3/1/2016 PROGRAM DAY 2 CATEGORIES OF TRANSACTIONS AND EVENTS TRANSACTIONS VS. INTERFUND ACTIVITY

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1 PROGRAM DAY 2 Categories of transactions and events Financial statement elements Governmental funds Revenues Expenditures Other financing sources and uses Financial statements 1 CATEGORIES OF TRANSACTIONS AND EVENTS TRANSACTIONS VS. INTERFUND ACTIVITY Interfund activity Between funds of the primary government Including blended component units Transactions Between primary government and outside parties Between primary government and discretely presented component units Between discretely presented component units 3 1

2 ADDITIONAL CLASSIFICATIONS Extraordinary items Special items 4 BASIC CATEGORIES OF TRANSACTIONS Exchange and exchange-like transactions Nonexchange transactions 5 EXCHANGE AND EXCHANGE-LIKE TRANSACTIONS Value both given and received Exchange: equal value given and received Exchange-like: Approximately equal value given and received, or Value provided to a party other than the counterparty For example, a discretely presented component unit 6 2

3 NONEXCHANGE TRANSACTIONS Value not both given and received Taxes Grants Four categories Derived tax revenues Imposed nonexchange revenues Government-mandated nonexchange transactions Voluntary nonexchange transactions 7 DERIVED TAX REVENUES Assessment based on an underlying transaction to which the government itself is not a party Sales tax Income tax Motor fuel tax Hotel occupancy tax 8 IMPOSED NONEXCHANGE TRANSACTIONS Government assessments other than derived tax revenues Ad valorem taxes Fines and penalties Forfeitures 9 3

4 GOVERNMENT-MANDATED NONEXCHANGE TRANSACTIONS Funded mandates Mandate to perform an action or provide a service accompanied by at least partial funding Requirement to offer a particular type of special education program for which the state will bear half the cost 10 VOLUNTARY NONEXCHANGE TRANSACTIONS All other nonexchange transactions 11 TREATMENT RECIPIENT PERSPECTIVE 12 4

5 EXCHANGE AND EXCHANGE-LIKE TRANSACTIONS Recognition = when exchange occurs Money received in advance? = liability (unearned revenue) Additional criterion for governmental funds = Is revenue available? No = deferred inflow of resources 13 DERIVED TAX REVENUES Recognition = when underlying exchange occurs Unaffected by purpose restrictions Motor fuel tax that must be spent on road construction and maintenance Manner of recognition Net of estimated refunds and uncollectible amounts Additional criterion for governmental funds = Is revenue available? No = deferred inflow of resources 14 IMPOSED NONEXCHANGE REVENUES Recognition Receivable = when enforceable legal claim Revenue = enforceable legal claim + time requirement met Time requirement = resources may be spent only Subsequent to a specified date During a specified period Unaffected by purposes restrictions Money received in advance of time requirement? Deferred inflow of resources 15 5

6 IMPOSED NONEXCHANGE REVENUES (CONT.) Manner of recognition Net of estimated refunds and uncollectible amounts Additional criterion for governmental funds = revenue available? No = deferred inflow of resources 16 GOVERNMENT-MANDATED NONEXCHANGE TRANSACTIONS Recognition = when all eligibility criteria have been met, including time requirement Time requirement assumed (if necessary) for governmental providers Fiscal year of immediate provider Unaffected by purpose restrictions Money received Before time requirement met, but after other eligibility requirements met Deferred inflow of resources Before other eligibility criteria met Liability 17 GOVERNMENT-MANDATED NONEXCHANGE TRANSACTIONS (CONT.) Additional criterion for governmental funds = revenue available? No = deferred inflow of resources 18 6

7 VOLUNTARY NONEXCHANGE TRANSACTIONS (CONT.) Recognition = same as for government-mandated nonexchange transactions 19 EXPENDITURE-DRIVEN (REIMBURSEMENT) GRANTS Classification = government-mandated or voluntary nonexchange transactions Eligibility requirement = spending Not a purpose restriction Recognition = when both Qualifying expenditures incurred and Contingent requirements met (for example, matching requirements) Not applicable to purely administrative requirements Filing of grantor reports 20 TREATMENT PROVIDER PERSPECTIVE 21 7

8 IN GENERAL Mirror image of recipient treatment 22 UNALLOWABLE AMOUNTS Receivable reported to match recipient liability for unallowable amounts Exception to general prohibition against reporting gain contingencies 23 ADDITIONAL CLASSIFICATIONS EXTRAORDINARY ITEMS AND SPECIAL ITEMS 24 8

9 EXTRAORDINARY ITEMS Both Unusual in nature High degree of abnormality and clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity Infrequent in occurrence Not reasonably expected to recur in the foreseeable future, taking into account the environment in which the entity operates Significant To financial statement in which reported 25 SPECIAL ITEMS Both Unusual in nature or infrequent in occurrence Within the control of management Significant To financial statement in which reported 26 SUMMARY Transactions vs. interfund activity Transactions Exchange/exchange-like Nonexchange Derived tax revenues Imposed nonexchange revenues Government-mandated nonexchange transactions Voluntary nonexchange transactions Extraordinary items and special items 9

10 QUESTIONS 28 QUESTION 1 How would property taxes be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 29 QUESTION 2 How would income taxes be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 30 10

11 QUESTION 3 How would billings to electrical utility customers be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 31 QUESTION 4 How would a motor fuel tax be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 32 QUESTION 5 How would an ad valorem tax on motor vehicles be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 33 11

