21 Jul WEEK 44 QUESTIONS
Many state and local governmental entities are not allowed to borrow funds without voter approval. The approved debt will generally consist of bonds, notes, or capital leases. Required entries are generally made in the governmental activities general journal at the government-wide level, as well as in the appropriate governmental fund(s).
To provide full disclosure to the financial statement reader, long-term liability disclosures are required. A schedule is required which provided details including the beginning balance, additions, reductions, ending balance, and the short-term portion of the balance. An addition schedule will disclose the principal and interest payments due in future years. Such information is very useful to managers, as well as potential investors, when making investment decisions.
The issuance of serial bonds is one of the most common methods used by state and local governments to fund capital needs. Bonds will take one of four types: regular serial bonds, deferred serial bonds, annuity serial bonds, and irregular serial bonds. A regular serial bond will require equal annual payments over the life of the bond issue. A deferred serial bond will delay the first payment for more than one year but maintain regular payment thereafter. An annuity serial bond attempts to maintain equal annual payments by increasing the principal payment each year as the interest payment decreases. A serial bond with a payment schedule that does not correspond to one of the prior three types will constitute an irregular serial bond.
Governmental entities are often involved in business-type activities. These activities are accounted for within proprietary funds. Internal service funds and enterprise funds are two types of proprietary funds used. In order to increase efficiencies and reduce costs, common services such as purchasing, data processing, and personnel services are handled within inter service funds. A city utility is an example of goods or services being provided to the public by the government. These activities are accounted for by an enterprise fund.
Proprietary funds require accounting similar to that required for for-profit entities. A balance sheet (statement of net position), income statement (statement of revenues, expenses, and changes in fund net position), and a statement of cash flows is required. GASB standards are used for the preparation of these statements instead of FASB standards used by for-profit entities.
While both the enterprise funds and internal service funds are classified as a proprietary fund, they are not reported in the same way on the government-wide financial statements. Enterprise funds are reported as part of the Business-type Activities column while internal service funds are reported as part of the Governmental Activities column of the government-wide financial statements. If the Business-type Activities column of the government-wide financial statement only includes enterprise funds, the governmental entity does not need to maintain separate records for the activities at the government-wide level. The records of all enterprise funds may be added together for reporting. Since inter-fund transactions among enterprise funds have no net effect on overall business-type activities, they should be eliminated.
Reference
Reck, J., Lowensohn, S., & Wilson, E. (2013). Accounting for governmental and nonprofit entities (16th ed.). McGraw-Hill Higher Education.
1. Discuss the distinguishing characteristics of general long-term liabilities and how they are reported. Using the same financial statements referenced in your Week Two discussion (or different organizations, if desired) provide two examples of general long-term liabilities and two examples of other long-term liabilities you found on the entities’ financial statements. Include any specific provisions or characteristics noted about each example. Reference this week’s lecture to support your post.
2. Discuss the differences between internal service funds and enterprise funds. Why is it important to distinguish the differences? Provide two examples of each type. Reference this week’s lecture to support your post.
WEEK LECTURE FOR QUESTIONS 3 AND 4
Often, governments are involved in activities utilizing resources not owned by the entity. These activities constitute Fiduciary Activities and they must be reported in a special section by the reporting entity. Fiduciary activities can be categorized in Agency or Trust Funds.
Agency funds normally involve relationships in which a governmental entity acts as an agent for another party. The assets being held belong to the entity for which the governmental agency is acting as an agent. One local governmental entity often collects taxes for other taxing authorities in the state or county and passes the revenues on to the appropriate entity. Grants, entitlements, or other shared revenues are other examples of agency funds.
Trust funds can be classified as private-purpose, investment, or pension. Under private-purpose funds, the beneficiaries are private individuals, organizations, or other governments. Accounting for escheat property, or performance deposits are examples of such funds. Governmental entities will often increase effective management of investments by maintaining them in an investment pool. The pool can also involve external participants which would require the use of an external investment pool. The final classification is pension funds whereby employees and/or employers contribute assets to the fund to be used to provide benefits to the employee upon retirement. The plans can be a defined contribution plan where the contributions made to a member’s account determines the benefit received. A defined benefit plan utilizes a formula including factors such as salary and years of employment to determine the benefit.
The financial reports issued by state and local governments provide information to assess their accountability and be used in making needed decisions. The financial reports begin with the state or local government, but also include organizations which are financially dependent on the primary government, or an organization which the primary government controls.
Just as management within for-profit organizations needs periodic information to aid with decision making, state and local governments will prepare periodic reports. These reports will contain schedules of actual and budgeted revenue and expenditures for the general fund as well as special revenue funds, enterprise funds, and internal service funds. A combined schedule of receipts, disbursements, and balance will be included for all funds, as well as a forecast of cash position.
The annual financial report issued by larger governmental entities is known as the comprehensive annual financial report (CAFR). This report goes beyond the minimum requirements of general purpose external financial reports. It includes individual fund and combining financial statements, schedule, explanations, statistics, and other material thought to be relevant. The statistical section will include information regarding trends, revenue capacity, debt capacity, demographics, economic conditions, and further operating details.
While the CAFR attempts to meet the information needs of all users, average citizens are often confused by the reports. In order to address this issue, other reports are often prepared and distributed. These reports are often highly condensed with summaries and narrative descriptions. They are used to supplement the CAFR report and not replace the larger report, as they do not include all of the required data.
Reference
Reck, J., Lowensohn, S., & Wilson, E. (2013). Accounting for governmental and nonprofit entities (16th ed.). McGraw-Hill Higher Education.
3. If you were trying to assess the financial health of a government administered pension plan, which financial statements or schedules would you review and why? Reference this week’s lecture to support your post.
4. A city manager was overheard saying, “Since we don’t release them to the public, I don’t see any value in taking the time to prepare interim reports.” Explain why you agree or disagree with this statement. Reference this week’s lecture to support your post.
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