assigns a number to each fund, department or agency, account,
and object of expenditure. One source for such a chart is in Appendix E of the Governmental
Accounting, Auditing, and Financial Reporting (2012), or GAAFR, which is the authoritative
guide on state and local government accounting practices. A simplified version of such a chart of
accounts gives each fund a two-digit code, each department has a four-digit number, and each
type of object of expenditure has a three-digit code (XX-YYYY-ZZZ). The combination of these
codes makes up the account number for a particular type of transaction. For example, salary
expenditures by the city manager's office from the General Fund would have an account number
of 01-0002-101. A chart of accounts provides a common framework that brings consistency to
the budget as well as accounting systems.
Recording and Reconciling Budget Transactions
The heart of the accounting system is the recording and reconciling of transactions. While a
detailed understanding of this process is beyond the scope of this unit, an understanding of at
least its elements is important for the budget analyst. Figure 3 provides a flow chart of the
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accounting cycle, beginning with some type of transaction and ending with the preparation of
interim and year-end financial statements. Each transaction, whether the levying of taxes or the
disbursement of the payroll, generates some type of documentation. In the case of a property tax
levy, invoices are mailed to property owners in the city or county. This documentation provides
the accounting system with evidence of a transaction, which is then logged in a journal or book
of original entry. Governments may maintain several specialized journals, such as a cash receipts
journal or purchases journal, in which to log transactions. All other transactions not logged in a
specialized journal are entered in the General Journal.
Sequence of accounting actions Example accounting entries
Step 1. Business transaction occurs taxes levied budget adopted payroll approved check issued transfer made
Step 2. Transaction logged in book of original entry, e.g.
General Journal Cash Receipts Journal
General Journal entry: 3/31 Taxes receivable 500,000
Revenue 500,000 To record levy of property tax.
Step 3. Posting to General Ledger and General Ledger entry:
Subsidiary Ledgers, such as 6/1 Estimated revenues 850,000 Revenue Subsidiary Ledger Fund Balance 50,000 Expenditure Subsidiary Ledger Expenditures 900,000
Step 4. Closing entries entered in journal and Closing entry:
posted to General Ledger 12/31 Appropriations 900,000 Expenditures 855,000 Encumbrances 28,000 Fund Balance 17,000
To close appropriations account
(This journal entry would then be posted to the General Ledger.)
Step 5. Financial Statements prepared such as
Interim (or monthly) reports Comprehensive Annual Financial
Report (CAFR)
Types of statements prepared: 1. Net Asset Statement (or Balance Sheet) 2. Operating Statement (or Statement of
Revenues, Expenditures and Changes in Fund Balance)
Figure 3. The accounting cycle
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Journal entries are entered chronologically and always involve at least two entries. By
convention, the first line is the debit or left-handed entry, and the second line is the credit or
right-handed entry, which is indented. (It is possible to have more than one debit or credit entry,
in which case the debit entries are listed first followed by the credit entries, which are indented.)
The sum of the debits must always equal the sum of credits. These entries are followed by a brief
explanation of the nature of the transaction, which in Figure 3 is the levying of the property tax.
As organized in the journal, the information is not particularly useful. It is impossible to
know the cumulative effect of these transactions on the cash balance of a fund, for example. The
next step in the accounting cycle depicted in Figure 3 is the posting of this information into a
subsidiary ledger. The ledger organizes information by accounts. For example, the Property Tax
Subsidiary Ledger would contain the individual accounts of all property tax payers in the
jurisdiction. When the property tax is levied as part of the budget adoption process, it is entered
into the journal, as previously described. In fact, the levy on each property owner would be
entered in the journal and the sum would equal the journal entry in Figure 3, or $500,000. The
debit to taxes receivable would then be periodically posted to the Property Tax Subsidiary
Ledger. Increases to asset accounts are recorded as debits, and increases to liabilities and fund
balance as credits.
