INTRODUCTION TO GOVERNMENTAL ACCOUNTING E' Barrett Barry Atwood, Sr', CPA

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INTRODUCTION TO GOVERNMENTAL ACCOUNTINGE.
Barrett (Barry) Atwood, Sr., CPA

FLORIDA GOVERNMENT FINANCE OFFICERS
ASSOCIATION2006 School of Governmental
Finance November 13-17, 2006 PGA National Resort
Spa
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Acknowledgements

• Ken Schermann, CPA
• Project Manager for GASB No. 34
• Robert J. Freeman, PhD, CPA
• Professor of Accounting, Texas Tech University
• Former GASB Vice Chairman
• Dan OKeefe, CPA
• Shareholder, Moore Stephens Lovelace, P.A.

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Part III Government-Wide Financial Statements

• Major topics well address
• What is the financial reporting entity included
  in the GWS?
• Where do the GWS fit in annual external financial
  reporting?
• How are the GWS different from the fund financial
  statements?
• What do the GWS display and what is their purpose?

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Financial Reporting Entity

• Consists of
• The primary government
• Organizations for which the primary government is
  financially accountable
• Other organizations, if exclusion would result in
  misleading/incomplete Basic Financial Statements

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How Wide is a Reporting Entitys Government-wide
Statements?

• Government-wide statements should
• Display information of the total entity
• Distinguish between
• The total primary government
• Governmental activities
• Business-type activities
• Discretely presented component units

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Reporting Entitys Fund Statements

• Fund financial statements present
• Major funds individually
• Non-major funds in the aggregate
• Fiduciary funds and fiduciary component units are
  
• Only presented in the fund statements
• Not presented in the government-wide statements

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External Annual Financial ReportingThe
Reporting Pyramid

• Comprehensive Annual Financial Report (CAFR)
• Minimum External Financial Report (MEFR)
• Basic Financial Statements (BFS)
• Government-wide statements appear at all
  levels

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The Financial Reporting Pyramid
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COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR)

• The CAFR is a governments official annual
  financial report
• Recommended, but not necessary to meet GAAP
  minimum requirements
• Supplements the Basic Financial Statements (BFS)

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3 Sections of the Comprehensive Annual Financial
Report (CAFR)

• Introductory Section
• Financial Section
• Managements Discussion Analysis (MDA)
• Basic Financial Statements (BFS)
• Required Supplementary Information (RSI)
• Statistical Section

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Minimum External Financial Reporting (MEFR) Under
GAAP
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Why Government-wide Statements?

• Focus on the big picture
• Demonstrate the total impact of the short-term
  financing decisions reported in the governmental
  funds
• Provide cost information (i.e. expenses), for
  activities reported in governmental funds

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What Makes Up theGovernment-wide Statements ?

• Statement of Net Assets
• Statement of Activities
• Each statement displays the primary government
  component units in 4 columns
• Governmental-type activity column
• Business-type activity column
• Total primary government
• Component units discretely presented

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What Are Governmental Activities of the GWS?

• Common services provided
• Public safety, education, public works
• Health sanitation, social services
• Culture recreation, community development
• Services primarily financed through
• Taxes
• Grants
• Other non-exchange revenues
• Usually includes
• All governmental funds
• Internal service funds

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What Are Business-Type Activities of the GWS?

• Common services provided
• Public utilities water, sewer, electric
• Transportation airports, mass transit, tollways
• Parking facilities
• Landfills
• Services primarily financed through
• Fees charged to external parties
• Usually includes
• All enterprise funds
• Usually excludes
• Internal service funds

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Common Features of Both GWS(Statement of Net
Assets Statement of Activities)

• Apply same accounting standards and distinguish
  between primary governments
• Governmental Activities and
• Business-Type Activities
• Focus is on the primary government distinguishing
  from discretely presented component units
• Exclude Fiduciary Funds fiduciary component
  units

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How Are GWS Different From Fund Statements?

• GWS provide consolidated statements (not
  individual fund statements)
• Balance Sheet (Statement of Net Assets)
• Operating Statement (Statement of Activities)
• GWS utilize the same measurement focus and basis
  of accounting (MFBA) for both financial
  statements
• Economic resources measurement focus
• Accrual basis of accounting

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Measurement Focus Basis of Accounting (MFBA)
Differences
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Impact of MFBA DifferencesMajor Balance Sheet
Items
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Impact of MFBA DifferencesMajor Operating
Statement Items
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Converting Fund Statements to GWS to Meet Minimum
External Financial Reporting

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Converting Fund Statements to Government-wide
Statements
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Steps to Convert Fund Statements to
Government-wide Statements - 1