12 QUESTION 6 How would fines and forfeitures be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 34 QUESTION 7 How would a grant for required bilingual education programs be classified? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 35 QUESTION 8 How would shared revenues from a countywide sales tax be classified by recipients? A. Exchange/exchange-like transactions B. Derived tax revenues C. Imposed nonexchange revenues D. Government-mandated nonexchange transactions E. Voluntary nonexchange transactions 36 12

13 QUESTION 9 In what way does an exchange-like transaction differ from an exchange transaction? A. The values exchanged may not be quite equal B. A portion of the value exchanged may benefit a third party C. Either A or B 37 QUESTION 10 There is no difference in accounting and financial reporting between exchange transactions and exchange-like transactions. A. True B. False 38 QUESTION 11 A purpose requirement has no effect on revenue recognition. A. True B. False 39 13

14 QUESTION 12 A time requirement has no effect on revenue recognition. A. True B. False 40 QUESTION 13 The time requirement has no effect on receivable recognition. A. True B. False 41 QUESTION 14 Which of the following would potentially qualify as an extraordinary item? A. A tornado B. A major sale of land C. Both A and B D. None of the above 42 14

15 QUESTION 15 Which of the following potentially would qualify as a special item? A. A hurricane on the Gulf Coast B. A major sale of land C. Both A and B D. None of the above 43 FINANCIAL STATEMENT ELEMENTS TRADITIONAL COMPONENTS OF FINANCIAL POSITION Financial statement elements Assets Liabilities Difference Equity/net assets/fund balance Accounting equation Assets Liabilities = Equity 45 15

16 DEVELOPMENT OF DEFINITIONS FOR PUBLIC SECTOR GASB Concepts Statement No. 4, Elements of Financial Statements 46 GASB DEFINITIONS Assets Resources with present service capacity that the government presently controls Liabilities Present obligations to sacrifice resources that the government has little or no discretion to avoid 47 ASSETS Resources with present service capacity that the government presently controls To be distinguished: controls vs. benefits 48 16

17 CONTROL Ability to determine whether to Use directly Exchange for another asset Employ in some other way that provides benefit For assets used by the general public Ability to control access Legal limitations or other external constraints are not inconsistent with control 49 SOURCE OF CONTROL Result of a past event (vs. inherent powers) Inherent powers may produce an asset, but are not, in themselves, an asset Typical sources Contractual rights Legal ownership 50 LIABILITIES Present obligations to sacrifice resources that the government has little or no discretion to avoid 51 17

18 PRESENT OBLIGATION Social, legal, or moral requirement Underlying event must have taken place As distinguished from a commitment 52 LITTLE OR NO DISCRETION TO AVOID Legally enforceable (not essential) Constructive Social, moral, or economic consequences leave little or no discretion Beyond the obligation to provide service Must involve an outside party Identity may be unknown Excludes items such as deferred maintenance 53 CHALLENGE RAISED BY DEFINITIONS A number of items traditionally reported as assets and liabilities do not qualify Example = grant proceeds paid/received prior to meeting a time requirement, but for which all other eligibility criteria have been met Not an asset for the grantor Not a liability for the grant recipient 54 18

19 SOLUTION Introduction of two new financial statement elements for the statement of financial position Deferred outflows of resources (debit) Deferred inflows of resources (credit) 55 WHAT IS A DEFERRED OUTFLOW OF RESOURCES? Outflow of resources Consumption of net assets applicable to the current period Net decrease in assets Net increase in liabilities Deferred outflow of resources Consumption of net assets applicable to a future period Example: grant payments if only time requirement not met 56 TREATMENT Debit on statement of financial position rather than debit on statement of resource flows Delays recognition of outflow Practical effect equivalent to reporting an asset 57 19

20 WHAT IS A DEFERRED INFLOW OF RESOURCES? Inflow of resources Acquisition of net assets applicable to the current period Net increase in assets Net decrease in liabilities Deferred inflow of resources Acquisition of net assets applicable to a future period Example: grant receipts if only time requirement not met 58 TREATMENT Credit on statement of financial position rather than credit on statement of resource flows Delays recognition of inflow Practical effect equivalent to reporting a liability 59 WHAT IF NEITHER? Neither an asset nor a deferred outflow of resources? Outflow of resources Neither a liability nor a deferred inflow of resources Inflow of resources 60 20

21 SUMMARY New accounting equation Assets Liabilities Deferred outflows = Deferred outflows Difference 61 WHICH IS WHICH? Determination made by GASB GASB Statement No. 65, Items Previously Reported as Assets and Liabilities 62 GASB S APPROACH TO RECLASSIFICATION Test 1: Does it meet the definition of an asset or a liability? Yes? - report as asset or liability Test 2: Does it meet the definition of a deferred outflow/ inflow of resources? Yes? - report as deferred outflow/inflow of resources Default: Outflow/inflow of the current period 63 21

22 DEFERRED OUTFLOWS OF RESOURCES Grant payments made to recipient when only the time requirement has not been met Excess of the reacquisition price of refunded debt over its net carrying amount Loss on refunding Payments made within the financial reporting entity to purchase the right to future revenues 64 OUTFLOWS OF RESOURCES Debt issuance costs (other than insurance) 65 DEFERRED INFLOWS OF RESOURCES Resources received from a grantor when the only eligibility criterion that has not been met by the recipient is a timing requirement Imposed nonexchange revenues received or recognized as a receivable prior to applicable period Period for which budgeted (property taxes) Period when the use of the resources is either required or first permitted (other) Governmental funds Unavailable revenue Contrast with unearned revenue 66 22

23 SUMMARY Definition of financial statement elements Assets Present service capacity Control Liabilities Present obligations Little or no discretion to avoid Outflows of resources (current period) vs. deferred outflows of resources (future period) Inflows of resources (current period) vs. deferred inflows of resources (future period) 67 SUMMARY (CONT.) Classification determined by GASB 68 QUESTION 1 A government cannot be said to control an asset if there are legal limitations on its use. A. True B. False 69 23

