ACTG 441 Midterm 1

Reasons for Accounting Diversity

1. Legal System

2. Taxation

3. Financing System

4. Inflation

5. Political and Economic Ties

Common Law

Found in English speaking countries, relies on court interpretations of limited statute law, leading to detailed accounting rules

Codified Law

Common in non-English speaking countries, emphasizes statute law

How does taxation influence accounting diversity?

In some countries, financial statements directly form the basis for taxation

Strong Equity-Outsider Financing (Class A)

Requires more disclosure and independence from tax rules

Weak Equity-Outsider Financing (Class B)

More conservative, less extensive disclosure, and closer alignment with tax rules

How does inflation affect accounting practices?

High inflation rates can diminish the usefulness of historical cost

Differences between IFRS and GAAP

1. Recognition differences

2. Measurement differences

3. Classification, presentation, and disclosure differences

Example of Recognition Differences

IFRS recognizes contingent losses when they are “more likely that not” while GAAP requires a higher threshold of “probable”

Example of Measurement Differences

Revaluation of PPE, Component Depreciation, and Impairment Loss Reversal are allowed by IFRS but not GAAP

Example of Classification, Presentation, and Disclosure Differences

Bank overdrafts are treated as a reduction in cash and cash equivalents under IFRS but classified as liabilities under GAAP

What are the five purposes of a government budget?

1. Public Policy

2. Financial Intent

3. Spending Limits

4. Performance Evaluation

5. Revenue Sufficiency

Encumbrance in Fund-Based Financial Statements

Requires entries when purchase order is made, when item is received, and reversal of remaining commitments at fiscal period end

Encumbrance in Government-Wide Financial Statements

No entry required to record the encumbrance, only an entry when the order is filled

Governmental Funds Purpose

Account for activities with a service orientation

Proprietary Funds Purpose

Account for functions financed by user charges

Fiduciary Funds Purpose

Account for monies held by the government in a trustee or agency capacity

Governmental Funds

1. General Fund

2. Special Revenue Fund

3. Capital Projects Fund

4. Debt Service Fund

5. Permanent Fund

Proprietary Fund

1. Enterprise Fund

2. Internal Service Fund

Fiduciary Fund

1. Investment Trust

2. Private-Purpose Trust

3. Pension Trust

4. Custodial Funds

General Fund

Accounts for all financial resources not accounted for in other funds

Special Revenue Fund

Accounts for resources restricted or committed for specific purposes other than debt payments or capital projects

Capital Projects Fund

Accounts for capital resources assigned for capital outlays (bridges, schools)

Debt Service Fund

Records financial resources accumulated to pay long-term liabilities and interest

Permanent Fund

Accounts for assets where the principal cannot be spent, but the income is used by the government

Enterprise Fund

Accounts for governmental activities open to the public and financed by user charges (subway system, toll road)

Internal Service Fund

Accounts for operations providing services to other governmental departments for a fee

Investment Trust

Fiduciary fund for investments held on behalf of others

Private-Purpose Trust

Fiduciary fund where principal and interest benefit parties outside the government

Pension Trust

Fiduciary fund for employee retirement benefits

Custodial Fund

Resources held by a government as an agent for others

Government-Wide Financial Statements focus

Report on the financial affairs of the government as a whole, utilizing accrual accounting and focusing on all economic resources

Fund Financial Statements focus

Report on individual activities, utilizing modified accrual accounting and focusing on current financial resources

Structure of Government-Wide Financial Statements

1. Statement of Net Position

2. Statement of Activities

Structure of Fund Financial Statements

1. Balance Sheet

2. Statement of Revenues, Expenditures, and Changes in Fund Balance