To summarize information even further, a General Ledger is maintained that contains the
control accounts for each of the subsidiary ledgers. For example, the General Ledger would
contain an entry under taxes receivable for $500,000 that is the sum of all the property tax
liabilities contained in the Property Tax Subsidiary Ledger.
The adoption of the budget constitutes a transaction that is first journalized and then
posted to the ledgers. In this case the control accounts are Estimated Revenues and
Appropriations, with the more detailed individual accounts posted to the appropriate subsidiary
ledger. The account number in the budget is the same as the account number in the subsidiary
ledger, making entry of the budget information the beginning point of the annual accounting
cycle.
As noted in Figure 3, interim financial reports are prepared periodically that compare the
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budgeted amount for each account – both estimated revenues and appropriation – with the actual
amount – revenues and expenditures. As discussed more fully in the next section, this
comparison is central to insuring that actual receipts for each revenue source are keeping pace
with estimates, and that expenditures and encumbrances for each account do not exceed that
authorized in the budget. If a city government adopted a budget in which estimated revenues
exactly equaled appropriations, then during the year if
Revenues > Estimated Revenues,
the fund balance increases; otherwise it declines. Similarly, if
Expenditures + Encumbrances < Appropriations,
then the fund balance does not decrease as much as planned. The challenge from a budget
implementation perspective is monitoring the interaction of these four accounts during the
fiscal year and their net effect on fund balance. Algebraically, this can be represented as
Assets = Liabilities + Fund + Estimated - Revenues + Expenditures – Appropriations
Balance Revenues & Encumbrances
| |
As the final step in the accounting cycle, the budgetary accounts demarcated to the right
of the fund balance in the above equation must be closed at the end of the fiscal year and any
residual resources transferred to the fund balance. This action reduces the information in the
accounting records back to the basic relationship of
Assets + Deferred Outflows = Liabilities + Deferred Inflows + Fund Balance
and is reported in the financial statements as the Balance Sheet. If actual revenues are greater
22
than expenditures, then the year-end fund balance will increase. Obviously if the reverse is the
case, year-end fund balance will decline. While the temporary accounts are closed to the fund
balance, the information they contain is not lost. As discussed in the following section, this
information is used to prepare an important report for each fund – the operating statement
comparing budget with actual – which provides management as well as council with critical
information on overall budget compliance and whether the fund balance increased or decreased
as a result of the forgoing year's operations.
As a result of the development of automated financial management systems, these steps
in the accounting cycle have effectively been merged into one step, which occurs with the entry
of the original transaction into the accounting database. The subsequent steps of journalizing,
posting to the appropriate subsidiary ledger, aggregating information in control accounts in the
General Ledger, preparing interim statements, and finally closing the temporary accounts to the
fund balance now can be completed relatively efficiently with automated accounting information
systems. The primary source of errors is in incorrectly entering account information at the initial
step, which often is detected once departments receive their periodic reports.
Measurement Focus
An ongoing debate in governmental accounting concerns the proper measurement focus
and basis of accounting to be used in recognizing transactions in the accounting system.
Measurement focus raises the question of what should be measured and reported in the fund. In
the case of governmental funds, the focus is on current assets and current liabilities. Capital
assets and long term liabilities are not accounted for in these funds.
Thus, governmental funds are said to have a flow of financial resources measurement
focus. As expendable (budgetable) funds, their purpose is not to accumulate wealth but to expend
current resources for current services. Statement 34 represented a significant shift by GASB to
require a more comprehensive reporting of financial activities in the governmental group of
funds.
23
Proprietary and fiduciary funds, by contrast, account for current and capital assets and
current and long-term liabilities and are said to have a flow of economic resources
measurement focus, similarly to that used in business accounting. That is, these funds exist to
accumulate wealth by generating net income (earned revenues that exceed expenses), and
accurate accounting for these funds requires a more comprehensive picture of the full range of
economic activity of the fund. These differences in measurement focus add to the complexity of
governmental accounting.
