KNOWLEDGE GAAP: THE FUNDAMENTALS OF GOVERNENTAL ACCOUNTING FOR NON-ACCOUNTANTS

Transcription

1 KNOWLEDGE GAAP: THE FUNDAMENTALS OF GOVERNENTAL ACCOUNTING FOR NON-ACCOUNTANTS Government Finance Officers Association 112 th Annual Conference Saint Louis, Missouri May 9,

2 Overview (1/3) Why governmental accounting is different Environmental differences between the public and private sectors Practical effect of these differences on governmental accounting Reporting model Nature and purpose of fund accounting Fund categories and fund types Government-wide financial reporting 2

3 Overview (2/3) Measurement focus and basis of accounting What to measure and when to measure it Understanding fund balance and its components Understanding net position and its components Financial reporting entity When should legally separate units be included? How should legally separate component units be included? 3

4 Overview (3/3) Comprehensive annual financial report (CAFR) Structure and contents What to look for and where to look for it Certified Public Finance Officer (CPFO) exam: topical overview Accounting and internal control Auditing Financial Reporting 4

5 Why Governmental Accounting Is Different 5

6 Environmental Differences (1/2) Provision of services Private sector: Means to an end (profit motive) Public sector: End in itself (service motive) Amount charged Private sector: Dependent on services received Public sector: Often unrelated to services received by individual Opportunity to recover cost Private sector: Limited to point-of-sale Public sector: Possible in future periods 6

7 Environmental differences (2/2) Management ability to apply resources Private sector: Essentially unlimited Public sector: Severely limited Restrictions imposed by grantors Restrictions imposed by lenders Limitations imposed by the legal budget 7

8 As a result Different financial objectives for different activities Business-type activities Are revenues sufficient to recover cost? Governmental activities Are near-term inflows sufficient to cover near-term outflows (liquidity)? Heightened focus on accountability 8

9 Effect on financial reporting Fund accounting Different financial statements measure different things Budgetary reporting 9

10 10 Reporting model

11 What is a fund? Separate fiscal and accounting entities used to segregate resources related to specific activities Originally separate bank accounts Now just accounting devices 11

12 Categories of funds Tax-supported activities Governmental funds Business-type activities Proprietary funds Resources held as an agent or trustee Fiduciary funds 12

13 Fund types: governmental funds General fund Chief operating fund/default fund Special revenue funds Revenues restricted to specific uses Debt service funds Capital projects funds Capital acquisition (construction or major purchases) Permanent funds Endowments 13

14 Fund types: proprietary funds Enterprise funds (e.g., utilities) Cost recovery Internal service funds (e.g., motor pool, print shop) Cost-reimbursement 14

15 Fund types: fiduciary funds Trust funds Pension (and other employee benefit) trust funds Investment trust funds Private-purpose trust funds Custodial funds (replace agency funds) 15

16 Level of detail (basic financial statements) By individual major fund (separate columns) Governmental funds Enterprise funds By fund type (one column per fund type) Internal service funds Fiduciary funds 16

17 Determining major funds Quantitative factors Ten percent test/five percent test Qualitative factors Special user interest 17

18 Government-wide financial reporting Complementary to fund accounting Fund accounting Focus = financial accountability Detail needed Often short-term Government-wide financial statements Focus = operational accountability Big picture Long-term 18

19 Scope Include Governmental funds Proprietary funds Exclude Fiduciary funds 19

20 Activity columns Governmental fund data Incorporated into governmental activities Enterprise fund data Incorporated into business-type activities Internal service fund data Incorporated into activity of predominant customers 20

21 Format of statement of activities Expenses presented before revenues Reflects public-sector focus on service rather than profit Focus on net program cost Expenses matched against program revenue to demonstrate the degree to which a program is self-financing Charges for services Operating grants and contributions Capital grants and contributions 21

22 Expenses before revenues E X P E N S E S 22 R E V E N U E S:

23 23 Focus on net program cost

24 Measurement Focus and Basis of Accounting 24

25 Measurement focus Economic resources All assets, liabilities, and deferred amounts Changes in net position during the period Current financial resources Only assets, liabilities, and deferred amounts relevant to nearterm liquidity Changes in fund balance during the period 25

26 Four key differences Issuance of long-term debt Capital outlay Repayment of principal of long-term debt Depreciation 26

27 Issuance of long-term debt (economic resources) Item Account DR CR Long-term borrowing Cash $100 Notes/Bonds $100 27

28 Capital outlay (economic resources) Item Account DR CR Long-term borrowing Cash $100 Notes/Bonds $100 Capital acquisition Equipment $100 Cash $100 28

29 Repayment of principal (economic resources) Item Account DR CR Long-term borrowing Cash $100 Notes/Bonds $100 Capital acquisition Equipment $100 Cash $100 Principal repayment Notes/Bonds $10 Cash $10 29

30 Depreciation (economic resources) Item Account DR CR Long-term borrowing Cash $100 Notes/Bonds $100 Capital acquisition Equipment $100 Cash $100 Principal repayment Notes/Bonds $10 Cash $10 Consumption Depreciation expense $10 Accumulated depreciation $10 30

