ACCOUNTING POLICIES
FOR ALL
FUND TYPES AND ACCOUNT GROUPS
Prepared by Accounting and Management Systems
Local Government Services Bureau
Updated July 2004
L:\LGS\ACCOUNTI\CONTENTS
ACCOUNTING POLICIES
TABLE OF CONTENTS
Prefaceii
Principles of Governmental AccountingA1 thru A7
Governmental Fund TypesB1 thru B13
Proprietary Fund TypesC1 thru C3
Enterprise FundsD1 thru D51
Internal Service FundsE1 thru E10
Fiduciary Fund TypesF1 thru F6
General Fixed Assets Account GroupG1 thru G-3
LongTerm Debt Account GroupH1 thru H7
Refunding and Advance Refunding BondsI1 thru I9
Cash and InvestmentsJ1 thru J8
Tax Deed and Tax Sale ProceduresK-1 thru K-16
Grants, Entitlements and Shared RevenuesL1 thru L10
InventoriesM1 thru M5
LeasesN1 thru N8
Interfund TransactionsO1 thru O7
Joint VenturesP1 thru P10
RefundsQ1
The Check/WarrantR1 thru R-2
The General Journal VoucherS1 thru S-2
The Trial BalanceT1
Checklist for YearEnd Closing EntriesU1 thru U3
Fixed Asset System Policy GuidelinesV1 thru V11
Index to Illustrative Accounting EntriesW1 thru W6
Bibliography of Selected Authoritative SourcesX1
I
ACCOUNTING POLICIES
PREFACE
Governmental accounting and reporting continues to evolve rapidly. They will continue to do so, because of the increased attention being focused on them by the industry and the Governmental Accounting Standards Board (GASB).
While accountability remains an important objective, the purpose of these Accounting Policies is to provide specific guidance on selected governmental accounting topical areas. The policies focus on governmental accounting problem areas that local finance personnel are confronted with on a daily basis.
The Accounting Policies were developed with local finance personnel in mind; to be used by them as a reference tool for answering questions on governmental accounting problems of a recurring nature.
It is intended that these policies undergo continual change and revision based on changing needs and guidance issued by the GASB. Suggestions are encouraged and welcomed.
This edition of the Accounting Policies replaces the edition dated April 1992.
II
ACCOUNTING POLICIES
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
SOURCES OF PRINCIPLES
Any discussion of governmental accounting principles should begin with the source of those principles. Formal standard setting in governmental accounting began in 1934, with the National Committee on Municipal Accounting and has evolved through the establishment of the Governmental Accounting Standards Board (GASB) in June1984. The GASB, like its private sector counterpart, the Financial Accounting Standards Board (FASB), functions under the auspices of the Financial Accounting Foundation (FAF). The GASB was established in accordance with a structural agreement, which sets forth the relative jurisdictions of the two boards. The structural agreement clearly establishes the GASB as the primary accounting and financial reporting standard setting body for local governments. Moreover, the American Institute of Certified Public Accountants (AICPA) reaffirmed the GASB's authority by designating the GASB as the body to establish financial accounting principles for local governmental entities.
BASIC PRINCIPLES
There are twelve basic principles of accounting applicable to local governments. They are as follows:
Principle 1 Accounting and Reporting Capabilities
A governmental accounting system must make it possible both: (a) to present fairly and with full disclosure the financial position and results of financial operations of the funds and account groups of the governmental unit in conformity with generally accepted accounting principles; and (b) to determine and demonstrate compliance with finance related legal and contractual provisions.
Principle 2 Fund Accounting Systems
Governmental accounting systems should be organized and operated on a fund basis. A fund is defined as a fiscal and accounting entity with a self balancing set of accounts, recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations. Fund financial statements should be used to report additional and detailed information about the primary government, included its blended component units. The focus of governmental and proprietary fund financial statements is on major funds.
A1
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ACCOUNTING POLICIES cont.
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
BASIC PRINCIPLES cont.
Principle 3 Funds Types
In fund financial statements, governments should report governmental, proprietary, and fiduciary funds to the extent that they have activities that meet the criteria for using those funds. The following fund types should be used.
A.GOVERNMENTAL FUNDS (emphasizing major funds)
1.General Fund
2.Special Revenue Funds
3. Capital Projects Funds
4.Debt Service Funds
5. Permanent Funds
B.PROPRIETARY FUNDS
6.Enterprise Funds (emphasizing major funds)
- Internal Service Funds
C.FIDUCIARY FUNDS (and similar component units)
- Pension (and other employee benefit) Trust Funds
- Investment Trust Funds
- Private-purpose Trust Funds
- Agency Funds
A2
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ACCOUNTING POLICIES cont.
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
BASIC PRINCIPLES cont.
Principle 4 Number of Funds
Governmental units should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established, however, since unnecessary funds result in inflexibility, undue complexity and inefficient financial administration.