A related issue concerns when to recognize (or record) transactions in the accounting
records, or the concept of basis of accounting. In the case of governmental funds, revenues are
recognized when they are measurable and available for use (generally within 60 days after fiscal
year-end) in the current accounting period. Revenues that are measurable but unavailable for use
in the current period are classified as a deferred inflow. Similarly, governmental funds measure
expenditures, that is the value of goods and services received but not necessarily used during the
current accounting period. Thus governmental funds seek to match revenues received during the
current year with expenditures made during the same period. The difference represents a measure
of whether revenues were sufficient to cover expenditures during the current accounting period, a
measurement focus consistent with the expendable orientation of these funds. This basis of
accounting is called modified accrual in recognition of its digression from the full accrual basis.
Proprietary and fiduciary funds, by contrast, rely on an accrual basis of accounting.
Revenues are recognized when they are earned, that is when a good or service is provided/sold
and a receivable is created. Similarly, expenses are recognized whenever goods are used,
regardless of the period in which they were acquired. Thus the focus is on matching revenues
earned during the year with the expenses incurred in earning those revenues including
depreciation, which is a measure of the amount of capital assets used during the current
accounting period. The difference constitutes net income and is a measure of the efficiency with
which capital was used to earn a return. Accurately matching the revenues earned during the
period with the expenses incurred is essential to a true assessment of the fund's net income.
Figure 5 depicts the difference between these two bases of accounting with that of a cash
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basis, which recognizes a transaction only when cash is exchanged. While governmental budgets
are often times prepared on a cash basis, GAAP requires that accounting and financial reporting
be on a modified or accrual basis of accounting depending on the type of fund. As a result, some
accounting systems work under one set of rules while budget reporting proceeds under another
set.
25
Figure 5. Bases of Accounting
1. Accrual v. Cash Basis
Request for Water Service - - - Water Service
ProvidedBill Prepared
& Mailed Bill Due + - - Water Bill Paid by Customer
accrualbasis
2. Modified Accrual Basis v. Cash Basis of Accounting
Property Assessed for Tax
Purposes- - - - - Tax Rate set
by Ordinance
Tax Bills Prepared &
Mailed
Tax Bill Due
Taxes Paid by
Taxpayer
modified cashaccrual basisbasis
THE BASES OF ACCOUNTING ON THE RECOGNITION OF EXPENDITURES OR EXPENSES
1. Encumbrance v. Expenditure v. Expense v. Disbursement
Purchase Requisition Prepared
Purchase Requisition Approved
Goods or Services Received
Vendor Invoice Received & Approved
for Payment
Check Issued Consumption
encumbrance expenditure disbursement expense
modified accrual cash accrualbasis basis basis
26
Financial Reporting
The culmination of budget implementation is the preparation of interim and annual
financial reports. From a budget perspective, the more important of these two are interim reports.
These reports generally originate as tallies of the revenue and expenditure subsidiary ledgers for
each fund. They are usually prepared on the same basis as the budget, which often times is a cash
basis. Unlike their corporate counterparts, these interim reports are primarily of internal value to
managers, members of council, and department heads in monitoring the progress in adhering to
the budget plan. The interim report for expenditures may be arranged as follows:
This report enables the budget office to monitor the budget status of each line item
appropriation within each department and to identify potential areas of concern. This information
may then be summarized into a graphical presentation that compares expenditures and
encumbrances with the projected level of spending at this point in the fiscal year. For example, in
the sixth month of the fiscal year and assuming a constant level of expenditures through the year,
then 50 percent of a department's appropriation should be expended or encumbered. The
projection will vary for departments with more seasonal expenditure patterns.
