Governmental Accounting and Reporting: Putting It All Together

Governments use funds — what else do I need to know? Quite a bit if you are going to audit or practice governmental accounting. This course goes deep into the accounting and reporting issues for state and local governments. Learn how to effectively and efficiently navigate the complexities of government accounting and reporting.

Objectives:

• Understand the key issues in governmental accounting and reporting
• Gain an understanding of the “meaning behind the madness” that is governmental accounting and reporting
• Understand how to convert the fund financial statements to the government-wide statements

Chapter 1 - A Good Place to Start

Learning Objectives

After completing this chapter you should be able to

• Understand the fund structure used by state and local governments.
• Understand the different measurement focuses and bases of accounting used in governmental financial statements.

The people that are new to governmental accounting and reporting taking this course just do not know how lucky they are. From 1999 to 2004, there was tremendous turmoil in governmental accounting and reporting. This was because in 1999, the Governmental Accounting Standards Board (GASB) issued the first of several standards that radically changed governmental accounting. That first standard was called Basic Financial Statements – and Management's Discussion and Analysis – for State and Local Governments, known here as GASB No. 34.

This standard did many things. It changed a fund structure that seemed to have been in effect forever. It altered the format and content of all fund financial statements. It added two new financial statements and a host of new notes. It really turned topsy-turvy the governmental accounting world.

And, it was only the first statement. It was followed by five additional standards that added to or, occasionally, took things away from GASB No. 34. In brief, these standards were:

• GASB No. 35, essentially the same standard as GASB No. 34 except for Colleges & Universities.
• GASB No. 37, which has exactly the same title as GASB No. 34 except for one word: Omnibus. Be aware of GASB standards containing the word "omnibus," it is a warning word that alerts users to the fact that this standard will be correcting errors in or making adjustments to the earlier standard with the same name (GASB No. 30 did the same thing for GASB No. 10). It somewhat depends on how you count them, but there were 13 changes to GASB No. 34 contained in GASB No. 37.
• GASB No. 38, Certain Financial Statement Note Disclosures. Some might argue that GASB No. 38 is not a GASB No. 34-related standard, but it continued or enhanced many of the disclosure requirements from GASB No. 34. The original purpose of GASB No. 38 was to eliminate some of the notes prepared by state and local governments. If graded on that goal, the standard was a failure as it added (depending again on how you count them) 14 new disclosure requirements while it eliminated only one.
• GASB No. 41, Budgetary Comparison Schedules-Perspective Differences. This standard slightly changed the budgetary presentation for some governments that do not budget using the standard General Fund and Special Revenue Funds as their basis of presentation.
• GASB No. 46, Net Assets Restricted by Enabling Legislation. One of the great ambiguities of GASB No. 34 was the definition of restricted net assets. In particular some felt that the phrase "enabling legislation" was not well defined. This standard adds clarification to the phrase "enabling legislation."

All of the aforementioned standards have now been in effect for several years. As a result, newcomers may think they have it easy. Nothing could be further from the truth. There is still a lot going on, even with GASB No. 34. Just in 2007, medium-size governments were supposed to complete the retroactive infrastructure requirements. We know from experience that not all governments attained this requirement. So for many, these rules are still as new and as fresh as the day they were printed.

The GASB continues to issue new standards that will be put into effect over the next several years. While this is not an update course, you need to be aware of how some of these new standards may affect you or your governmental clients. Some of the more recent ones include

• GASB Nos. 43 and 45 addressing other postemployment benefits (OPEB). These two standards have had and continue to have a profound effect on what benefits governments offer their employees and how to account for them. However, this is not an OPEB course. You may need additional training in this area.
• GASB No. 48 on the sale and pledging of receivables and future revenues. This standard has been seen by many as a departure from the FASB's rules on this subject, but it may just be an adaptation of their requirements in FASB No. 140.
• GASB No. 49 on pollution remediation obligations. While this standard may not, hopefully, apply to many governments, you still need to be aware of it and be prepared to help your clients implement it, if necessary.
• GASB No. 50 that changes some pension note disclosures to more closely match those required by the OPEB standards.
• GASB No. 51 on intangible assets. While impact of this standard is difficult to assess. Most governments do not currently report intangible assets. Still, when one considers the
copyrights held by colleges and universities for mascots and other school logos, the impact of the standard may extend far beyond the computer software example which is the main one in the standard.
• GASB No. 52 on land and other real estate held as investments by endowments.

