Special Revenue Funds, Capital Project Funds, Debt Service Funds, Permanent Funds, Proprietary Funds, and Fiduciary Funds

Chapter 16

GovernmentalAccounting:

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Special Revenue Fund

• Same accounting as the General Fund• May have expenditure-driven grants• If “on behalf” payments are administered

by the government, activities are accounted for here

• Accounts for expendable trust fund activity where both principal and earnings are used to support government activities or programs

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Permanent Fund

• Used to account for nonexpendable trusts where the earnings, but not the principal, are used to support government activities and programs

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Capital Projects Fund (CPF)

• The acquisition of major general fixed assets through– purchase– construction– capital lease

• Same basic accounting and reporting model as General Fund or Special Revenue Funds

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CPF:Funding Sources• Interfund operating transfers (credit OFS)• Long-term borrowing (credit OFS)

– general obligation term or serial bonds • Intergovernmental grants (credit revenue)• Special assessments (credit revenue)

– levied against property owners or other beneficiaries

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CPF:Activities• Record budget on an annual basis• Interim financing (bond anticipation notes)• Record costs charged to projects• Interest on temporary investments is revenue• Intergovernmental grants are revenues• Disposition of bond premiums, discounts,

accrued interest, and issuance costs

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CPF:Year EndProject complete• close revenues and

expenditures to F.B. and transfer any residual fund equity to source(s)

Project incomplete• close revenues & OFS,

expenditures & OFU to the F.B.• close open encumbrances

against F. B. -- leave F.B.- Reserve for Encumbrance

• reestablish at beginning of next year:Encumbrance xxF.B. xx

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CPF Acquisition:Capital Lease• Use FASB 13 criteria to assess lease contract• Entries:

Expenditure - Fixed Asset xxOther financing sources xx

(lease liability recorded in GLTDAG)

Expenditure - lease principal xxExpenditure - lease interest xx

Cash xx(fixed asset recorded in GFAAG)

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Issue bond:Cash 1,509,000

OFS - Bond Proceeds 1,509,000

Transfer premium to Debt Service Fund:Other Financing Uses 9,000

Cash (or Due to Debt Service Fund) 9,000

CPF Resources:Bond Issued at Premium

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Issue bond:Cash 1,491,000

OFS - Bond Proceeds1,491,000

CPF Resources:Bond Issued at Discount

Additional financing may have to come from a transfer from the general fund or project may have to be scaled back.

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CPF Resources:Bond Anticipation Notes (BANS)• Issued as short-term “interim” financing• In essence, a long-term debt

– accounted for in GLTDAG if• maturity > 1 year or• maturity 1 year and

– all steps have been taken to refinance on long-term basis

– intent is supported by ability to consummate refinancing

• All other BANS are current (fund liabilities)

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CPF Resources:Special Assessments• Compulsory levy made against certain

property to defray part or all of the cost of an improvement or service

• Assume general benefit and specific benefit to property owners assessed

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CPF Resources:Special Assessments, continued• Proceeds from special assessment-related debt

– is government obligated in some manner?• yes: credit OFS-Bond Proceeds• no: credit Contributions from Property Owners

• Debt not issued– credit OFS-Transfer from Other Funds

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Debt Service Fund (DSF)

• Used to account for the financial resources accumulated to cover the payment of principle and interest on general government obligations

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DSF:Types of Debt Serviced• Bond issues are most common

– usually serial– term bonds are rare

• Capital lease obligations• Notes and warrants payable• Other

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DSF:Use required only if either:• Legally mandated, or

• Accumulating resources for future years’ debt service payments (to satisfy term bond indenture requirements)

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DSF:Sources of Financing• Property taxes usually transferred in from another

fund• Sales tax• Special assessments• Income from investments (net of any

arbitrage)

• Refunding or defeasance

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DSF:Special AssessmentSpecial assessments levied to provide for debt service on indebtedness incurred for general government special assessment projects.• Noncurrent special assessments receivable

included in fund assets– is offset by deferred revenue– does not result in revenue and does not

affect fund balance

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DSF:Expenditure Recognition• Modified accrual

– report principal and interest expenditures when legally payable (i.e., do not accrue unmatured principal or interest)

