PADM523:

Lesson Overview

In Lesson 1, we examined the key characteristics that differentiate not-for-profit accounting and financial reporting from for-profit accounting and reporting. We compared the financial reporting objectives in government, not-for-profit organizations, and for-profit organizations. Lastly, we introduced the requirements for external financial reporting in relation to the comprehensive annual financial report; general objectives of state and local government financial reporting standards were also introduced.

In Lesson 2, we will (1) understand the nature of governmental activities and learn about three of them: governmental activities, business-type activities, and fiduciary activities; (2) look at the makeup of major fund reporting and the criteria for determining a major fund; (3) examine the components of the Governmental Accounting and Standards Board (GASB) integrated accounting and financial reporting model, including government-wide financial and fund financial statements and the types of funds in each category; and (4) measurement focus and basis of accounting that state and local governments use in preparing their financial reports.

Lesson Objectives

Before beginning this lesson, think about the following lesson objectives. After completing this lesson, you should be able to

• identify and explain the nature of key governmental activities;
• describe fund accounting;
• define a fund, types of funds, and characteristics of funds;
• identify and explain the components of the GASB’s integrated accounting and reporting model; and
• apply the concepts of measurement focus and basis of accounting into preparation of finacial reports.'

Lesson Roadmap

By the end of this lesson, make sure you have completed the readings and activities found in the Lesson 2 Course Schedule.

The Nature of Governmental Activities

We saw from our previous lesson that governmental and nonprofit organizations exist in a social, legal, and political setting that is different from the for-profit environment. We are also beginning to see that because government exists to provide public goods and services, most general purpose governments engage in the three broad service categories of

• governmental,
• business type, and
• fiduciary.

The activities of government, such as administration, police and fire, public works, education, parks, etc. are referred to as governmental activities. Governmental activities are the core or basic services that government provides. Governments also are involved in certain activities that are called business-type activities, such as toll roads, parking garages, liquor stores, golf courses and swimming pools. In addition, governments operate in a fiduciary capacity as either an agent or trustee for individuals or entities.

Reporting of Governmental Activities: Two Levels of Basic Financial Statements

Since the accounting and reporting standards for state and local governments need to meet the financial information needs of many diverse groups (citizen groups, legislative and oversight officials, and investors and creditors), we have two levels of basic financial statements to meet the different reporting objectives. 

Fund-Basis Financial Statement

The first type is the fund-basis financial statement. Fund-basis statements are presented for three categories of activities: governmental, proprietary (bussiness-type), and fiduciary (proprietary and fiduciary are discussed later). Because the fund-basis statements present an in-depth record of individual activities of the government, these statements make it challenging for the user to pull the disaggregated information together and form an overall view of the government’s finances.

Government-Wide Financial Statement

The second type is the government-wide financial statement, which governments are also required to provide. Government-wide financial statements combine the governmental and business-type activities of the government for the purpose of presenting an overall picture of the financial position and the results of operations. 

Fund Accounting

Before we talk about funds, we first need to discuss the concept of an entity. A reporting entity defines the boundaries of a particular financial reporting unit by describing whose assets, liabilities, revenues, expenses, and equities are included in the entity’s financial report. In the private sector, if a parent company, such as General Motors, exercises control over its legally separate subsidiaries, the financial activities of all those units are consolidated for financial reporting purposes.

In state and local governmental accounting, there is also the complexity of the dimension of the reporting entity. For example, a city's financial report may cover not only the activities of the legally constituted government, but also the separate legal organizations for which the city is financially responsible. The "city" is referred to as the primary government; the separate legal organizations are called component units. The primary government itself is disaggregated, subdivided into separate fiscal and accounting entities, called funds.

Definition of a Fund

From GASB, the formal legal definition of a fund by is as follows:

In this definition, the term fiscal entity refers to the separate budgetary nature of funds that have only spendable financial resources. The term accounting entity refers to a separate financial unit that is treated as an entity for accounting purposes. Some types of funds also have capital assets that, in fund accounting terms, are non-spendable, non-financial resources.