• Prepare Governmental Funds Statements
• Balance Sheet (Exhibit 1)
• Statement of Revenues, Expenditures and Changes
  in Fund Balances (Exhibit 2)
• Prepare Proprietary Funds Statements
• Statement of Net Assets (Exhibit 3)
• Statement of Revenues, Expenses and Changes in
  Fund Net Assets (Exhibit 4)
• Statement of Cash Flows (Exhibit 5) Not for GWS

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Steps to Convert Fund Statements to
Government-wide Statements - 2

• Derive Governmental Activities Statements
• Statement of Net Assets (Exhibit 6)
• Statement of Activities (Exhibit 7)
• Derive Business-Type Activities Statements
• (Not illustrated)

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Derive Governmental Statement of Net Assets
Add capital assets, net of accumulated
depreciation
Recognize revenue previously deferred
Accrue long-term debt interest
Add bonds payable, compensated absences,
litigation settlement
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Derive Governmental Statement of Net Assets
Add assets and liabilities of certain internal
service funds
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Derive Governmental Statement of Net Assets
Reclassify due from other governments and liens
to receivables
Reclassify due to other governments to accounts
payable
Eliminate due to and due from other governmental
funds
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Derive Governmental Statement of Activities
Recognize taxes other revenue previously
deferred
Accrue interest and advance refunding adjustment
Total expenditure adjustment
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Derive Governmental Statement of Activities
Add depreciation
Remove cost of land sold
Net reduction of capital related items
Remove capital outlay
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Derive Governmental Statement of Activities
Add revenues, expenses transfers of certain
internal service funds
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Derive Governmental Statement of Activities
Remove bond proceeds from other financing sources
Remove bond principal payments from expenditures
Remove bond refunding from other financing uses
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Steps to Convert Fund Statements to
Government-wide Statements - 3

• Prepare Statement of Net Assets (Exhibit 8)
• Governmental Activities
• Business-Type Activities
• Total Primary Government
• Component Units
• Prepare Statement of Activities (Exhibit 9)
• Expenses
• Program Revenues
• Total Primary Government
• Governmental Activities
• Business-Type Activities
• Component Units

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Steps to Convert Fund Statements to
Government-wide Statements - 4

• Reconcile Governmental Funds to Governmental
  Activities
• Total Fund Balances (Exhibit 1) to
• Total Net Assets (Exhibit 6)
• Net Change in Fund Balances (Exhibit 2) to
• Change in Net Assets (Exhibit 7)
• Reconcile Proprietary Funds to Business-Type
  Activities
• (Not Illustrated)

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Reconciling Funds to GWS

• Purpose
• Helps users assess the relationship between the
  fund statements and government-wide statements
  (GWS)

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Reconciling Funds to GWS

• Scope
• Only governmental and proprietary funds are
  reconciled to the GWS
• Statement of Net Assets
• Statement of Activities
• Fiduciary funds not included in GWS
• Proprietary funds Statement of Cash Flows not
  included in GWS

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Reconciling Funds to GWS

• Level of detail
• Brief explanations are usually sufficient
• If the nature of the individual elements are
  obscured, a more detailed explanation should be
  presented in the notes

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Government-wide Statements

• Statement of Net Assets
• Statement of Activities - Cost of services
  approach
• Economic resources measurement focus
• Accrual basis of accounting

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Statement of Net Assets

• Displays -
• Financial position of the reporting government as
  a whole
• With the financial position of
• Governmental activities
• Business-type activities
• Total primary government
• Component units

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Displays total financial position by -
No total for the reporting entity
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Statement of Net Assets

• Includes -
• All assets (Capital assets including
  infrastructure)
• All liabilities (Current and long-term liabilities

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Statement of Net Assets

• Format -
• Present assets in order of liquidity
• Present liabilities in two components
• Due within one year
• Due in more than one year
• Use of classified format (current and long-term)
  acceptable for
• Assets
• Liabilities

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All assets and liabilities are reported.
Assets in liquidity order
Internal balances (Activities) eliminated in
total column
Capital assets including infrastructure assets
Long-term liabilities reported in two components
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Statement of Net Assets

• Format -
• Encouraged to use net asset format
• Assets - liabilities net assets
• Allowed to use balance sheet format
• Must still report difference between assets and
  liabilities as net assets, not fund balance or
  fund equity

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Statement of Net Assets

• Format -
• Net assets in 3 components
• Invested in capital assets, net of related debt
• Restricted (distinguish major categories)
• Unrestricted

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The display of net assets
The difference between assets and liabilities is
Net Assets, and must be reported in three
categories.
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Statement of Activities

• A net cost operating statement
• Shows the net cost (left to right) of reported
  programs
• (Program expense) (program revenue)
• Net cost of governmental activities to the
  taxpayers and
• Net revenues (expenses) of business-type
  activities