In this course, we hope to give you some insight on why governments do some of the things they do and some shortcuts on how to do these things even better. With that said, let us now review the fundamental foundations of governmental accounting and reporting!

The basic building block of government operations is the function or activity. However, when governments report the activities of these functions, they rarely configure their reports that way. Instead, the traditional reporting element has always been the fund, with information on the functions included within these funds. With the implementation of GASB No. 34, functional reporting has become more widespread. However, fund reporting still rules many of the financial statements issued by state and local governments.

Hence, understanding when to use funds and what funds to use is essential in preparing governmental financial statements. In this section we take a quick review of the funds a government may use, along with a look at the measurement focus and basis of accounting of each fund category. There are three categories of funds used by governments:

• Governmental – Used to account for the government's general operations.
• Proprietary – Used to account for the government's business-type operations.
• Fiduciary – Used to account for resources not available for government use but for which the government has an accounting responsibility and, given the category's name, a fiduciary responsibility.

We will discuss each of these fund categories in turn.

You would think that the GASB would give us a really good definition of "governmental funds," but they do not. NCGA Statement 1, Governmental Accounting and Financial Reporting Principles (NCGAS 1) does describe them as "source and disposition" funds or "expendable" funds, but they are never really defined. However, it is generally accepted that these funds are used to account for most government functions. NCGAS 1 and GASB No. 34 do prescribe the types of funds to be used and gives definitions of each (the following definitions come from NCGAS 1, Principle No. 3, as amended, most notably by GASB No. 34).

The General Fund is used to account for all financial resources except those required to be reported in another fund. Think about that definition for a moment. What it really says is that the General Fund is the residual fund. If the resources are not accounted for elsewhere, then put them in this fund. One would think that if a fund is the residual fund, it would be defined last, but the definition comes first among the funds. Why? Because it is the only fund a government has to have. All others are used only if there is an essential need for it. Otherwise, just use the General Fund. After all, Governmental Accounting Principle No. 4 tells us "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, because unnecessary funds result in inflexibility, undue complexity, and inefficient financial administration" (NCGAS 1, paragraph 29). If you can do it, only use the General Fund.

Special Revenue Funds are used to account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditure for specified purposes. Resources restricted to expenditure for purposes normally financed from the General Fund may be accounted for through the general fund provided that applicable legal requirements can be appropriately satisfied; and use of special revenue funds is not required unless they are legally mandated. The General Fund of a blended component unit should be reported as a special revenue fund.

The key words here are "legally restricted" and "specified purposes." Governments should use caution not to have too many specified purposes. You do not want to be like one southern state that has 1,100 SRFs. That is right: one thousand, one hundred Special Revenue Funds!

Capital Projects Funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds or in trust funds for individuals, private organizations, or other governments). Capital outlays financed from general obligation bond proceeds should be accounted for through a Capital Projects Fund.

Most governments use one of these funds for each capital project. After all, the fund is designed to be a cost center to capture all costs associated with the project. However, as we will see later, few governments report every activity as a separate fund.

Debt Service Funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Debt Service Funds are required if they are legally mandated and/or if financial resources are being accumulated for principal and interest payments maturing in future years. The debt service transactions of a special assessment issue for which the government is not obligated in any manner should be reported in an agency fund rather than a Debt Service Fund to reflect the fact that the government's duties are limited to acting as an agent for the assessed property owners and the bondholders.

Like the capital projects funds (CPFs), governments may elect to have a separate debt service fund (DSF) for each outstanding general obligation debt, but the reporting is typically much more restricted.

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