Fund Financial Statements
Within governmental funds, equity is reported as fund balance; proprietary and fiduciary fund equity is reported as net assets. Fund balance and net assets are the difference between fund assets and liabilities reflected on the balance sheet or statement of net assets. Because of the current financial resources measurement focus of governmental funds, fund balance is often considered a measure of available expendable financial resources. This is a particularly important measure in the general fund because it reflects the primary functions of the government and includes both state aid and local tax revenues. The relative amount of unreserved fund balance reflected in the general fund is used by rating agencies as a measure of financial strength of the government. Declines in the amount of unreserved fund balance may signal deterioration in the financial condition of the entity. Governmental fund balances are categorized as follows:
Reserved Fund Balances Reservations of fund balance should be used in governmental financial reporting to identify the portion that is
Examples of reservations of fund balance follow:
Unreserved Fund Balances Unreserved fund balance is the difference between the total and reserved fund balance. It has two components: designated and undesignated. The unreserved fund balance of the general fund represents the balance available for legal appropriation and expenditure for general operating expenditures. Prudent financial management requires accumulating a sufficient undesignated, unreserved fund balance in the general fund representing available expendable financial resources to meet the net cash outflows during the fiscal year. Designated, Unreserved Fund Balances. Portions of fund balance may be designated by management to reflect tentative plans or commitments of governmental resources. Designations generally reflect board action to earmark the balance for purposes that will be fulfilled at a later time, but specific board action is not required. Designations represent planned actions, rather than actual commitments. Because they typically arise from internal actions (management decisions) rather than actions external to the entity (encumbrances), designations are reported as part of unreserved fund balance. The amount and nature of the designation should be explained in a
Within proprietary and fiduciary fund statements of net assets, net asset balances are classified into three components:
The difference between an entity's assets and liabilities in the Statement of Net Assets represents its net assets. Net assets have three components:
[back to top] The accounting and financial reporting for revenues within a governmental entity is determined by the economic substance of the underlying transactions. Generally accepted accounting principles have established criteria for recognition based on the classification and characteristics of the transaction. Within governmental entities, transactions may be classified as either exchange (or exchange-like) transactions or nonexchange transactions. Exchange transactions are those in which the parties involved give up and receive essentially equal values. Within a commercial enterprise, transactions between businesses and their customers meet this definition. Within a proprietary fund of a governmental entity, fees or charges made for goods or services represent exchange transactions. Although similar to exchange transactions, exchange-like transactions represent situations in which the values exchanged may not be equal or the direct benefits may not be exclusively for the parties involved in the transaction. Examples include permits and professional or regulatory licensing fees. To clarify and expand existing guidance in the accounting and financial reporting of nonexchange transactions within governments, GASB issued Statement 33, Accounting and Financial Reporting for Nonexchange Transactions, and Statement 36, Recipient Reporting for Certain Shared Nonexchange Revenues (an amendment of Statement 33). These standards establish recognition criteria for nonexchange transactions reported on the accrual basis or the modified accrual basis of accounting. Statement 33 describes four classifications of nonexchange transactions:
GASB Codification Section 1600.106 states that revenues in governmental funds and other governmental fund financial resource increments are recognized using the modified accrual basis of accounting when they are susceptible to accrual, which means they must be both measurable and available. Revenues are measurable when the amount of the revenue is subject to reasonable estimation. To be available, revenues must be subject to collection within the current period, or after the end of the period, but in time to pay liabilities outstanding at the end of the current period. Revenues in the proprietary funds are recognized using the accrual basis of accounting, (i.e., in the period in which they are earned). They are classified either as operating or nonoperating revenues. Operating revenues are generated by the primary activity of the fund. Conversely, nonoperating revenues are not generated by the primary activity of the fund, but by other means, such as through grants or interest earnings. Governmental entities account for a variety of revenues that generally may be presented in the financial statements of governmental funds in three broad categories.
Governmentwide Reporting
GASB Statement 34 introduces a number of new reporting concepts for revenues in the governmentwide statements. Essentially, revenues must be classified as either program or general revenues on the Statement of Activities. The following sub-section outlines the basic reporting criteria established for revenues.