In the case of the interim revenue report, the central budget office may receive
information organized as follows:
Account Name
Budget for
Current Year
Actual Revenue for
Percent of Budget Current Period Year-to-date
MPA Scholarships $xxx $xxx $xxx xx %
Trends in revenue collection, especially for the larger revenue sources, are critical to the success
of budget implementation. Should actual revenue receipts fall below budget projections, the
central budget office must then take action to either reduce expenditures or, if the shortfall is
expected to be corrected in the current year, it may seek a short-term note to provide the
Name of Current Period Year-to-date UnencumberedDepartment Appropriation - Expenditures - Expenditures - Encumbrances = Balances
XYZ xxx xxx xxx xxx $xxx
27
necessary cash for operations. For example, delay in receiving a state or federal grant may
prompt a local government to seek a Grant Anticipation Note if it expects payment of the grant
before the end of the current fiscal year.
Comprehensive Annual Financial Report
While GAAP does not address the content or design of information in interim reports, it
says a great deal about such matters for the comprehensive annual financial report (CAFR), in
particular the Basic Financial Statements, Management’s Discussion and Analysis (MDA), Notes
to the Financial Statements, and Required Supplementary Information (RSI). Prepared primarily
for use by external stakeholders, the CAFR provides a report on all funds managed by a
government for the preceding fiscal year. Unlike interim reports, that portion of the CAFR
covered by GAAP is subject to examination by an external auditor, who reports on its accuracy.
In the United States, external auditors are accountable to city councils. Since the CAFR is
prepared by management, a system of checks and balances requires an independent auditor to
verify the accuracy of that report to the legislature. Once the audit is completed, the CAFR
contains a copy of the auditor's opinion on the firm's letterhead.
Every CAFR includes, at a minimum, three basic sections:
• Introductory Section
• Financial Section
• Statistical Section
Introductory Section contains:
1. Table of Contents
2. Letter of Transmittal
3. Organizational Chart
4. List of Principal Officials
5. Reproduction of Certificate of Achievement for Excellence for Financial Reporting (if
applicable)
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Financial Section – The core of the annual report, which must contain at a minimum:
1. Management discussion and analysis (MD&A)
2. Basic financial statements including:
{a} Government-wide financial statements
{b} Fund-specific financial statements (one set for Governmental Funds, another for
Proprietary Funds, and another for Fiduciary)
{c}Notes to the financial statements
3. Required supplementary information (RSI).
The MD&A precedes the financial statements and is intended to give management an
opportunity to (1) describe the basic financial statements, (2) discuss trends in the overall
financial condition of the jurisdiction as well as in key funds and fund types, (3) explain
significant differences between the original and final approved budgets, (4) describe significant
changes in capital assets and long term debt, and (5) any known events that may have a
significant effect on the City’s financial condition.
With government-wide financial statements, GASB has taken a huge step toward moving
governmental accounting and reporting toward the business model of a consolidated report
prepared on an accrual basis. Two statements are required: a Statement of Net Position and a
Statement of Activities. Together these statements provide stakeholders with a consolidated view
of all governmental and business-type activities of governments (fiduciary activities are
specifically excluded) using a uniform accrual basis of accounting. In essence, these statements
approximate the corporate sector’s “bottom line” statement.
The Statement of Net Position reports the overall financial position of the government by
listing major categories of assets and liabilities, deferred inflows and outflows of resources and
reporting their difference as net position. The columns (see Figure 6 page 30) report the totals for
the primary government (both governmental and business-type activities) and for the discretely-
presented component units of the government, such as a city-sponsored hospital. The greatest
adjustment occurs for the governmental activities column since this information must be
converted from a modified accrual basis to the accrual basis in order to make it comparable to the
29
business-type activities column.
An even more interesting and complicated statement is the government-wide Statement
of Activities (see Figure 7). For governmental activities, this statement reports the expense of
providing services by function (i.e. General Government, Public Safety, Public Works, Streets,
Community Development, Interest on Long-term Debt).