Governmental organizations must comply with legal requirements stated in constitutions, city charters, statutes, local ordinances, etc. Because the organizations' day-to-day activities are guided by budgets proposed by the executive branch and enacted into law by the legislative branch, internal accounting systems are needed to ensure compliance with budgetary spending limits. Funds have traditionally provided a basic control mechanism for ensuring compliance with legal restrictions on the use of governmental resources. Most funds are set up because of specific legal requirements.

Fund accounting is probably the most distinctive feature of governmental and not-for-profit organization accounting. Fund accounting segregates an organization’s assets, liabilities, and net assets into separate accounting units based on legal restrictions, donor-imposed regulations, or special regulations. Fund accounting is a convenient control mechanism to help ensure that resources are spent for the intended purpose. Because each fund is a separate accounting element, each must have a set of self-balancing accounts; that is, the total of the assets of a particular fund must equal the total of its liabilities and fund balance (or net assets). Thus, the accounting records of a particular fund must identify the fund's unique resources and the claims to those resources, as differentiated from all other funds.

Organizations that use fund accounting generally establish a separate general fund or unrestricted current fund, where resources can be used for any purpose designated by the governing body. In addition, they use separate unique accounts for the acquisition and disposition of restricted-use resources (generally by law, regulation, or donor requirement).

Fund Categories

To better understand the unique aspects of state and local government accounting, it is important to examine the types of activities that government conducts, how the activities are financed, and how governments are organized to carry activities out. It is also important to identify the role of laws and budgets in governmental accounting and reporting. State constitutions and statutes and local laws determine what governments do, how their activities are financed, and how their activities are organized. Most governmental activities carried out on a daily basis are based upon budget appropriations that, once enacted, have the force of law. Government accounting systems are designed not only in terms of stewardship of resources, but also in terms of accountability for resources entrusted to government and to help ensure budgetary compliance with appropriations. There are several ways to categorize governmental activities. One way is to differentiate the activities by purpose and how the activities are financed: (1) governmental, (2) proprietary (business), and (3) fiduciary.

Criteria for Determining Major Funds

GASB Statement 34 requires two financial statements for the general fund and other governmental funds. Both statements report separate columns for major funds and for non-major funds, as well as a totals column. These statements are the Balance Sheet and the Statement of Revenues, Expenses, and Changes in Fund Balances. (Note: you will see specific examples through the City and County of Denver, Examples 4-2 and 4-3 in Lesson 4.)

There are three circumstances under which a fund is considered major and is shown in its own column in the financial statements:

1. The main operating fund (usually the general fund) is always considered a major fund.
2. An individual governmental or enterprise fund’s assets, liabilities, revenues, OR expenditures/expenses are at least
   1. 10% of the total for all governmental OR enterprise funds, respectively, AND
   2. 5% of the total for all governmental AND enterprise funds COMBINED.
3. Government may designate as major any other governmental or enterprise fund it believes is important to the users of its financial statements.

A government may designate any fund as major if reporting that fund separately in the basic statements would be deemed useful. In all fund statements, the non-major funds are aggregated and reported in a single column. Fiduciary fund financial statements and the internal service fund portion of proprietary fund statements are reported by fund type, not major fund.

References

• GASB Codification of Governmental Accounting and Financial Reporting Standards (GASB Cod.). Sec. 1300, "Statement of Principle-Fund Accounting Systems" (Norwalk, CT: GASB, 2010).

Tax Abatement Disclosures

This section will discuss the GASB changes in Tax Abatement Disclosures. Governments that are legally prohibited from disclosing certain tax information should not be required to disclose, but should instead be required to:

1.  identify the general nature of the tax abatement information omitted; and
2. cite the source of the legal prohibition.

For example, governments should not be required to disclose either the number of tax abatement agreements they enter into during the reporting period, or the number of tax abatements in effect at the end of the reporting period.

Governments that receive an offsetting payment should report that payment separately rather than as a reduction to the amount of the tax abatement, and likewise, they should disclose the identity of the other government and the authority for the offsetting payment.

Governments that make one or more additional commitments other than their commitment to reduce taxes should disclose each period, both:

1. a general description of the types of those other commitments, and
2. the most significant individual commitments until those commitments have been fulfilled.

Discretely presented component units should be treated as "other governments" in this case, unless the information on their abatements is considered essential for the fair presentation of the primary government.