24 QUESTION 2 A government s power to tax meets the definition of an asset. A. True B. False 70 QUESTION 3 A commitment should be classified as a liability. A. True B. False 71 QUESTION 4 A liability, by definition, must be legally enforceable. A. True B. False 72 24

25 QUESTION 5 The key factor underlying the notion of deferred outflows and inflows of resources is timing. A. True B. False 73 QUESTION 6 The deferral of an outflow or inflow of resources has the practical effect of moving the effect of a given transaction or event from the statement of resource flows to the statement of financial position. A. True B. False 74 QUESTION 7 A grant payment received prior to the start of the period for which it may be used should be reported as a A) Liability B) Deferred inflow of resources C) Either A or B 75 25

26 QUESTION 8 How should debt issuance costs be treated? A. Asset B. Outflow of resources C. Deferred outflow of resources D. Either A or B E. Either B or C 76 QUESTION 9 How should property taxes collected in advance of the year for which levied be classified? A. Liability B. Deferred inflow of resources C. Inflow of resources D. Either A or B 77 QUESTION 10 A government should report a deferred inflow of resources for prepayments it receives in connection with an exchange transaction. A. True B. False 78 26

27 GOVERNMENTAL FUND REVENUES TRADITIONAL APPROACHES TO REVENUE RECOGNITION Accrual basis one criterion Obtain claim to resources Cash basis two criteria Obtain claim to resources and Collect cash 80 PUBLIC-SECTOR CHALLENGE Governmental funds Focus on near-term liquidity Cash basis revenue recognition too narrow Excludes revenues not yet collected in cash, but that will be available in time to liquidate liabilities of the current period Accrual basis revenue recognition too broad Includes revenues that will not be available in time to liquidate liabilities of the current period 81 27

28 PUBLIC-SECTOR CHALLENGE (ILLUSTRATION) 82 SOLUTION FOR GOVERNMENTAL FUNDS Modified accrual basis Midway between cash basis and accrual basis Criteria for revenue recognition: Obtain claim to resources and Available Collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period 83 SIMILARITY IN REVENUE RECOGNITION No revenue recognition prior to obtaining a claim to resources Cash basis Accrual basis Modified accrual basis Amounts received in advance Liability/deferred inflow of resources 84 28

29 DIFFERENCES IN REVENUE RECOGNITION CRITERIA Cash basis Claim to resources plus: Actual cash collection Modified accrual basis Claim to resources plus: Actual cash collection Available amounts not yet collected Accrual basis Claim to resources plus: Actual cash collection Available amounts not yet collected Amounts not yet collected or available 85 SUMMARY OF REVENUE RECOGNITION CRITERIA 86 RESULT OF APPLYING REVENUE RECOGNITION CRITERIA 87 29

30 REVENUE RECOGNITION IN GOVERNMENTAL FUNDS (SUMMARY) Recognize revenue: As soon as the government obtains claim to resources (modified accrual) Only to the extent that the resources will be received soon enough to be used to liquidate liabilities of the current period (modified accrual) No effect on asset recognition (receivable) Effect limited to balancing credit Revenue vs. deferred inflow of resources 88 AVAILABILITY Availability period Generally a matter of professional judgment Exceptions 60-day maximum for property taxes Immediate recognition required for increases in the fair value of investments Single period desirable Typically 60 days Exception for unusual circumstances Collectible vs. collected Issue = whether government could collect revenue Declining to collect available revenue does not make it unavailable 89 INITIAL JOURNAL ENTRY Option 1 book entire amount as revenue Reclassify a portion as unavailable revenue at year end Option 2 book entire amount as unavailable revenue Reclassify a portion as revenue at year end 90 30

31 REFUNDS AND UNCOLLECTIBLES Revenue reported net of estimated refunds and uncollectibles 91 YEAR-END ADJUSTMENT Unavailable revenue DR CR Revenue $5 Unavailable revenue $5 92 PREPAYMENTS Availability is not a substitute for obtaining a claim to resources Offset prepayments by liability/deferred inflow of resources Liability unearned Deferred inflow of resources only awaiting future period 93 31

32 APPLICATION TO MISCELLANEOUS REVENUES Option to recognize on a cash basis Presumption = difference would be immaterial Examples Golf fees Swimming fees Inspection charges Parking fees Parking meter receipts 94 PROPERTY TAXES Receivable = earlier of Legal claim (lien date/assessment date) Start of the period taxes are intended to finance Revenue Start of the period taxes are intended to finance Available 95 SALES TAXES Receivable = when underlying transaction occurs Include anticipated recoveries from future tax audits. Revenue = when available Shared taxes = Provider government = tax Recipient government = not a tax Government-mandated or voluntary nonexchange transaction 96 32

33 INCOME TAXES Receivable = when income earned Including anticipated recoveries from future tax audits Offset by liability for over-withholding Revenue = when available 97 FINES AND FORFEITURES Enforceable legal claim Not going to court When payment made When period for challenging the citation ends Going to court When fine is imposed Net of refunds on appeal 98 PASS-THROUGH GRANTS Vantage point of intermediate provider Functional equivalent of expenditure-driven grant Remittance to ultimate recipients = qualifying expenditure = revenue for intermediate provider 99 33

34 ON-BEHALF PAYMENTS OF SALARIES AND BENEFITS Reporting by recipient employer Revenue = amounts paid or due to third party 100 DONATED CAPITAL ASSETS TO BE USED IN OPERATIONS Not a financial resource No recognition in governmental funds 101 INVESTMENT INCOME Increase in fair value of investments = revenue Earned interest = revenue when available