30
Figure 6. Statement of Net Position
CITY OF ANYWHERE, TEXAS
Primary Government
Governmental Business-type ComponentASSETS Activities Activities Total UnitCash and cash equivalents 32,735,551$ 9,588,808$ 42,324,359$ 1,351,501$ Receivables (net of allowance
for uncollectibles) 3,449,124 2,898,863 6,347,987 1,151,160Inventories 181,891 40,865 222,756 5,868,277Prepaid items - - - 2,000Restricted assets:
Cash and cash equivalents 16,237 3,113,712 3,129,949 15,000Receivables - 1,926,210 1,926,210 -
Capital assets (net of accumulated depreciation):Land 35,681,086 112,045 35,793,131 - Other non-depreciable assets 795,937 - 795,937 - Construction in progress 15,304,893 147,311 15,452,204 - Buildings 40,350,859 3,453,962 43,804,821 - Improvement other than buildings 94,908,058 49,966,013 144,874,071 - Machinery and equipment 6,870,743 882,767 7,753,510 -
Total Assets 230,294,379 72,130,556 302,424,935 8,387,938
DEFERRED OUTFLOWS OF RESOURCESDeferred loss on refunding 1,597,083 45,947 1,643,030 - Deferred outflows -pension 1,946,446 213,108 2,159,554 30,663
Total deferred outflows of resources 3,543,529 259,055 3,802,584 30,663
LIABILITIESAccounts payable and other
current liabilities 2,626,164 701,805 3,327,969 88,265Accrued interest payable 462,243 33,898 496,141 4,019 Due to other governments 44,114 - 44,114 - Liabilities payable from restricted assets - 376,232 376,232 - Unearned revenue 3,022,847 - 3,022,847 315,475Non current liabilities:
Due within one year 6,227,673 868,420 7,096,093 521,974Due in more than one year: 97,074,831 7,264,346 104,339,177 2,144,816
Total Liabilities 109,457,872 9,244,701 118,702,573 3,074,549
NET POSITION Net investment in capital assets 110,141,284 47,855,920 157,997,204 - Restricted for:
Debt service 470,789 - 470,789 - Capital projects - 5,039,922 5,039,922 - Community development 1,501,824 - 1,501,824 - Tourism 759,278 - 759,278 - Other 66,321 - 66,321 -
Unrestricted 12,040,540 10,249,068 22,289,608 5,344,052
Total Net Position 124,980,036$ 63,144,910$ 188,124,946$ 5,344,052$
SEPTEMBER 30, 2016STATEMENT OF NET POSITION
31
Figure 7. Statement of Activities
CITY OF ANYWHERE, TEXASSTATEMENT OF ACTIVITIESFOR THE YEAR ENDED SEPTEMBER 30, 2016
Program Revenues
Operating CapitalCharges for Grants and Grants and Governmental Business-type Component
Function/Programs Expenses Services Contributions Contributions Activities Activities Total UnitPrimary GovernmentGovernmental activities:
General government 8,292,990$ 2,650,115$ -$ -$ (5,642,875)$ -$ (5,642,875)$ -$ Public safety 15,265,836 1,519,821 394,093 7,303 (13,344,619) - (13,344,619) - Public works 1,040,898 1,399,132 - - 358,234 - 358,234 - Streets 7,649,278 - - 2,569,497 (5,079,781) - (5,079,781) - Community development 7,326,919 946,334 73,054 7,766,385 1,458,854 - 1,458,854 - Interest on long-term debt 3,920,570 - - - (3,920,570) - (3,920,570) -
Total governmental activities 43,496,491 6,515,402 467,147 10,343,185 (26,170,757) - (26,170,757) -
Business-type activities:Utility 12,878,510 15,473,529 - 2,399,575 - 4,994,594 4,994,594 -
Total business-type activities 12,878,510 15,473,529 - 2,399,575 - 4,994,594 4,994,594 -
Total primary government 56,375,001$ 21,988,931$ 467,147$ 12,742,760$ (26,170,757)$ 4,994,594$ (21,176,163)$ -$
Component unit:Anywhere Community Development Corp 2,397,744$ 412,541$ -$ -$ -$ -$ -$ (1,985,203)$
Total component units 2,397,744$ 412,541$ -$ -$ -$ -$ -$ (1,985,203)$
General revenues: Ad valorem taxes 24,620,586 - 24,620,586 - Sales taxes 6,663,646 - 6,663,646 2,191,784 Franchise taxes 2,665,092 - 2,665,092 - Unrestricted investment earnings 12,708 93,293 106,001 4,481 Miscellaneous income 160,750 336,548 497,298 28 Gain on disposal of capital assets 339,328 - 339,328 - Transfers 1,961,899 (1,961,899) - - Total general revenues and transfers 36,424,009 (1,532,058) 34,891,951 2,196,293