• Accrual permitted, but not required, if:– resources for debt service accumulated in fund by

year end and– payment due early next year– if accrual option is used, must accrue entire debt

service payment due early next year

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DSF:Reserves• Excess of assets over liabilities

– FB-Reserved for Debt Service– amount usually equal to highest year’s principal and

interest payments– “Amount Available” in GLTDAG at year end should

equal amount in debt service fund balance designated for future principal payments

– If not, then adjustment entry is made:

Amount Available xxAmount to be Provided xx

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DSF:Refunding & Defeasance of Debt• Reasons for refunding or defeasance:

– lower effective interest rates– extend maturity dates– revise payment schedules– remove or modify restrictions

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• Issuance of new debt to finance payment of interest and principal of existing debt– current refunding - use refunding proceeds to

retire debt immediately– advance refunding - place proceeds in escrow

and use to pay interest and principal in future (in-substance defeasance)

DSF:Refunding, defined

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DFS:Reporting Refunding & Defeasances

• DSF entry:Cash xx

OFS-Proceeds of Refunding Bonds xx

• Refunding issue is reported in GLTDAG

• Defeased/retired debt is removed from GLTDAG

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In Substance Defeasance

• if achieved - remove from GLTDAG --- if new debt used record Amt to be Prov & New GLTDG (as if refunded or defeased)

• if attempted, but not achieved - do not remove old debt --- assets that are placed in trust are recorded as investments in Debt Service Fund -- new debt recorded in GLTDAG

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Proprietary Funds

• Pertaining to a proprietor• Users of goods or services will be charged

on the basis of consumption• Types

– enterprise: goods or services provided to the general public

– internal service: goods or services provided inter- or intra- governmental unit

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Proprietary Funds:Interfund / Intrafund Transactions• Operating

– intrafund: record other financing sources or uses– interfund: record revenue or expenditure [or

expense]• Nonoperating:

– government funds: record as other financing sources/uses

– proprietary funds: interfund transfers• Reimbursements (adjust expenditures)

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Proprietary Funds:Common Features• Accounting equation - full accrual• Fixed assets and long-term debt maintained

in the fund• Applicability of pertinent business (i.e.,

FASB) pronouncements• Reporting interfund transactions• Required financial statements

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Proprietary Funds:Accounting Principles• Similar to for-profit enterprises• Apply GAAP except where it has been

specifically overridden by a GASB pronouncement

• GASB #20 (Sept ‘93):– must apply all pertinent GAAP (ARBs, APBs,

SFASs, etc.) through SFAS 102 unless conflict– may apply GAAP from SFAS 103 to present

• apply ALL, unless conflict or• apply NONE, unless adopted by GASB

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Proprietary Funds:Accounting Principles, continued• GASB #34 (June ‘99):

– may apply those FASB standards and interpretations limited to NFP organizations

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Proprietary Funds:Financial Statements• Balance Sheet• Statement of Revenues, Expenses, and

Changes in Net Assets• Statement of Cash Flows• Plus:

– Combining statements– Segment information

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Proprietary Funds:Statement of Cash Flows• Must use the direct method• 4 categories of cash flows• 1) Cash flows from operating activities

– cash received from sales of goods/services– cash paid to suppliers, employees, and providers

of services– excludes most items not related to operating

income

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• 2) Cash flows from noncapital financing activities– borrowings for noncapital construction,

acquisition, and/or improvement purposes– repayments and interest on above borrowings– certain intergovernmental receipts/payments– interfund transfers from other funds except

those made to finance capital activities– all interfund transfers to other funds

Proprietary Funds:Statement of Cash Flows, continued

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• 3) Cash flows from capital and related financing activities– acquisition and disposal of capital assets– proceeds of fixed asset disposals– borrowing for capital assets acquisition

/construction/ improvements

Proprietary Funds:Statement of Cash Flows, continued

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• 3) Cash flows from capital and related financing activities, continued– repayments and interest on those borrowings– intergovernmental receipts restricted solely for

capital assets acquisition /construction/ improvements

– interfund transfers from other funds made clearly and specifically to finance capital assets acquisition/construction/improvement

Proprietary Funds:Statement of Cash Flows, continued

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• 4) Investing activities– making/collecting loans– acquiring/disposing of investments– collection of related interest and dividends

Proprietary Funds:Statement of Cash Flows, continued

Reconciliation of net operating income to net cash flow from operating activities must be provided in a separate schedule