If a government chooses to disclose information about individual tax abatement agreements, such disclosures should be consistent for all individual abatements above a quantitative threshold, selected by the government, based on a percentage of the total dollar amount of all abated taxes during the reporting period, and then disclose that threshold.
 

References

GASB (2015). Statement No. 77 of the Governmental Acounting Standards Board: Tax Abatment Disclousures. Governmental Accounting Standards Series, No. 353. Retrieved from http://www.gasb.org/jsp/GASB/Document_C/GASBDocumentPage?cid=1176166283745&acceptedDisclaimer=true

Components of GASB Integrated Accounting and Financial Reporting Model

A typical state or local government presents data in its financial report from two different perspectives. Each perspective represents one of two levels of financial statement reporting. The fund financial statements present the perspective of the government as a collection of separate funds, while the government-wide financial statements offer a view of the government as a single, integrated financial reporting unit. This unique combination of fund and government-wide financial statement reporting is known as the integrated reporting model. 

Differences Between Governmental and Business-Type Activities

The government-wide financial statements use separate columns to distinguish governmental activities from business-type activities (GASB Statement 34, paragraph 12). As a rule, governmental fund data are incorporated into the governmental activities column of the government-wide financial statements and enterprise fund data are incorporated into the business-type activities column (GASB Statement 34, paragraph 15). Because the resources of fiduciary funds are generally not available for government spending, by definition, to support the government’s programs, data from these funds are not incorporated into the government-wide financial statements (GASB Statement 34, paragraph 12b).

How data from an internal service fund are incorporated into the government-wide financial statements will depend on which types of funds (general fund or proprietary) predominantly utilize the internal service fund's goods and services. Thus, the data from internal service funds are normally combined with the data from governmental funds in the governmental activities column. However, whenever the predominant users are enterprise funds, the internal service fund’s data are properly incorporated with the data from the enterprise funds in the business-type activities column (GASB Statement 34, paragraph 62). 

Generally accepted accounting (GAAP) allow a government the flexibility to incorporate data from an enterprise fund into the governmental activities column (or to incorporate data from a government fund into the business-type activities column) if it wants to (GASB Statement 34, paragraph 15 indicates that governmental activities "are usually reported in governmental funds and internal service funds" and that business-type activities "are usually reported in enterprise funds.") For example, a government might decide to use an enterprise fund to report on a heavily subsidized operation supported by user fees while incorporating data from that fund as part of governmental activities to emphasize the extent of the subsidy and to highlight dependence on taxes (GASB Comprehensive Implementation Guide, 7.7.4).

The Governmental Financial Reporting Model Revisited

It has now been more than 15 years since the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments (June 1999). Also, more than a decade has passed since the three-stage implementation of that standard was completed for the very smallest governments (FYE June 30, 2004).

It has now been more than 15 years since the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments (June 1999). Also, more than a decade has passed since the three-stage implementation of that standard was completed for the very smallest governments (FYE June 30, 2004). The GASB has already begun its standard 10-year review of GASB Statement No. 34 to see if it has met its objectives and whether any changes are needed.

This section will focus on a few specific elements of the governmental financial reporting model that are highly likely to be discussed during the forthcoming 10-year review of GASB Statement No. 34. As you read the chapter sections concerning financial reporting, you will see some of the issues that have come about in the use of the current government financial reporting model.

Measurement Focus and Basis of Accounting

In order to ensure consistency over time and to ensure comparability across organizations, governments follow certain standards when recording their financial transactions and summarizing them for reporting to individuals outside of government. These standards are known collectively as generally accepted accounting principles (GAAP). Crucial underlying principles are those that prescribe the measurement focus and basis of accounting.

Measurement Focus

Measurement focus refers to the kinds of assets, liabilities, deferred inflows and outflows, and changes in net position (or fund balance) a government should concentrate on when recording transactions. Government uses an economic resources measurement focus for government-wide financial statements, meaning that the government records all financial and capital resources that flow in and out and all changes in net position, regardless of their form, as long as a monetary value can be put on these resources. Therefore, governments must track not only cash that changes hands, but also investments, inventory, equipment, buildings and other property, amounts owed to suppliers and employees, outstanding notes and bonds, long-term leases, and looming judgments and claims.