Change in net position 10,253,252 3,462,536 13,715,788 211,090
Net position - Beginning of year 114,726,784 59,682,374 174,409,158 5,132,962Net position - Ending 124,980,036$ 63,144,910$ 188,124,946$ 5,344,052$
Net (Expense) Revenue and Changes in Net Position
32
For business-type activities, the information is reported by major service area (utility,
etc.). For both governmental and business-type activities, program revenues (service charges,
operating grants and contributions, and capital grants and contributions) are reported and then
expenses netted to provide a summary of the amount of tax subsidy required for each activity.
The climax, if one dare call it that, to the table of (hyper) activities is a sub- section reporting the
general revenues by sources (primarily locally-levied taxes) required to balance operating
expenses for both governmental and business-type activities.
Fund-specific financial statements are the next section in the CAFR and represent the
more familiar balance sheets and operating statements of the pre-GASB Statement 34 era.
Governmental Funds are reported on a modified accrual basis and Proprietary on an accrual
basis, but individual statements (columns) are required only for the major funds with the smaller
funds aggregated into one column titled nonmajor funds. The General Fund is required to be
reported separately as a “major fund” as well as any other fund that meets certain quantitative
requirements.
Proprietary funds prepare a Statement of Net Position (balance sheet), Statement of
Revenues, Expenses and Changes in Net Position, and a Statement of Cash Flows, all prepared
on an accrual basis. For Fiduciary funds, the Statement of Net Position and Statement of Changes
in Net Position are presented by fund type rather than individual funds.
Preparation of a budget comparison statement for Governmental Funds is required, which
can be included as a statement in the Basic Financial Statements section or as a schedule in the
Required Supplemental Information (RSI) section. Statements comparing budget with actual
revenues and expenditures are required for the General Fund and each major special revenue
fund that has an annually approved budget. In addition, the budget comparison is required to
report (1) the original approved budget, (2) the final amended budget, which represents the
ultimate appropriation authority for the fiscal year, and (3) the actual amounts (on a budgetary
basis) for the same period. A column showing the variance between actual and final budget is
also required.
33
The Notes to the Financial Statements are not an afterthought or an embellishment, but
rather an integral and an essential part of the basic financial statements [2012 GAAFR, pg 345].
GASB 34 established general disclosure requirements as well as required note disclosures for
capital assets and long-term liabilities, donor-restricted endowments, and segment information.
The final element in the Basic Financial Statements is a section on Required Supplementary
Information (RSI) other than MD&A. These types of RSI affect only some governments and
include the following:
(1) If budgetary comparisons were not provided in the fund-specific section, then they are
to be included in the RSI as schedules following the same basic format as specified
for the fund-specific section. As with the funds statement, if reported in the RSI, a
schedule comparing budget to actual for the General Fund and all major special
revenue funds must be included.
(2) GAAP gives governments the option of not reporting depreciation for certain types of
infrastructure. In such cases, local governments must provide an assessment of the
condition of such infrastructure and the cost required as well as the actual amount
expended to maintain this infrastructure at a predetermined level of quality.