35 SPECIAL ASSESSMENTS Exchange or exchange-like transaction Receivable = when enforceable legal claim Revenue = when available 103 SUMMARY Modified accrual basis Claim + available Application of availability Initial journal entry Specific applications Property taxes Sales taxes Income taxes Fines and forfeitures Pass-through grants On-behalf payments of salaries and benefits Donated capital assets to be used in operations Investment income Special assessments QUESTIONS

36 QUESTION 1 To be recognized as revenue under the cash basis of accounting, amounts must be: A. Earned B. Collected C. Both A and B 106 QUESTION 2 Which of the following would be recognized as revenue under the cash basis of accounting? A. Amounts collected B. Amounts collectible in the near term C. Amounts collectible later D. All of the above E. Both A and B 107 QUESTION 3 Which of the following would be recognized as revenue under the accrual basis of accounting? A. Amounts collected B. Amounts collectible in the near term C. Amounts collectible later D. All of the above E. Both A and B

37 QUESTION 4 Which of the following would be recognized as revenue under the modified accrual basis of accounting? A. Amounts collected B. Amounts collectible in the near term C. Amounts collectible later D. All of the above E. Both A and B 109 QUESTION 5 Which of the following might be reported at different amounts depending upon the basis of accounting used? A. Receivables B. Revenues C. Both A and B 110 QUESTION 6 What is the maximum availability period for property taxes? A. 30 days B. 45 days C. 60 days D. 90 days E. One year

38 QUESTION 7 As the result of a natural disaster, revenues that ordinarily would be received within 60 days of the end of the fiscal year are instead received 90 days after the close of the fiscal year. Which of the following statements is true if the government uses a 60-day availability period for revenue recognition? A. Amounts received after the 60-day deadline should be recognized as revenue. B. Amounts received after the 60-day deadline should not be recognized as revenue 112 QUESTION 8 How should amounts that are never expected to be collected be reported in governmental funds? A. Bad debt expense/allowance for doubtful accounts B. Bad debt expenditure/allowance for doubtful accounts C. Reduction of revenue/allowance for doubtful accounts 113 QUESTION 9 What is the appropriate credit when a revenuerelated receivable is initially recorded in a governmental fund? A. Revenue B. Unavailable revenue C. Either A or B D. Combination of A and B

39 QUESTION 10 A government with a 60-day availability period levies property taxes ($100) during the current fiscal year to finance the budget of the next fiscal year. Of that amount, $60 is collected in the current year, $30 within the first 60 days of the subsequent year, and $10 at a later date. What amount should be recognized as revenue in the current fiscal year? A. $0 B. $60 C. $90 D. $ QUESTION 11 A government with a 60-day availability period levies property taxes ($100) during the current fiscal year to finance the budget of the current fiscal year. Of that amount, $60 is collected in the current year, $30 within the first 60 days of the subsequent year, and $10 at a later date. What amount should be recognized as revenue in the current fiscal year? A. $0 B. $60 C. $90 D. $ QUESTION 12 When should fines associated with traffic citations be recognized as revenue? A. When paid voluntarily B. At the end of the period for challenging the citation C. When imposed by a court D. All of the above

40 QUESTION 13 How should a governmental fund report the receipt of a donated capital asset with a donor carrying value of $100 and a fair value of $250 as of the date of donation? A. Revenue $100 B. Revenue $250 C. Either A or B D. None of the above 118 QUESTION 14 A government (60-day availability period) receives a $500,000 expenditure-driven grant with a dollar-fordollar matching requirement. The government incurs $800,000 of qualifying expenditures in the current period, but will not be reimbursed until 90 days after the end of the period. How much revenue should the government recognize in the current period? A. $500,000 B. $400,000 C. $0 119 QUESTION 15 A government (60-day availability period) receives a $500,000 expenditure-driven grant with a dollar-fordollar matching requirement. The government incurs $800,000 of qualifying expenditures in the current period and could have received reimbursement within 60 days had it filed a claim for reimbursement on a timely basis. How much revenue should the government recognize in the current period? A. $500,000 B. $400,000 C. $

41 GOVERNMENTAL FUND EXPENDITURES BACKGROUND Accrual basis Expense = when liability incurred Dilemma Governmental funds focus on near-term liquidity Unaffected by liabilities not payable in the near-term Resolution Modified accrual Expenditure = when a liability normally would be liquidated with current financial resources Normally = practice of government in general 122 CONTRAST Vacation leave: Expense (accrual) = when earned Expenditure (modified accrual) = when paid

42 BASIC RULE MODIFIED ACCRUAL Expenditure = when liability incurred Same as accrual basis Examples: salaries and vendor payables Exceptions Debt service Certain specified accrued liabilities Postemployment benefits Operating leases with scheduled rent increases Inventories of supplies Prepaids 124 EXCEPTION FOR DEBT SERVICE Expenditure = when payment is due (that is, the period in which payment normally would be budgeted) No accrual of interest at year end Early recognition option Purpose = avoid transitory surplus in debt service fund Three criteria for use Use of debt service fund Transfer required prior to end of fiscal year Payment due early in subsequent year (one month) 125 EXAMPLE DEBT SERVICE EXPENDITURE RECOGNITION Assumptions June 30 fiscal year end Requirement to transfer $650,000 to debt service fund by end of fiscal year Payment due July

43 TRANSFER TO DEBT SERVICE FUND Always the same 127 SUBSEQUENT JOURNAL ENTRIES NORMAL APPROACH Single journal entry on payment date 128 SUBSEQUENT JOURNAL ENTRIES EARLY RECOGNITION OPTION Additional entry at year end Entry on payment date