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The Net Cost format
Net governmental program cost to taxpayers
Net business-type program revenue (expense)
Total expenses
Program revenues that are generated by the
program
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Statement of Activities

• The statement displays -
• Expenses (full cost) by program service
• Program revenues classified by
• Charges for services
• Operating grants and contributions
• Capital grants and contributions
• Net revenue (expense) for each program
• General revenues
• Special, extraordinary items, and transfers
• Changes in net assets

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The Statement of Activities
Expenses by program
Program revenues
Net revenue (expense) for each program
General revenues
Special items transfers
Change in net assets
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What the Net Cost format can tell us
What was the total net cost?
How was it paid for?
What was the total change in net assets?
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Statement of ActivitiesDefinitions - Programs
No definition for reporting programs Governmental
activities typically include

• Criminal justice
• Community development
• Transportation
• Library

• General government
• Health and sanitation
• Public works
• Parks and recreation

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Statement of ActivitiesDefinitions Conversion
to Expenses

• GWS eliminated expenditures for -
• Capital outlay
• Debt retirement
• GWS include expenses for -
• Depreciation of capital assets infrastructure
• Interest, using effective interest method
• Compensated absences, claims judgments, pensions

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Statement of ActivitiesDefinitions Reporting
Expenses

• Direct expenses by program
• Indirect expenses
• No required allocation of indirect expenses to
  programs
• Must report in a separate column if allocated

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Assess the full cost of government services
Expenses are reported on the accrual basis
including charges for using capital assets and
net increases in long-term operating liabilities
(for example, compensated absences, claims and
judgments, pensions, and OPEB).
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Statement of ActivitiesDefinitions Reporting
Expenses

• Interest expense on general long-term debt
• Report as indirect (normally)
• Report as direct expense if
• Borrowing is essential to a specific program
• Misleading to exclude from a specific program

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Statement of ActivitiesDefinitions Reporting
Expenses

• Depreciation expense reported as
• Direct if identified to specific programs
• Indirect if related to assets of several programs
• Separate line item
• Infrastructure depreciation may be reported
• With public works or
• As a separate line item

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Statement of ActivitiesDefinitions Program
Revenues

• Derived directly from
• The program itself or
• Parties outside the reporting governments
  taxpayers or citizenry
• They reduce the net cost of the function to be
  financed from the governments general revenues

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Statement of ActivitiesDefinitions Program
Revenues

• Three categories -
• Charges for services
• Program specific operating grants and
  contributions
• Program specific capital grants and contributions

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Statement of ActivitiesDefinitions - Program
Revenues

• Charges for services
• Revenues based on exchange or exchange-like
  transactions (fees, licenses, permits)
• Revenues arise from charges to customers or
  applicants who purchase, use, or directly benefit
  from the goods, services, or privileges provided

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Statement of ActivitiesDefinitions - Program
Revenues

• Program-specific grants and contributions
• Operating
• Capital
• Revenues arising from mandatory nonexchange
  transactions with
• Federal, state or local governments
• Capital special assessments
• Individuals / developers
• that are restricted for use in a particular
  program

Multipurpose grants not identified to a program
should be treated as general revenues
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Statement of Activities identifies how programs
are financed
Whats the story on the Health and Sanitation
program?
Total expenses of the program were 6,705,675.
But the net cost cost to the taxpayer was reduced
by the revenues generated by the program.
The city charged service recipients 5,612,267
and received a 575,000 grant, so the drain on
the general revenues was only 518,408.
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Statement of ActivitiesDefinitions - General
Revenues

• All revenues not qualifying as program revenues
  and include
• All taxes, even those levied for a specific
  purpose
• Property and income taxes
• Sales and gas taxes
• Other non-program revenues
• Interest earnings
• Grants and contributions (non-program)
• Reported after the total net expense of the
  governments programs

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Statement of ActivitiesDefinitions Other Items

• Extraordinary items
• Unusual in nature and infrequent in occurrence
• Special items
• Unusual in nature or infrequent in occurrence
• Subject to management control
• Transfers
• Resources transferred between governmental and
  business-type activities
• Excludes transfers within each activity as they
  are previously eliminated in consolidation of
  funds

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How is the ability to compare governments
enhanced?
There is greater commonality of
functions/programs.
The same basis of accounting is used for all
activities. The ability to control what is
reported is diminished.
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INTRODUCTION TO GOVERNMENTAL ACCOUNTINGE.
Barrett (Barry) Atwood, Sr., CPA

• QUESTIONS?

FLORIDA GOVERNMENT FINANCE OFFICERS
ASSOCIATION2006 School of Governmental
Finance November 13-17, 2006 PGA National Resort
Spa