Program Revenues Program revenues are revenues that are directly attributable to a specific functional activity. GAAP requires these revenues to be presented separately in the appropriate functional areas, providing a calculation of net expense for each activity. This net expense often represents the level of support required from the government's own resources. Program revenues include fees collected from those who benefit from the program, grants, and other contributions required by the resource provider to support a specific activity. Program revenues are reported on the Statement of Activities in the following three categories, if applicable:
General Revenues All revenues are general revenues unless they are required to be reported as program revenues. General revenues are reported in the governmentwide statement of activities after program revenues have been subtracted from functional expenses.
Classification of Revenues Programs are financed from essentially four sources (see table 4):
[back to top] Expenditures
GASB Codification Chapter 1600.116 defines expenditures as decreases in net financial resources. In governmental funds, the recognition of expenditures occurs in accordance with the modified accrual basis of accounting. Expenses incurred in proprietary funds are recognized using the accrual basis of accounting. Therefore, significant differences exist between the recognition of expenditures in governmental funds and the recognition of expenses by proprietary funds. In governmental funds, expenditures are usually recognized in the accounting period in which the goods or services are received and the liability for payment is incurred. However, in instances when current financial resources are not reduced as a result of the incurrence of a liability, an expenditure is not recorded. A common example is the liability for compensated absences (e.g., employee sick and vacation pay). Such liabilities result from current services received from employees; however, the payment of the liabilities usually does not occur until a future date. As a result, compensated absences relating to employees whose salaries are accounted for in governmental funds are not recorded as expenditures and liabilities of the fund until the due date for payment of the compensated absences. GASB Interpretation No. 6 clarifies the guidance for recognizing certain liabilities and expenditures in governmental funds, including general long-term indebtedness such as compensated absences. The matured portion of long-term indebtedness, to the extent it is expected to be liquidated with expendable available financial resources, should be recorded as a fund liability and expenditure. The unmatured portion of the long-term indebtedness represents a general long-term liability to be presented in the governmentwide financial statements.
Types of Expenditures and Accounting Treatments The major types of expenditures are operating, capital, debt service, and intergovernmental charges. Operating expenditures for governmental agencies include a wide range of expenditures. Often the largest portion relates to payroll and related employee benefits. The modified accrual basis of accounting requires that proper accruals are made for the amount of unpaid salaries and related benefits earned by employees at year-end because these liabilities will be paid early in the next reporting period. The other types of operating expenditures should be accounted for in the same manner, with the recording of a liability when the goods or services are received and necessary accruals made at year-end.
Expenses
Expenses are defined as the outflows or expiration of assets or the incurrence of liabilities during a period from providing or producing goods, rendering services, or carrying out other activities that constitute the entity's primary operations. Proprietary funds recognize expenses using the accrual basis of accounting (i.e., when the related liability is incurred) without regard for the timing of the payment. This recognition criterion is consistent with the following guidelines discussed in Financial Accounting Standards Board (FASB) Concepts Statement No. 5. Although FASB Concepts Statements do not represent authoritative guidance for governments, the discussion is useful in classifying expense transactions within proprietary funds.
[back to top] Governmental entities are required to present the governmentwide financial statements on the accrual basis of accounting. Thus, the Statement of Activities reflects the expenses of the entity for the reporting period. Entities are required to report all expenses by activities and programs (by function), except certain indirect expenses, as explained below. GASB has defined direct expenses as those that are specifically associated with a service, program or department and thus are clearly identifiable to a particular function. Direct expenses include both operating and nonoperating expenses, including depreciation and amortization of assets. Functions, such as general administration or data processing services, may include indirect expenses of other functions. Governmental entities are not required to allocate indirect expenses to other functions, but may choose to do so. If indirect expenses are allocated, direct and indirect expenses should be presented in separate columns. A column totaling direct and indirect expenses may be presented, but is not required. Indirect expenses may be allocated to any of the primary government's functions. Although there are no standards for determining an allocation methodology, there should be a reasonable basis for expense allocations. Depreciation expense should be included in the statement of activities as follows:
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