44 NET EFFECT ON FUND BALANCE END OF YEAR Normal approach Transfer in: + $650,000 Net effect on fund balance + $650,000 Early recognition option Transfer in: +$650,000 Debt service expenditure - $650,000 Net effect on fund balance $ EXCEPTION FOR CERTAIN SPECIFIED ACCRUED LIABILITIES Expenditure when normally liquidated with current financial resources The period in which payment normally is budgeted Practical application Amounts payable to former employees Compensated absences When due and payable Claims and judgments Termination benefits When goods and services are received Landfill closure and postclosure care costs Pollution remediation obligations 131 EXCEPTION FOR PENSIONS AND OPEB Employers in single-employer and agent multipleemployer defined benefit plans Expenditure = when payment made or due Employers in cost-sharing multiple-employer plans Expenditure = all contributions related to the period, regardless of when payment is expected

45 EXCEPTION FOR OPERATING LEASES WITH SCHEDULED RENT INCREASES Accrual accounting Expense is anticipated Expenditure = only when payment is due 133 EXCEPTION FOR PURCHASES OF SUPPLIES Two options Purchases method Consumption method 134 INVENTORIES OF SUPPLIES PURCHASES METHOD Expenditure = upon purchase Material amounts must still be reported Direct adjustment to fund balance

46 INVENTORIES OF SUPPLIES CONSUMPTION METHOD Consumption method (like private sector) Initially recognize asset Expenditure = when consumed 136 EXCEPTION FOR PREPAIDS Two options Purchases method No requirement to report an asset for significant balances Contrast with purchases method for supplies inventories Consumption method 137 SUMMARY Modified accrual Expenditure = when liability normally would be liquidated with current financial resources When liability incurred Exceptions Debt service Certain specified accrued liabilities Postemployment benefits Operating leases with scheduled rent increases Inventories of supplies Prepaids 46

47 QUESTIONS 139 QUESTION 1 Under the accrual basis of accounting, when is expense recognized? A. When a liability is incurred B. When a liabilities incurred that is normally expected to be liquidated with available financial resources C. When paid 140 QUESTION 2 Under the modified accrual basis of accounting, when is an expenditure recognized? A. When a liability is incurred B. When a liability is incurred that normally is expected to be liquidated with available financial resources C. When paid

48 QUESTION 3 For which of the following would an expenditure and an expense be recognized at the same time? A. Vacation leave B. Salaries and wages C. Vendor payables D. All the above E. Both B and C 142 QUESTION 4 A government with the June 30 fiscal year end has a debt service payment due on July 1 of the following fiscal year. Which of the following potentially could qualify for expenditure recognition as of June 30? A. Principal payment due July 1 B. Interest payment due July 1 C. Both A and B D. None of the above 143 QUESTION 5 A government voluntarily transfers $300,000 to a debt service fund prior to the close of the current fiscal year for a debt service payment due 15 days into the subsequent fiscal year. $200,000 of this payment is for interest and $100,000 for principal. How much could be recognized as an expenditure in the current fiscal year? A. $300,000 B. $200,000 C. $100,000 D. $

49 QUESTION 6 What amount should be reported for vacation leave in a governmental fund? A. Total leave earned B. The portion of earned leave expected to be paid within one year of the close of the fiscal year C. The portion of earned leave expected to be paid early in the subsequent year D. The portion of earned leave associated with former employees (that is, reimbursable unused vacation leave at separation) 145 QUESTION 7 A government that participates in a cost-sharing pension plan is regularly asked to make its fourthquarter contribution in the first quarter of the subsequent fiscal year. When should an expenditure related to the contribution be recognized in a governmental fund? A. Current year B. Subsequent year C. Either A or B 146 QUESTION 8 When might a governmental fund report an asset for supplies inventories? A. When the purchases method is used B. When the consumption method is used C. Both A and B

50 QUESTION 9 When might a governmental fund report an asset for prepaids? A. When the purchases method is used B. When the consumption method is used C. Both A and B 148 QUESTION 10 When should a governmental fund recognize an expenditure and a liability for claims and judgments? A. In the period the underlying event occurs B. In the period a court makes an award or a settlement is reached C. In the period in which related amounts became due and payable 149 OTHER FINANCING SOURCES AND USES 50

51 NATURE AND PURPOSE Some items that increase/decrease fund balance clearly differ from regular revenues and expenditures Transfers among funds Receipt of proceeds of long-term debt Thus: Revenue + other financing sources Expenditures + other financing uses Only items specified by GASB qualify 151 OTHER FINANCING SOURCES 1. Issuance of long-term debt 2. Inception of a capital lease 3. Sales of capital assets 4. Insurance recoveries 5. Transfers ISSUANCE OF LONG-TERM DEBT Both face value and premium Report separately Discounts Underwriter s discount = expenditure Original issue discount = other financing use

52 PROCEEDS OF NO-COMMITMENT SPECIAL ASSESSMENT DEBT Economic substance = revenue Similar to grant INCEPTION OF CAPITAL LEASE Background Debt-financed capital acquisition 155 NET RESULT One inflow/two outflows

53 INFLOWS AND OUTFLOWS FOR CAPITAL LEASES No inflows/one outflow 157 ADDITIONAL JOURNAL ENTRY NEEDED TO DUPLICATE REGULAR BORROWING Surrogate for inflow from borrowing and outflow for capital outlay 158 RESULT OF ADDITIONAL JOURNAL ENTRY One inflow/two outflows (like regular debt)