(3) Trend data on postemployment benefits (postemployment benefit plans and employers
that participate in sole-employer or agent multiple-employer defined benefit plans).
(4) Trend data on revenue and claims development (public-entity risk pools)
(5) Pension schedules – which vary depending on whether the government is a single or
agent employer or a cost-sharing employer
The Statistical Section of the CAFR is an important source of information regarding a
government’s economic condition. It is designed to meet five objectives:
• Provide information on financial trends
• Provide information on revenue capacity
• Provide information on debt capacity
• Provide demographic and economic information
• Provide operating information
34
Authoritative accounting and financial reporting standards set minimum requirements as to what
information needs to be provided in the statistical section to meet each of these objectives [2012
GAAFR, pgs 615-6]. The section is not subject to review by the external auditor.
Other Topics
Other Post-Employment Benefits (OPEB)
Statement No. 45, and its companion statement No. 43 addressed the accounting and
reporting of other post-employment benefits (OPEB) including post-employment health and
dental care and life insurance. Prior to GASB No. 45, state and local governments typically used
a pay-as-you-go approach to budgeting and accounting for and these benefits, mostly to retirees.
The problem has been that with the escalation in health care costs and the expanding number of
retirees who are living longer, these unfunded liabilities have grown in terms of their impact on
local budgets.
GASB 45 requires that governments must now provide an estimate of these OPEBs as an
expense during the years the employee is working, similar to what is required for employer-
funded pension plans.11
Unlike most retirement benefits, OPEBs are not normally administered as part of a
pension plan. Most of these benefits are paid out of an annual appropriation from a state or local
government’s operating budget along with benefits to those currently employed by the
government. State and local governments with group health plans that extend to retirees incur an
implicit cost from (1) the increase in the average age of the pool of beneficiaries caused by the
addition of older retirees, and (2) the direct subsidy, if any, provided by the government for the
health insurance premium. While GASB 45 does not require governments to fund these
liabilities, the assumption is that by requiring them to include an estimate of the cost it will
compel more responsible decision making by governments and a more complete awareness of
the long-term financial impact of such benefits.
35
The Financial Reporting Entity:
Statement 39, issued in May 2002, amended Statement 14, providing guidance on when
certain organizations, although not financially accountable to the primary government, should be
reported as a component of that government’s financial reports based on the nature of their
relationship. These separate units may be a special tax district or economic development
corporation created by the city or county, which although legally separate, exist primarily for the
benefit of the city or county. Specifically, any tax-exempt organization, although legally separate,
that meets the following criteria should be reported as a component unit:
(1) The resources received by the separate organization are entirely or almost entirely for
the direct benefit of the parent government or its components or constituents;
(2) The parent government or its component units can access most of the resources held
by the separate organization;
(3) The resources held by the organization, that the parent government is entitled to or
has the authority to access, are significant to the parent government.10
In those cases where these criteria are not met, the finance manager must use “professional
judgment” in deciding whether the failure to report a component unit would render the parent
government’s financial statements incomplete or misleading.
Statement 61, issued in 2010, modified certain requirements for inclusion of component
units in the financial reporting entity. For organizations that previously were required to be
included as component units by meeting the fiscal dependency criterion, a financial benefit or
burden relationship also would need to be present between the primary government and that
organization for it to be included in the reporting entity as a component unit. Further, for
organizations that do not meet the financial accountability criteria for inclusion as component
units but that, nevertheless, should be included because the primary government’s management
determines that it would be misleading to exclude them, Statement 61 clarified the manner in
which that determination should be made and the types of relationships that generally should be
considered in making the determination.
