Chapter 10: Government Accounting: Government-wide Financial Statements

Annual Comprehensive Annual Financial Report

Governments official annaual report and it has three sections

• introductory, financial (govt wide and fund financial statemtns as well as managements discussion and analysis, schedules necessary to demonstrate complicance with financie related legal and contractual provisions that affect the government), and statistical

The minimum requirements for basic financial statements and required supplementary information

a. managements discussion and analysis: the MD&A should introduce the basic financial statements and provide an analytical overview of the governments financial activities

b. basic financial statements: include government wide financial statements, fund financial statements, and notes to the financial statements

1. government wide financial statements: display info about the reporting government as a whole except for its fiduciary activities. The statements should include seperate columns for the governmental and business type activies of the primary government as well as for its component units. Should be prepared using the economic resources measurement focus and the accrual basis of accounting

2. Fund financial statements: fund financial statements for the primary governments governmental proprietary, and fiduciary funds should be presented after the government wide statements. SHould be prepared using the curretn financial resources measurement focus and the modified accrual basis for accounting. Proprietary and fiduciary funds are prepared using the economic resources measurement focus and the accrual basis of accounting

3. Notes to the financial statements: these notes should communicate information essential for the fair presentation of the financial statements that is not displayed on the face of the financial statements and is required by gaap for state and local governements

c. Required supplementary information (RSI) and other MD&A: included in the rinancial report and seperate from the notes ot the financial statements, the RSI consists of schedules and statistical data and other info that that gasb has determines are essential part of financial reporting and should be rpesented with but are not part of the basic financial statemnts of a govenmental entity. May include budgetary comparisons that rpesent the originally adopted budget the financial budget and the actual inflow and outflows and balances of net position. Governmetns are also encourage but not requiredd to provide a column indicating the variances between the final budget and actual amounts. an choose to present a budgetary scheudle in RSI or a budgetary statemnt in the basic financial statments

-the intorductary section may include a TOC letter of transmissial an org chart, and any awards received.

-the statistical section provides information on fianncail trends, rev and and debt capacity, demographic and economic information, and operating information with service and infrastructure data

MD&A

-a brief discussion of the basic financial statements, including the relationships of the statmetns to each other, and the significant differences in the information they provide

-condensed financial information derived from governemnt wide financial statemtns including the relationships comparing the current year to the prior year

-an analysis of the governemnts overall financial position and results of operations to assit users in assesing whether financial position has improved or deteriorated as a result of the years operations

-an analysis of balances and transaction of individual funds

-an analysis of significant variations between original and final budget amounts and between final budget amounts and actual budget results for the general fund

-a discription of significant capital assets and long term debt activity during the year, including a discussion of commitments made for capital expenditures, changes in credit ratings and debt limitations that may affect the financing of planned facilities or services

-a discussion by governments that use the modified approach to report some or all of their infrastructure assets including:

1. significant changes in the assessed condition of eligable infrastructure assets from previous condition assessments

2. how the current assesed condition compares with the condition level the government has established

3. any significant differences from the estimated annual amount to maintain/preserve eligable infrastructure assets compared with the actual amounts spent during the current period

-a description of currently known facts, decisions or conditions that are expected to have a significant effect on financial positon or results of operations

Government-wide financial statements

-all state and local governments must issue government-wide financial statements financial statements if a higher-level governent or board requires them

-these financial statemetns consist of a statement of net position (similar to BS) and a statement of activities (the government equivilant of an operating or income statement)

BASB requires:

1. a report information about the overall government without displaying individual funds or fund types

2. exclude information about fiduciary activities, including component units that are fiduciary in nature (such as certain public employee retirement systems)

3. distinguish between the primary government and its discretly presented component units

4. diistinguish between governmental activities and buisness type activities of the primary government

5. measure and report all assets (both financial and capital); liab, rev, exp, gains, and losses using the economic resources measurement focus and accrual basis of accounting

-government wide financial statements are prepared using the accrual basis of accounting that we use for business because the measurement focus is on the long term flow of economic resources

-these statements present all of the assets and liab, rev and exp of the governmental unit

-they are designed to answer questions relating to whether the governmet is operating efficiently and whether its solvent

-the difference beetween assets and liab is net position isntead of stockholders equity becase the governemtn has no owners

Primary government

-the focus of the government-wide financial statents should be on the promary government. Seperate rows and columns should be used to distiguish between the total primary government and its discretly presented component units

-The Primary government is a governmental unit that, has a seperatly elected governing body, is legally seperate, is a fiscally independant of other state and local governments

-the primary government is any state, city country town or village. Primary governments are seperate legal entities with governing bodies duly elected by the citizens to carry out the role of the government in meeting their needs, and with powers of taxation that make them fiscally independent so that they can set their own budgets and fund those budgets from tax inflows.