54 3. SALES OF CAPITAL ASSETS Conceptually other financing source Practical exceptions Immaterial amounts reported as other revenue May qualify as special item INSURANCE RECOVERIES Really involuntary conversions = sales of capital assets May qualify as extraordinary item Not a special item because not subject to management s control FEMA payments are not insurance recoveries Form of assistance = revenue TRANSFERS Including certain interfund loans If repayment not expected within a reasonable time

55 OTHER FINANCING USES 1. Original issue discount on debt 2. Payments to advance refunding escrow agent 3. Transfers ORIGINAL ISSUE DISCOUNT ON DEBT Really an adjustment to the related inflow rather than an outflow Contrast with underwriter s discount (expenditure) Involves actual payment PAYMENTS TO ADVANCE REFUNDING ESCROW AGENT Purpose = to distinguish from regular debt service Limited to resources provided by the refunding debt The application of other resources = expenditure

56 3. TRANSFERS Including certain interfund loans If repayment not expected within a reasonable time 166 SUMMARY Nature and purpose Limitation on use Other financing uses Issuance of long-term debt Capital leases Sales of capital assets Insurance recoveries Transfers Other financing uses Original issue discount on debt Payments to advance refunding escrow agent Transfers QUESTIONS

57 QUESTION 1 How is the determination made whether to report a given item as an other financing source/use rather than as a revenue/expenditure? A. The item meets the definition of an other financing source/use B. Professional judgment C. Specific items qualify as other financing sources/uses only if they have been identified as such in the authoritative accounting literature 169 QUESTION 2 A government issues bonds with a face value of $1 million and receive $1,010,000 in proceeds. How does the governmental fund that receives the proceeds report the credit(s) resulting from the transaction? A. OFS debt issuance $1,010,000 B. OFS debt issuance $1,000,000/OFS debt issuance premium $10,000 C. Liability bonds payable $1,000,000/debt issuance premium $10, QUESTION 3 How should a governmental fund report the receipt of the proceeds of no-commitment special assessment debt? A. Other financing source B. Revenue C. Liability D. Either A or B

58 QUESTION 4 Which of the following statements is true: A. Cash flows resulting from a debt-financed capital acquisition are the same as cash flows resulting from a lease-financed capital acquisition B. Journal entries for a lease-financed capital acquisition closely parallel journal entries for a debt-financed capital acquisition. C. Both A and B D. Neither A nor B 172 QUESTION 5 How should the receipt of the proceeds from the sale of a capital asset be reported in a governmental fund? A. Revenue B. Other financing source C. Special item D. All of the above E. Both A or B 173 QUESTION 6 How should a governmental fund report the receipt of insurance proceeds following a natural disaster? A. Revenue B. Other financing source C. Special item

59 QUESTION 7 How should a governmental fund report the receipt of resources from the Federal Emergency Management Agency (FEMA) following a natural disaster? A. Revenue B. Other financing source C. Special item 175 QUESTION 8 How should a discount related to the issuance of bonded debt be reported in a governmental fund? A. Expenditure B. Other financing use C. Either A or B D. Deferred outflow of resources 176 QUESTION 9 How should payments made by a governmental fund to an escrow agent in connection with an advance refunding be classified? A. Expenditures B. Other financing uses C. Either A or B D. Reduction of related debt

60 BASIC FINANCIAL STATEMENTS Balance sheet Statement of revenues, expenditures, and changes in fund balances 178 FOCUS OF REPORTING Major funds Separate column for each Nonmajor funds In the aggregate as a single column If there is only one nonmajor governmental fund, that column should be labeled accordingly 179 AUDIT IMPLICATIONS Each major fund constitutes an opinion unit Point of reference for materiality in the financial statement audit

61 IDENTIFYING MAJOR FUNDS General fund always a major fund Criteria for other governmental funds Relative size Qualitative factors 181 CLASSIFICATION AS A MAJOR FUND BASED ON RELATIVE SIZE Proportionate share of Assets + deferred outflows of resources Liabilities + deferred inflows of resources Revenues Expenditures Points of reference Governmental funds in total Total for governmental funds + enterprise funds 182 CRITERIA FOR EVALUATION BASED ON RELATIVE SIZE For a given category (assets + deferred outflows of resources/liabilities + deferred inflows of resources/revenue/expenditures) At least 10 percent of the total for governmental funds At least 5 percent of the combined total for governmental funds + enterprise funds

62 GOVERNMENTAL FUNDS Financial Statement Element Assets + deferred outflows of resources Liabilities + deferred inflows of resources % of total for governmental funds % of total for governmental + enterprise funds 10% 5% 10% 5% Revenues 10% 5% Expenditures/expense 10% 5% 184 FOUR-STEP PROCESS 1. Calculate 10 percent of a given category for governmental funds in total $500 governmental funds in total x 10% = $50 2. Calculate 5 percent of that same category for governmental funds + proprietary funds $4,000 governmental funds + enterprise funds x 5% = $ FOUR STEP PROCESS (CONT.) 3. Select the higher amount as the threshold for classification as a major fund $200 > $50 => $ Determine whether the amount of the financial statement element reported in the individual governmental fund ($210) exceeds that threshold $210 reported > $200 threshold => major fund

63 CLARIFICATIONS Exclude from calculation Other financing sources and uses Extraordinary items 187 EXAMPLE: ASSUMPTIONS Assets + Deferred outflows Liabilities + Deferred inflows Revenues Expenditures/ expense General fund $6,900 $1,900 $37,300 $31,200 Governmental fund A $5,800 $4,200 $2,400 $5,000 Governmental fund B $6,800 $1,300 $3,200 $5,900 Governmental fund C $3,000 $700 $3,800 $2,100 Total governmental funds: $22,500 $8,100 $46,700 $44,200 Enterprise fund $162,300 $72,100 $16,200 $3,800 Total governmental + enterprise $184,800 $80,200 $62,900 $48, ASSETS + DEFERRED OUTFLOWS OF RESOURCES Governmental funds: $22,500 x 10% = $2,250 Governmental funds + enterprise funds: $184,800 x 5% = $9,240 Threshold: $9,240 > $2,250 = $9,