36
Statement 61 also amended the criteria for reporting component units as if they were part
of the primary government (that is, blending) in certain circumstances. For component units that
currently are blended based on the “substantively the same governing body” criterion, it
additionally required that (1) the primary government and the component unit have a financial
benefit or burden relationship or (2) management (below the level of the elected officials) of the
primary government have operational responsibility for the activities of the component unit. New
criteria were added to require blending of component units whose total debt outstanding is
expected to be repaid entirely or almost entirely with resources of the primary government. The
blending provisions were amended to clarify that funds of a blended component unit have the
same financial reporting requirements as a fund of the primary government. Lastly, additional
reporting guidance was provided for blending a component unit if the primary government is a
business-type activity that uses a single column presentation for financial reporting.
Recent Statements
In the years following Statement No. 34, many pronouncements were issued in an effort
to bring more accountability and utility for those using the financial reports of government.
Some of the more recent statements include the following:
GASB 68 –
• Replaced Statements 27 & 50 as they relate to governments that provide pensions
primarily through plans administered as trusts.
• Requires governments that provide defined benefit pensions to recognize their long-term
obligation for the pension benefit as a liability (net pension liability) for the first time.
• Statement 68 establishes standards for measuring and recognizing liabilities, deferred
outflows of resources, and deferred inflows of resources, and expense/expenditures.
• For defined benefit pensions, Statement 68 identifies the methods and assumptions that
should be used to project benefit payments, discount projected benefit payments to their
actuarial present value, and attribute that present value to periods of employee service.
• Note disclosure and required supplementary information requirements about pensions
37
also are addressed. Distinctions are made regarding the particular requirements for
employers based on when they are single employers, agent employers or cost-sharing
employers
GASB 72 –
• Defines “fair value” and “investment”
• Requires investments to be measured at fair value, with certain exceptions
• Addresses acceptable valuation techniques
• Establishes a fair value hierarchy that categorizes the inputs to valuation techniques used
to measure fair value into three levels (level 1, 2, and 3)
• Expands disclosure requirements related to fair value measurements and the impact of
fair value measurements on a government’s financial position
Additional Sources
Bland, Robert L. and Irene S. Rubin. Budgeting: A Guide for Local Governments. Washington, D.C.: International City/County Management Association, 1997.
Freeman, Robert J. and Craig D. Shoulders. Governmental and Nonprofit Accounting.
Upper Saddle River, NJ: Prentice Hall Publishers, Inc., 2003.
Gauthier, Stephen J. Governmental Accounting, Auditing, and Financial Reporting (GAAFR). Chicago: Government Finance Officers Association, 2012.
Martin, Susan W. and Ellen N. West. Today’s Essentials of Governmental and Not-for- Profit
Accounting & Reporting. Mason, OH: Thomson Learning, 2003.
Ruppel, Warren. GAAP for Governments, 2002. New York: John Wiley & Sons, Inc., 2002.
Endnotes
1. Governmental Accounting Standards Board, Service Efforts and Accomplishments Reporting, Concepts Statement No. 2, April 1994: p. 10. (www.gasb.org)
2. Stephen J. Gauthier, Governmental Accounting, Auditing, and Financial Reporting (GAAFR). Chicago: Government Finance Officers Association, 2001: pp. 135-8.
3. Governmental Accounting Standards Board Statement No. 34, “Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments.” Norwalk, CT: June 1999.
4. GAAFR, ibid., p. 17.
38
5. One of the earliest references to funds was in the Antideficiency Act, first adopted in 1870 by Congress and amended in 1905-06.
6. GAAFR, op. cit., p. 88. 7. GAAFR, op. cit., pp. 23-25. 8. Robert J. Freeman and Craig D. Shoulders, Governmental and Nonprofit Accounting.
Upper Saddle River, NJ: Prentice Hall Publishers, Inc., 2003: pp. 49. 9. U.S. General Accounting Office, A Glossary of Terms, p. 4. 10. Governmental Accounting Standards Board Statement No. 39, “Determining Whether
Certain Organizations are Component Units – An Amendment of GASB Statement No. 14.” Norwalk, CT: May 2002.
11. Governmental Accounting Standards Board Statement No. 45, “Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions.” Norwalk, CT: June 2004.