31 Issuance of long-term debt (current financial resources) Item Account DR CR Long-term borrowing Cash $100 Other financing source $100 31

32 Capital outlay (current financial resources) Item Account DR CR Long-term borrowing Cash $100 Other financing source $100 Capital acquisition Expenditure capital outlay $100 Cash $100 32

33 Repayment of principal (current financial resources) Item Account DR CR Long-term borrowing Cash $100 Other financing source $100 Capital acquisition Expenditure capital outlay $100 Cash $100 Principal repayment Expenditure debt service $10 Cash $10 33

34 Depreciation (current financial resources) Item Account DR CR Long-term borrowing Cash $100 Other financing source $100 Capital acquisition Expenditure capital outlay $100 Cash $100 Principal repayment Expenditure debt service $10 Cash $10 Consumption N/A 34

35 Summary Report on statement of resources flows 35

36 36 Net effect on resource flows

37 Terminology Increases Economic resources Revenues/gains Current financial resources Revenues/other financing sources Decreases Economic resources Expenses/losses Current financial resources Expenditures/other financing uses 37

38 Basis of accounting Measurement focus = what to measure Changes in net economic resources Expenses Changes in net current financial resources Expenditures Basis of accounting = when to measure change 38

39 Two extremes Accrual basis Cash basis 39

40 Accrual basis Transactions and events recognized when they occur, regardless of when cash is received or disbursed Revenue when earned Expense when liability incurred 40

41 Cash basis Transactions and events recognized only when related cash flows occur Revenue when cash is received Disbursements when cash is spent 41

42 Middle way: modified accrual basis Starting point = accrual When the underlying transaction or event occurs Modification Only to the extent that near-term liquidity is affected Revenue recognized only if available to make payments soon after year end Expenditures recognized only if payments normally are made during the period or soon after year end Practical result More aggressive recognition than cash basis Less aggressive recognition than accrual basis 42

43 Summary revenue recognition Inflows (claims to resources obtained) Collected Collectible near-term Collectible later Cash basis Relevant Not relevant Not relevant Near-term liquidity Relevant Relevant Not relevant Accrual basis Relevant Relevant Relevant 43

44 Summary Expenditure recognition Outflows (obligations incurred) Paid Payable near-term Payable later Cash basis Relevant Not relevant Not relevant Near-term liquidity Relevant Relevant Not relevant Accrual basis Relevant Relevant Relevant 44

45 Natural pairing Measurement Focus Economic resources Current financial resources Basis of Accounting Accrual basis Modified accrual basis 45

46 Application Current financial resources + modified accrual Governmental fund financial statements Economic resources + accrual Government-wide financial statements Proprietary fund financial statements Trust fund financial statements 46

47 Why are governmental funds different? Focus = providing information useful for making budgetary decisions Balanced budget = focus on near-term liquidity Will existing resources + inflows be sufficient to cover outflows? 47

48 Reporting residual balance Governmental funds Assets + deferred outflows - Liabilities + deferred inflows Fund balance Other funds Assets + deferred outflows - Liabilities + deferred inflows Net position 48

49 Classifying fund balance Two principles of classification Limitation on spending Source of limitation 49

50 Components of fund balance Nonspendable Restricted Committed Assigned Unassigned 50

51 Nonspendable fund balance Nonspendable in form Permanently, or Temporarily (assuming no limitation on how amounts can be spent once received) Legally nonspendable 51

52 Restricted fund balance Externally enforceable legal limitation 52

53 Committed fund balance Self-imposed legal limitation Imposed at highest level of decision making Binding unless removed in the same manner Excludes restrictions that lapse Action taken by year end 53

54 Assigned fund balance Intended use of resources Established by the governing body itself, or Established by delegated body or official Cannot create a deficit Action may be taken after year end Some specific applications Encumbrances Appropriated fund balance 54

55 Unassigned fund balance Total fund balance Less: Nonspendable Less: Restricted Less: Committed Less: Assigned. Unassigned fund balance* *Positive balance only possible in the General Fund 55

56 Net Position: Private-sector approach Classification based on capital maintenance focus Investment vs. residual Capital (investment) Retained earnings (residual) 56

57 Net position: Public-sector approach Classification based on accessibility vs. capital maintenance Net investment in capital assets Restricted Unrestricted 57

58 58 Reporting entity

59 Background Financial accountability always traceable to elected officials Core = primary government Legally separate entities for which the primary government is financially accountable = component units Primary government + Component units _ Financial reporting entity 59

60 Primary government Every general purpose government Special purpose governments if Separate legal status or equivalent Separately elected governing body Fiscal independence Budget Tax levies, rates, and charges Issuance of bonded debt 60

61 Identifying component units Financial accountability Fiscal dependence + Financial benefit or burden relationship Board appointment (voting majority) + Financial benefit or burden relationship Board appointment (voting majority) + Ability to impose will Misleading to exclude 61