64 LIABILITIES + DEFERRED INFLOWS OF RESOURCES Governmental funds: $8,100 x 10% = $810 Governmental funds + enterprise funds: $80,200 x 5% = $4,010 Threshold: $4,010 > $810 = $4, REVENUES Governmental funds: $46,700 x 10% = $4,670 Governmental funds + enterprise funds: $62,900 x 5% = $3,145 Threshold: $4,670 > $3,145 = $4, EXPENDITURES/EXPENSE Governmental funds: $44,200 x 10% = $4,420 Governmental funds + enterprise funds: $48,000 x 5% = $2,400 Threshold: $4,420 > $2,400 = $4,

65 APPLICATION OF THRESHOLD Fund total Threshold >Threshold? Fund A Assets + deferred outflows of resources $5,800 $9,240 No Liabilities + deferred inflows of resources $4,200 $4,010 Yes Revenues $2,400 $4,670 No Expenditures $5,000 $4,420 Yes Fund B Assets + deferred outflows of resources $6,800 $9,240 No Liabilities + deferred inflows of resources $1,300 $4,010 No Revenues $3,200 $4,670 No Expenditures $5,900 $4,420 Yes Fund C Assets + deferred outflows of resources $3,000 $9,240 No Liabilities + deferred inflows of resources $700 $4,010 No Revenues $3,800 $4,670 No Expenditures $2,100 $4,420 No Major fund? Yes Yes No 193 EFFECT OF INTERFUND RECEIVABLES AND PAYABLES Balances may be netted within individual funds for the purpose of applying the 10 percent and 5 percent criteria Effect = lower thresholds for total assets and total liabilities 194 EXAMPLE

66 GROSS VS. NET 196 QUALITATIVE FACTORS A fund may be classified as major if the government's officials believe [the fund] is particularly important to financial statement users (for example, because of public interest or consistency). An individual fund that normally meets the size criteria, but not in a given year Heightened public interest 197 BALANCE SHEET 66

67 PRESENTATION Distinguish Assets from deferred outflows of resources Liabilities from deferred inflows of resources No need for a classified presentation Practical result of current financial resources measurement focus 199 FUND BALANCE Term unique to governmental funds Up to five different components Basis for categorization Constraints on how existing resources of the fund can be spent The sources of those constraints 200 PRESENTATION OF COMPONENTS From most constraining to least constraining Nonspendable Restricted Committed Assigned Unassigned

68 1. NONSPENDABLE FUND BALANCE Not in spendable form Permanently: inventories and prepaids Temporarily: Assets acquired for sale prior to sale Limitation on use of eventual proceeds? Classify based on ultimate limitation on use Not spendable because of legal requirement to maintain intact Endowment principal Principal of a revolving loan fund 202 AMOUNT OF EACH COMPONENT Either display or disclose Nonspendable in form Nonspendable because of a legal requirement to maintain intact RESTRICTED FUND BALANCE Externally enforceable limitations Sources (same as for restricted net position) Creditors Grantors Contributors Laws and regulations of other governments Constitutional provisions Enabling legislation

69 CLARIFICATIONS May include resources related to stabilization arrangements If limitation on use is externally enforceable and Circumstances that trigger spending are both specific and nonroutine Unaffected by fund balance policy A fund balance policy is not focused on existing resources COMMITTED FUND BALANCE Self-imposed legal limitation Highest level of decision-making authority Formal action Remains in force unless formally rescinded In place by the end of the reporting period Formula for calculation is sufficient 206 CLARIFICATIONS Unaffected by operating budget Appropriations = authorization to spend vs. limitation on spending of existing resources Budgetary limitations naturally lapse over time May include resources related to stabilization arrangements If limitation on use meets the definition of a commitment and Circumstances that trigger spending are both specific and nonroutine

70 4. ASSIGNED FUND BALANCE Earmarking of resources Contrast with committed fund balance Level at which limitation imposed Highest level (committed) Power may be delegated to a group or individual (assigned) Type of action Formal (committed) Less formal (assigned) Timing No later than the end of the reporting period (committed) Later date (assigned) 208 CLARIFICATIONS Must reflect any encumbrances not reflected in restricted or committed fund balance May never be used in connection with stabilization arrangements Used for appropriated fund balance Authorization to use existing fund balance to balance a projected operating deficit Cap = projected operating deficit 209 CLARIFICATIONS (CONT.) Can never exceed the difference between total fund balance and the sum of its nonspendable, restricted, and committed components

71 CLARIFICATIONS (CONT.) Maximum amount Total fund balance $100 Less: nonspendable fund balance (5) Less: restricted fund balance (20) Less: committed fund balance (15) Maximum assigned fund balance $ UNASSIGNED FUND BALANCE Positive balance only in the general fund Resources would not be reported in another fund unless they were not, at a minimum, earmarked (assigned) for the purpose of that fund Deficit in any governmental fund = unassigned fund balance 212 FLOW ASSUMPTIONS Needed for calculation of various components Use of restricted resources vs. unrestricted resources (committed and assigned) Use of committed resources vs. assigned resources Formal policy or assumed policy Assumed policy First use committed resources Then use assigned resources Only then use unassigned resources