Principle 5 – Reporting Capital Assets
A clear distinction should be made between general capital assets and capital assets of proprietary and fiduciary funds. Capital assets of proprietary funds should be reported in both the government-wide and fund financial statements. Capital assets of fiduciary funds (and similar component units) should be reported only in the statement of fiduciary net assets.
All other capital assets of the governmental unit are general capital assets. They should not be reported as assets in the governmental funds but should be reported in the governmental activities column in the government-wide statement of net assets.
Principle 6 Valuation of Capital Assets
Capital assets should be reported at historical cost. The cost of capital assets should include ancillary charges necessary to place the asset into its intended location and condition for use. Donated fixed assets should be recorded at their estimated fair value at the time of acquisition plus ancillary charges, if any.
Principle 7 Depreciation of Capital Assets
Capital assets should be depreciated over their estimated useful lives unless they are either inexhaustible or are infrastructure assets reported using the modified approach. Inexhaustible capital assets such as land and land improvements should not be depreciated. Depreciation should be reported in the government-wide statement of activities; the proprietary fund statement of revenues, expenses and changes in fund net assets; and the statement of changes in fiduciary net assets.
Principle 8- Reporting Long-term Liabilities
A clear distinction should be made between fund long-term liabilities and general long-term liabilities. Long-term liabilities directly related to and expected to be paid from proprietary funds should be reported in the proprietary fund statement of net assets and in the government-wide statement of net assets. Long-term liabilities directly related to and expected to be paid from fiduciary funds (and similar component units) should be reported in the statement of fiduciary net assets. All other unmatured general long-term liabilities of the governmental unit should not be reported as liabilities in governmental funds but should be reported in the governmental activities column in the government-wide statement of net assets.
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ACCOUNTING POLICIES cont.
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
BASIS PRINCIPLES cont.
Principle 9 – Measurement Focus and Basis of Accounting in the Basic Financial Statements
Government-wide Financial Statements
The government-wide statement of net assets and the statement of activities should be prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues, expenses, gains, losses, assets, and liabilities resulting from exchange and exchange-like transactions should be recognized when the exchange takes place. Revenues, expenses, assets, and liabilities resulting from non-exchange transactions should be recognized in accordance with the standards relating to non-exchange transactions.
Fund Financial Statements
In fund financial statements, the modified accrual or accrual basis of accounting, as appropriate, should be used in measuring financial position and operating results.
a.Financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues should be recognized in the accounting period in which they become available and measurable. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general longterm liabilities, which should be recognized when due.
b.Proprietary fund statements of net assets and revenues, expenses, and changes in fund net assets should be presented using the economic resources measurement focus and the accrual basis of accounting.
c.Financial statements of fiduciary funds should be reported using the economic resources measurement focus and the accrual basis of accounting, except for the recognition of certain liabilities of defined benefit pension plans and certain postemployment healthcare plans.
d.Transfers should be reported in the accounting period in which the interfund and receivable and payable arise.
A-4
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ACCOUNTING POLICIES cont.
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
BASIS PRINCIPLES cont.
Principle 10 Budgeting, Budgetary Control, and Budgetary Reporting
a.An annual budget(s) should be adopted by every governmental unit.
b.The accounting system should provide the basis for appropriate budgetary control.
c.Budgetary comparison schedules should be presented as required supplementary information for the general fund and for each major special revenue fund that has a legally adopted annual budget. The budgetary comparison schedule should present both (a) the original and (b) the final appropriated budgets for the reporting period as well as (c) actual inflow, outflows, and balances, stated on the government’s budgetary basis.
Principle 11 Transfer, Revenue, Expenditures, and Expense Account Classification
- At a minimum, the statement of activities should present:
(1)Activities accounting for governmental funds by function to coincide with the level of detail required in the governmental fund statement of revenues, expenditures, and changes in fund balances.
(2)Activities accounted for in enterprise funds by different identifiable activities.
b.Governmental fund revenues should be classified by fund and source. Expenditures should be classified by fund, function (or program), organization unit, activity, character and principal classes of objects.
c.Proprietary fund revenues should be reported by major sources and should identify revenues used as security for revenue bonds, and expenses should be classified in essentially the same manner as those of similar business organizations, functions or activities. Revenues and expenses should be distinguished as operating and non-operating.
d.Proceeds of general long-term debt issues should be classified separately from revenues and expenditures in the governmental fund financial statements.
A5
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ACCOUNTING POLICIES - cont.
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
BASIS PRINCIPLES - cont.
Principal 11 – Transfer, Revenue, Expenditure, and Expense Account Classification – cont.
e.Contributions to term and permanent endowments, contributions to permanent fund principal, other capital contributions, special and extraordinary items, and transfers between governmental and business-type activities should each be reported separately from, but in the same manner as, general revenues in the government-wide statement of activities. In the proprietary fund statement of revenues, expenses, and changes in fund net assets, these items should be reported separately after non-operating revenues and expenses. Transfers should be classified separately from revenues and expenditures in the governmental fund statement of revenues, expenditures, and changes in fund balances. Special and extraordinary items should be reported separately after “other financing sources and uses” in the governmental fund statement of revenues, expenditures, and changes in fund balances.