62 Two different types of component units Blended component units Much like a department of the government, despite being legally separate Treat funds of component units as though they were funds of the primary government Discretely presented component units Substantial autonomy Present data as one or more separate columns following the primary government total column 62

63 Comprehensive Annual Financial Report (CAFR) 63

64 Basic financial statements Defined as minimum needed for fair presentation in conformity with GAAP Three essential components Government-wide statements Fund statements Notes 64

65 Need for something more Profile of the government Types and levels of services Revenue sources Fund structure Information on individual funds Demonstrating compliance Context for analysis Trend data Demographic and economic information Subjective analysis 65

66 Meeting that need Introductory information Information on individual funds Combining and individual fund statements Schedules necessary to demonstrate compliance Budgetary comparisons Statistical data 66

67 Comprehensive annual financial report (CAFR) Three basic sections Introductory Letter of transmittal Financial Basic financial statements Combining and individual fund financial statements Statistical Financial trends Revenue capacity Debt capacity Demographic and economic information Operating information 67

68 Illustration: combining statements Basic financial statements Combining financial statements 68

69 Analysis: Public-sector challenge Most private-sector ratios are inapplicable Presuppose a profit motive (profit margin) Presume stock ownership Focus in absence of a bottom line Near-term financial position Are regular inflows sufficient to cover regular outflows? Are there sufficient liquid resources to meet unexpected contingencies? Net position Is the government s net position improving or deteriorating? Economic condition Is the government s net position likely to improve or deteriorate? 69

70 Where to look for information Near-term financial position Fund financial statements Provides information on limitations on use of resources Net position Government-wide financial statements Economic condition Statistical section Letter of transmittal 70

71 Governmental fund balance sheet (1/2) Limitations and relative force reflected in the various components of fund balance Focus unrestricted fund balance: Committed fund balance Assigned fund balance + Unassigned fund balance Unrestricted fund balance 71

72 Governmental fund balance sheet (2/2) Assessing the adequacy of fund balance Point of reference More predictable Operating revenues Operating expenditures Level Lower for very large governments Higher for governments with volatile revenues 72

73 Statement of revenues, expenditures, and changes in fund balances Focus = revenues expenditures $0 Regular operating revenues Regular operating expenditures Any single year must be placed in broader context Trend information in statistical section 73

74 Proprietary fund statement of net position Focus = working capital: Current assets - Current liabilities Working capital Additional focus: Ratio: current assets/current liabilities Compare to peers 74

75 Proprietary fund statement of revenues, expenses, and changes in net position Focus: Operating revenues - Operating expenses Operating income Must be interpreted in light of cost-recovery goal 75

76 Government-wide statement of net position Focus = net position Assess in context of trends Interperiod equity Potentially compromised by persistent decline Special issue of pensions and other postemployment benefits Key = adherence to a realistic funding policy 76

77 Government-wide statement of activities Functional cost data Net program cost Special care required when accrual-basis cost information is used in the context of Budgeting Rate setting 77

78 Information on financial trends Four specific schedules Information about net position (government-wide financial statements) Information about changes in net position (government-wide financial statements) Information about fund balances (governmental funds) Information about changes in fund balances (governmental funds) 78

79 Context Past trends Direction Rate of growth/decrease Proportional increase/decrease Comparisons with similar governments Consider scope and quality of services Comparability of costs 79

80 Information on revenue capacity Four specific schedules Revenue base Revenue rates Principal revenue payers Property tax levies and collections 80

81 Information on debt capacity Five specific schedules Ratios of outstanding debt Ratios of general bonded debt Information about direct and overlapping debt Information about debt limitations Information about pledged revenue coverage 81

82 Demographic and economic information Two specific schedules Demographic and economic indicators Principal employers 82

83 Operating information Two specific schedules Information about the government's employees Operating indicators and information about capital assets 83

84 Certified Public Finance Officer (CPFO) exam: topical overview 84

85 Accounting and internal control Objectives of internal control Elements of a comprehensive framework of internal control Principles of effective internal control Responsibility for internal control Inherent limitations of internal control Evaluating control-related policies and procedures Internal control and fraud prevention Enterprise risk management 85

86 Auditing (1/2) Types of audits and auditors Auditing standards Reasonable assurance Materiality Opinion units Material weaknesses Single Audit Independent auditor s reports and findings 86

87 Auditing (2/2) Obtaining a financial audit Auditor rotation Audit committees Performance auditing Internal auditing 87

88 Financial reporting (1/2) Internal financial reporting Special-purpose external financial reporting Characteristics of accounting data Reporting entity Users of general-purpose external financial reports Sources of generally accepted accounting principles for governments Fund accounting and fund financial statements Measurement focus and basis of accounting 88

89 Financial reporting (2/2) Significance of fund balance Pensions and other post-employment benefits Government-wide financial reporting The comprehensive annual financial report Contents of the letter of transmittal Contents of management s discussion and analysis Popular financial reporting Financial statement analysis 89