72 TOTAL COLUMNS AND COMPARATIVE DATA Must report a total column for governmental funds Presentation of comparative data optional 214 ELIMINATING INTERFUND BALANCES Only among governmental funds Two approaches Use a separate eliminations column Keep interfund balances in fund financial statements and then simply drop them from government-wide financial statements 215 ELIMINATIONS COLUMN

73 RECONCILIATION TO GOVERNMENTAL ACTIVITIES Summary reconciliation Face of the governmental fund balance sheet Accompanying schedule (following page) Detailed information in notes if necessary If aggregated information in the summary reconciliation obscures the nature of the individual elements of a particular reconciling item. 217 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES BASIC FORMAT

74 REVENUES Present by major source Taxes Licenses and permits Intergovernmental revenues Charges for services Fines and forfeits Miscellaneous 220 EXPENDITURES Present by Function or program Function = related activities aimed at accomplishing a major service or regulatory responsibility Program = activities, operations, or organization units directed to the attainment of specific purposes or objectives Character Current Debt service Capital outlay Intergovernmental 221 EXAMPLES OF FUNCTIONS General government Public safety Highways and streets Sanitation Health and welfare Culture and recreation Conservation

75 EXAMPLES OF PROGRAMS WITHIN A FUNCTION Function = public safety Police Fire Corrections Protective inspection 223 FUNCTION/PROGRAM VS. CHARACTER Typically function/program detail provided only for current expenditures: 224 CAPITAL OUTLAY Normally used only in capital projects funds Amount so reported often will include non-capitalized, project-related costs (e.g., furnishings) Routine capital expenditures in the general fund normally are included in the appropriate functional category

76 GRANTS TO OTHER GOVERNMENTS Theoretical classification Intergovernmental expenditures Practice Commonly included in corresponding functional category within current expenditures 226 TOTAL COLUMNS AND COMPARATIVE DATA A government must report a total column for governmental funds The presentation of comparative data is optional 227 ELIMINATING INTERFUND TRANSFERS Only among governmental funds Two approaches Separate eliminations column Keep transfers in fund financial statements but drop from government-wide financial statements

77 RECONCILIATION TO GOVERNMENTAL ACTIVITIES Summary reconciliation Face of the governmental fund statement of revenues, expenditures, and changes in fund balances Accompanying schedule (following page) Detailed information in notes if necessary If aggregated information in the summary reconciliation obscures the nature of the individual elements of a particular reconciling item. 229 EXAMPLE Reconciliation $450,000 difference between capital outlays expenditures and depreciation expense Notes Capital outlay $500,000 Depreciation expense (50,000) Increase $450, SUMMARY Two basic financial statements Major fund reporting Components of fund balance Nonspendable Restricted Committed Assigned Unassigned Classification of expenditures Function/program Character 77

78 QUESTIONS 232 QUESTION 1 How are funds presented in the governmental fund financial statements? A. By major fund B. By fund type C. Both A and B 233 QUESTION 2 Classification as a major fund is only required in the case of a fund that meets both the 10 percent test and the 5 percent test. A. True B. False

79 QUESTION 3 What is the point of reference for applying the 10 percent test for determining whether an individual governmental fund is a major fund? A. Governmental funds in total B. Governmental funds in total + enterprise funds in total 235 QUESTION 4 A governmental fund that reported 1) 15 % of total assets and deferred outflows of resources for governmental funds and 2) 7% percent of total revenues for governmental funds + enterprise funds in total must be reported as a major fund A. True B. False 236 QUESTION 5 Based on the assumptions in the next slide, which of the funds must be reported as a major fund? General fund Governmental Fund A Governmental Fund B Governmental Fund C

80 QUESTION 5 (ASSUMPTIONS) Which of the following Assets + Liabilities funds would + always Expenditures/ need to Deferred Deferred Revenues be classified as outflows a major inflows fund? Expense General fund $500 $70 $1,150 $1,125 Governmental fund A $200 $25 $800 $780 Governmental fund B $60 $10 $150 $115 Governmental fund C $50 $10 $80 $75 Total governmental funds: $810 $115 $2,180 $2,095 Enterprise funds $450 $220 $685 $545 Total governmental + enterprise $1,260 $335 $2,865 $2, QUESTION 6 Which of the following statements is true in regard to interfund receivables and payables and the application of the 10 percent and 5 percent tests? A. They may not be netted B. They may be netted in total C. They may be netted by individual fund D. They must be netted in total E. They must be netted by individual fund 239 QUESTION 7 Which of the following statements is true regarding the classification of an individual governmental fund if it does not meet the 10 percent and 5 percent tests? A. It may be reported as a major fund B. It may not be reported as a major fund

81 QUESTION 8 Any governmental fund may report up to five components of fund balance. A. True B. False 241 QUESTION 9 The general fund acquired a piece of land for the purpose of sale. The related grant contract requires that the proceeds of sale be applied to a specific program. In which component of fund balance should the land be reflected prior to sale? A. Nonspendable fund balance B. Restricted fund balance C. Either A or B 242 QUESTION 10 The detail of the components of nonspendable fund balance must presented on the face of the balance sheet. A. True B. False

82 QUESTION 11 In which of the following categories could resources associated with a stabilization arrangement potentially be placed? A. Restricted fund balance B. Committed fund balance C. Assigned fund balance D. All of the above E. Both A and B 244 QUESTION 12 In which of the following situations must limitations be in place as of the end of the fiscal year? A. Committed fund balance B. Assigned fund balance C. Both A and B D. None of the above 245 QUESTION 13 Which of the following is a requirement for categorization as committed fund balance? A. Formal action to impose the limitation B. Formal action to remove the limitation C. Both A and B D. None of the above