Basis of Accounting

The basis of accounting describes when to record the assets, liabilities, deferred inflows and outflows, and changes in net position (or fund balance) stipulated by the measurement focus. Government uses the accrual basis of accounting to prepare the government-wide statements. It is the accounting method used by businesses and not-for-profit organizations. When using full accrual, the government reports all transactions that occur and have an effect on the government's finances, regardless of whether cash changes hands, in the yearly financial statements. For example, goods and services provided are recorded regardless of whether cash was received in exchange from a customer or credit was extended to a customer. Similarly, purchases of office supplies are recorded whether paid for in cash or bought with a promise to pay later (by credit card or business account).

Difference between Governmental Funds and Measurement Focus and Basis of Accounting

Government uses a different measurement focus and basis of accounting for its governmental fund financial statements. Governmental funds use a current financial resource measurement focus and a modified accrual basis of accounting. This measurement focus concentrates on financial resources that are current; that is, they are likely to be turned into cash or consumed within one year. These resources typically include cash, investments, accounts receivable, and accounts payable. Capital resources, such as buildings, equipment and infrastructure, and long-term liabilities are not included.

The basis of accounting for governmental funds focuses on expenditures rather than expenses. Whereas resources are used up as expenses in order to operate an organization and provide services (full accrual records a reduction in net position upon comsumption), expenditures represent a payment or a requirement to pay for purchased and received goods and services used to operate the government or provide public services. Consequently, modified accrual records a reduction in fund balance when a good or service has been delivered, and the government is obligated to pay.

Summary and Preview

This lesson introduced you to the key characteristics that distinguish governmental and not-for-profit entities from for-profit entities, identified the authoritative bodies for government financial reporting standard setting, explained the minimum requirements for general purpose external financial reporting, and introduced you to the concepts of measurement focus and basis of accounting. You were also presented with the key differences between the various budget classifications and their impact on communicating the achievement of goals and objectives.

In Lesson 3, "The Governmental Operating Statements Accounts; Budgetary Accounting," we will examine how operating revenues and expenses that relate to governmental activities are classified and reported in the government-wide financial statements; differentiate between revenues and other financing sources and between expenditures and other financing uses in governmental funds, and explain how budgetary accounting contributes to budgetary control.

Summary and Preview

This lesson introduced you to the key characteristics that distinguish governmental and not-for-profit entities from for-profit entities, identified the authoritative bodies for government financial reporting standard setting, explained the minimum requirements for general purpose external financial reporting, and introduced you to the concepts of measurement focus and basis of accounting. You were also presented with the key differences between the various budget classifications and their impact on communicating the achievement of goals and objectives.

In Lesson 3, "The Governmental Operating Statements Accounts; Budgetary Accounting," we will examine how operating revenues and expenses that relate to governmental activities are classified and reported in the government-wide financial statements; differentiate between revenues and other financing sources and between expenditures and other financing uses in governmental funds, and explain how budgetary accounting contributes to budgetary control.

Discussion Question: What are the criteria for determining if a governmental or enterprise fund must be reported as a major fund? What other funds should or may be reported as major funds?

First, you will discuss the question or explore a different question on the same topic with your group members in your group discussion forum space. Once your group has collaborated and developed a position, please assign one person to post  your group's position (indicating the group number) to the Lesson 2 Assigned Question Class Discussion Forum no later than 11:59 p.m. eastern time on Thursday. Each team must provide two sources of evidence for their argument. From Friday to Sunday, each student is required to read and make individual comments on all other group postings.

Assignment: Write a three-page, double-spaced response to Exercise 2-1 in the Reck et al. textbook. Examine the CAFR, pp. 59–60, complet Questions a-f, using your chosen government entity. Submit your examination to the Lesson 2 CAFR Summary Drop Box.

Note: You can find out which group you are assigned to with the following steps:

1. Click on the Communicate link on the left menu of this page.
2. Select the Course Roster link beneath the Course Roster subheading.
3. On the right side of the toolbar, select the Teams link to view the list of teams for the course.
4. Select the Members link beneath a team name to view an alphabetized member roster for that team.