Principle 12 Common Terminology and Classification
A common terminology and classification should be used consistently throughout the budget, the accounts and the financial reports of each fund.
Principle 13 Annual Financial Reports
a.Appropriate interim financial statements and reports of financial position, operating results, and other pertinent information should be prepared to facilitate management control of financial operations, legislative oversight, and where necessary or desired, for external reporting purposes.
b.A comprehensive annual financial report should be prepared and published, covering all funds and activities of the primary government (including its blended component units) and providing an overview of all discretely presented component units of the reporting entity - including introductory section, management’s discussion and analysis (MD&A), basic financial statements, required supplementary information other than MD&A, appropriate combining and individual fund statements, schedules, narrative explanations, and statistical section. The reporting entity is the primary government (including its blended component units) and all discretely presented component units.
A-6
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ACCOUNTING POLICIES - cont.
PRINCIPLES OF GOVERNMENTAL ACCOUNTING
BASIS PRINCIPLES – cont
Principle 13 Annual Financial Reports – cont.
c.The minimum requirements for MD&A, basic financial statements, and required supplementary information other than MD&A are:
(1) Management’s discussion and analysis
(2) Basic financial statements. The basic financial statements should include:
(a)Government-wide financial statements
(b)Fund financial statements
(c)Notes to the financial statements
(3) Required supplementary information other than MD&A
d. The financial reporting entity consists of (1) the primary government, (2) organizations for which the primary government is financially accountable, and (3) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s basic financial statements to be misleading or incomplete. The reporting entity’s government-wide financial statements should display information about the reporting government as a whole, distinguishing between the total primary government and its discretely presented component units as well as between the primary government’s governmental and business-type activities. The reporting entity’s fund financial statements should present the primary government’s (including its blended component units, which are, in substance, part of the primary government) major funds individually and non-major funds in the aggregate. Funds and component units that are fiduciary in nature should be reported only in the statements of fiduciary net assets and changes in fiduciary net assets.
e.The nucleus of a financial reporting entity usually is a primary government. However, a governmental organization other than a primary government (such as a component unit, joint venture, jointly governed organization, or other stand-alone government) serves as the nucleus for its own reporting entity when it issues separate financial statements
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ACCOUNTING POLICIES - cont.
GOVERNMENTAL FUND TYPES
INTRODUCTION
Nature and Purpose
Governmental fund types are those through which most governmental functions are typically financed. They are often called source and disposition or expendable fund types. The acquisition, use and balances of expendable financial resources and the related current liabilities, except those accounted for in proprietary funds, are accounted for through governmental fund types.
Governmental fund types are, in essence, accounting segregation of financial resources. Expendable assets are assigned to the various governmental funds according to the purposes for which they may or must be used. Current liabilities are assigned to the fund from which they are to be paid and the difference between governmental fund assets and liabilities, the fund equity, is referred to as fund balance.
The governmental fund measurement focus is on determination of financial position and changes in financial position (sources, uses and balances of financial resources), rather than on income determination. The statement of revenues, expenditures and changes in fund balance is the primary governmental fund operating statement. It may be supported or supplemented by more detailed schedules of revenues, expenditures, transfers and other changes in fund balance.
Governmental fund types are classified into five generic fund types:
1.General Fund - BARS - 1000
2.Special Revenue Funds – BARS - 2000
3.Debt Service Funds - BARS - 3000
- Capital Projects Funds - BARS – 4000
- Permanent Funds – BARS – 8000
Since the elimination of the special assessment fund type, special assessments that are used to finance certain service type activities may now be accounted for as a special revenue fund (maintenance), debt service fund (bond funds), or a capital projects fund (construction). Service type special assessments are for operating activities and do not result in the purchase or construction of fixed assets.
Each of the above governmental fund types is examined in more detail later in this discussion.
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ACCOUNTING POLICIES - cont.
GOVERNMENTAL FUND TYPES
Basis of Accounting
Governmental fund type revenues and expenditures should be recognized on the modified accrual basis. Revenues should be recognized in the accounting period in which they become available and measurable. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term debt, which should be recognized when due.
Measurement Focus
The governmental fund type measurement focus is concerned with reflecting those revenues, expenditures, assets and related liabilities that identify the net financial resources available for subsequent appropriation and expenditures. (the flow of current financial resources.) Since the measurement focus is to determine the change in net financial resources, accounts such as fixed assets and long-term obligations are not reflected in (but short-term obligations are) the governmental fund type balance sheets, since these items will neither provide nor use financial resources of the current budgetary period.
Budgetary Systems
The budget is an essential element of the financial planning, control and evaluation process for governmental fund types. Every government should prepare an annual budget covering all governmental fund types. Budgets are categorized as either fixed or flexible. Fixed budgets provide estimates of specific (fixed) dollar amounts. Flexible budgets embody dollar estimates that vary according to demand for services provided.