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Enterprise Funds

• Use mandatory when– to account for operations financed/operated like

a business• provide goods/services• to the public• on continuing basis• for fee• intended to recover (most of) the full costs of

providing goods/services

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Enterprise Funds, continued

• Use optional when– the entity engages in activities for which

governing body deems net income type information appropriate

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• Common examples– public utilities– public transportation systems– recreational facilities– parking facilities– lotteries– airports– hospital/healthcare facilities– landfills

Enterprise Funds, continued

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• Capital contributions• Operating transfers• Loans• Others

– grants– tap fees– impact fees– internal and external subsidies– debt forgiveness from general government

Enterprise Funds:Non-operating Revenues

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Enterprise Funds:Capital Contributions• Recorded as interfund transfer• Included in the Statement of Revenues,

Expenses, and Changes in Net Assets as Nonoperating Revenue

• No longer a separate Contributed Capital on Balance Sheet

• No longer “residual equity transfers”

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Enterprise Funds:Restricted Assets• A way to have a “fund within a fund”

– distinctively titled restricted asset, liability and equity reserve accounts

– customer deposits– construction financed by bond issue– debt service– contingencies

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Enterprise Funds:Landfills• Significant amounts involved• Recognize the liability for closure and post-

closure care over remaining life of landfill• Current period expense:

estimated total cost (capacity used so far total capacity)= to-date cost based on used capacity– costs already recognized= current period expense

• Liability: amount of expense not funded

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Internal Service Fund

• Services to other departments• Cost-reimbursement basis• Intermediary fiscal and accounting entity

– economy/efficiency– equitable cost sharing

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Internal Service Fund:Pricing Policies• Charges should be based on cost• Charges cannot be excessive• Pricing often includes total costs and total

consumption of goods or services

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Self-Insurance

• If risk financing is not centralized– do not use Internal Service Fund (ISF)– record expenditures/expenses/losses in affected funds– record liability in appropriate fund and/or GLTDAG

• If risk financing is centralized– use general fund or internal service fund– if general fund, reimburse for actual claims paid– additional charges - operating transfers

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Self-Insurance ISFs

• Recognize claims and judgments in ISF– when probable and reasonably estimable– charges to user departments must be reasonable and

equitable• Revenues and expenses must be equal over a

reasonable time period– provision for future catastrophic losses allowed in

charges to user departments– reflected as Reserve or Designation of Retained

Earnings & in notes• Over (& under) payments are operating transfers

Trust and Agency Funds• Used to account for assets received and held by

government acting as trustee or custodian for individuals, organizations, businesses, or other governments

• Difference - duration of the fiduciary responsibility–Agency Fund – short-term fiduciary responsibility–Trust Funds – long-term fiduciary responsibility

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Types of Trust Funds

• Private Purpose – expendable– nonexpendable

• Investment Trust• Pension Trust

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Trust Funds:Private Purpose Expendable• Can spend both principal (corpus) and

earnings• Financial statements

– Statement of Net Assets– Statement of Changes in Net Assets

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Trust Funds:Private Purpose Nonexpendable• Can only spend earnings• Principal (corpus) stays intact• Financial statements

– Statement of Net Assets– Statement of Changes in Net Assets

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Investment Trust Funds

• Used to account for pooled investment funds and other investment activity

• Financial statements– Statement of Net Assets– Statement of Changes in Net Assets

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Pension Accounting

• GASB 25 – Annual pension cost - actuarial method– Acceptable annual required contribution (ARC)– Determination of normal cost– Unfunded actuarial accrued liability and

amortization

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• Statement of Net Plan Assets– Investments at FMV– Fixed income securities not amortized– Fixed assets reported at depreciated cost– No liability reported for actuarial present value of future benefits– Actuarial information (must comply with established parameters

& assumptions) reported as Required Supplementary Information (RSI)

• Statement of Changes in Net Plan Assets– Reports on additions and deductions– Identifies changes in net plan assets

Pension Accounting, continued

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Agency Funds

• Used for– tax collections for other governments– payroll deductions– pass-through grants– grants, entitlements, shared revenue

• GASB required agency funds– if government has no program/discretion– no obligation special assessment debt service

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Agency Funds

• Accounting Equationassets = liabilities

• Financial StatementStatement of Net Assets