Governmental Accounting
Chapter 7
Accounting for the Business-Type Activities of State and Local Governments
I) Internal Service Funds
A) Types and Purposes
1. Created to improve the management of resources
a. Provide services/resources to other funds or governmental units for a user fee.
2. Services rendered can be many and varied
a. Purchasing, storing, and issuing supplies
b. Repairs to vehicles - motor pools
c. Data processing functions
d. Printing shops
3. User fee charges to recover costs
a. What is cost? (i.e. how does one determine user fee to charge?)
i. Recover direct costs only, or direct and indirect costs, or what about financing for growth or what about financing for replacements, modernizations, and expansions?
B) Creation of entity
1. Generally subject to legislative approval
2. Created through contribution from another fund
Cash XX
Interfund transfers-in XX
3. Created through long term advances (loan)
Cash XX
Interfund loan from ____________ Fund XX
C) Operation of Entity
1. Record user fees as revenues
a. Example: Due from _____ Fund (Cash) XX
Billings to Departments XX
2. Recording of Expenses -- Similar to commercial entities
a. Functional expense categories
3. Depreciation Expense
a. Same considerations as in financial accounting - cost, useful life, salvage value
4. Closing Entries
a. Revenues and expenses closed into "Excess of Net Billings to Departments over Costs"
b. "Excess of Net Billings to Departments over costs" is closed into Retained Earnings.
i. Note -- sources of equity must be accounted for separately.
c. Special rule for depreciation of contributed assets or assets acquired from capital grants.
i. Option to close the deprecation expense on these assets to the contributed equity account.
D) Financial Reporting (Internal)
1. Statement of Net Assets (Balance sheet) - prepare classified balance
sheets
2. Statement of Revenues, Expenses, and Changes in Net Assets
3. Statement of Cash Flows
a. Different sections for reporting
i. Operating activities
ii. Noncapital financing activities
iii. Capital and related financing activities
iv. Investing activities
b. Statement is prepared in manner similar to the direct method of FASB #95
i. Note Reconciliation of Operating Income" to "Net Cash provided by Operating Activities
E) Financial Reporting – (External)
1) For external reporting of Proprietary Funds, internal service funds are reported as a separate column.
2) In the government-wide statements, internal service funds are normally included in the “governmental activities” column.
a) Assumes majority of transactions of the internal service fund are worth governmental-type funds.
b) This “collapsing” of internal service fund information into the governmental activities column necessitates various eliminating and reclassification entries.
1) Record the Change in each internal service fund balance sheet account
2) Eliminate the effects of interfund transfers between governmental type funds and internal service funds
3) Eliminate the change in net assets due to operating income of the internal service fund
F) Dissolution of Internal Service Fund
1. Continue operation as a subsidiary activity of another fund.
2. Distribution of fund assets "in kind" to another fund(s)
a. Naturally, all fund liabilities would have to be paid.
3. Sell all noncash assets of the Internal Service Fund and distribute the cash to another fund(s)
a. Naturally, all fund liabilities would have to be paid.
II) Enterprise Funds
A) Introduction
1. Purpose of enterprise fund
a. Account for activities whereby services are rendered to the general public on a user charge basis.
i. Intended to be largely self supporting, otherwise might be included with general or as a special revenue fund.
b. GASB #34 requires use of an enterprise fund under certain circumstances.
c. Account for activities for which administrators are interested in “net income” (operating results on full accrual method)
2. General accounting issues
a. Financial statements are self contained.
b. Enterprise funds generally should follow the accounting structures developed for privately-owned enterprises of the same nature.
c. GAAP and RAP concerns for utilities
i. Use chart of accounts as provided by principal regulatory bodies
a) National Association of Regulatory Utility Commissions (NARUC)
b) Federal Energy Regulatory Commission (FERC)
d. Enterprise funds should use full accrual accounting
B) Specific accounting issues.
1. Generally, budgets are not formally recorded.
2. Resources
a. Provision of services generates revenues
i. Cycle billing procedures results in necessity to estimate unbilled receivables at end of accounting period.
a) Accrued Utility Revenues XXX
Utility Revenue XXX
b) Entry is reversed at start of new accounting period so that normal transaction may be recorded in usual manner.
b. Borrowings result in recording of liabilities
i. Bond premiums and discounts are amortized to interest expense
c. Customer deposits
i. Generally this cash is not available for operating purposes
a) Shown as restricted asset
ii. Shown as liability payable from restricted assets
d. Customer advances for construction
i. Accounted for as current liability
ii. At completion of project funds are either:
-- refunded to customer (or applied against utility bills)
-- any amount not refunded is transferred to a fund equity account (net assets)
3. Expenses
a. Recorded on accrual basis in normal manner
b. Utility plant construction costs should be capitalized as
work-in-progress.
i. Capitalization of interest on borrowed funds is required.
ii. Capitalization of imputed interest on "equity" funds used for construction. (AFUDC)
c. Costs for additional plant assets should be capitalized
d. Customer accounts expense (bad debts) and depreciation is recorded as in a commercial entity.
e. Contributions in lieu of property taxes is an expense
C) Financial Reporting
1. Statement of Net Assets (Balance sheet) -- see illustration 7-6, page 304.
2. Statement of Revenues, Expenses, and Changes in Retained Earnings
a. Note format and important subtotals
3. Statement of Cash Flows
a. Same format as that used for internal service fund
b. Note reconciliations shown in bottom half of illustration 7-8
4. If internal service funds are included in the governmental activities column of the government wide statements, there is no need to maintain a separate set of records for business type activities at the government wide level
a. Any interfund transactions between enterprise funds should be eliminated.
b. Enterprise funds are reported in the business type activities column of the government wide statements.
5. See page 312 for disclosure requirements.
6. Municipal Solid Waste Landfills (MSWLF)
a. EPA regulations establish stringent criteria for operations and closure and postclosure maintenance.
I. Owners/operators must provide assurances that adequate financial resources will be available for closure and postclosure procedure
ii. Current accounting statements must reflect portion of estimated closure and postclosure costs.