-the GASB also requires seperate preesntation of financial statements for all of the primary governments component units

→ a component unit is a legally seperate organization for which the elected officicals of the primary governemnt are financially accountable. A primary governmetn is financially accountable for acomponent unit when it can incur financial obligations from the component unit and it controls the appointment of a majority of the controlling board and can impose its will on the components activities

-a component unit is a governmental unit whose exclusion from the government-wide financial statements would make them misleading in some sense, even if the primary government is not financially accountable for it

-components are usually reported using descrete presentation in which the financial sttemtns of each component unit are presented in a column apart from those of the primary government and not included in the totals taht are reported in a column apart from those of the primary government and not included in the totals that are reported for the primary government

-the discrete columns should be located to the right of the total column of the primary government, distinguishing between the financial data of the primary government and those of the discretly presented component units by providing descriptive column headings

-Blending: some component units are so intertwined with the primary government that they are in substance the same as the primary government and should be reported as part of the primary government

-a component unit should be included in the reporting entity fincal statements using the bleding bethos if the component units governing body is substantially the same as the governing body of the primary government; the component unit provides services entierly or almost entierly to the primary government or otherwise exclusivly, benefits the primary government even though its does not provide services directly to it; the components units total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government. If any of these crietera is met, the funds of the component units are added to similar funds of the primary government except forthe components units General Fund which is combined with the primary governments special recvenue funds

Measurement focus and basis of accounting

-government-wide fiancial statemtns are prepared using the economic resources measurement focus and the accrual basis fo accounitng

-economic resources is broader and includes long term assets and liabilities as well as current financial resources and is similar to the GAAP measurement focus

-The accrual basis of accounting requires that

1. rev, exp, g/l, assets, ad liab resulting from exchange and exchange like transactions should be recognized when the exchange takes place with appropriate provision for uncollectable accounts

2. rev, exp, g/l, assets, and liab resulting from nonexchange trasactions should be recognized as

   1. derived tax revenue trasactions: governments should recognize assets from derived tax revenue transactions in the period when the exchange trasaction on which the tax is imposed occurs or when the resources are received, whichever occurs first. Governemtns should recognize revenues net of estimated refunds and estimated uncollectable amonts in the same period that the assets are recognized, provided that the underlying exchnage transaction has occured. Resources received in advance should be reported as defered revenues Iliab) until the period of the exchange

   2. Imposed nonexchange revenue trasactions: governments should recognize assets from imposed nonexchange revenue transactions in the period when an enforcable legal claim to the assets arises or when the resources are received, whichever occurs first. Govts should recognize revenues from property taxes net of estimated refunds and estimated uncollectibel amounts, in the period for which the taxes are levied even if the enforcable legal claim arises or the due date for payment occurs in a different period

   3. government-mandated nonexchange transactions and voluntary nonexchange transactoins: Providers of resources in these frequently establish eligiabiilty requirements. Eligabliity requirements are conditions established by enabling legislation or the provider that are required to be met before a transaction can occur. Unitl those requiremens are met, the provider does not have a liab, the reciprient does not have a receiaveable and the recognition of exp or rev for resources transmitted in advanced should be deffered

Statement of net position

-presents assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position

-assets - liab = net position

-seperate rows and columns should also be used to distinguish between the governmental and its distinctly presented component units and a total column should be presented for the primary government

-seperate rows and columns should also be used to distinguish between the governmental and busienss type activities of the primary government. Fiduciary activities are not presented on the government-wide statements

-assets are rpesented in order of liquidity an dliab in order of maturity

-asset conversion to cash (liquidity) may be restricted by law or regulation which plaes additional limitations on the use of assets that may not be present in the business setting

-the current and noncurrent segregation of assets and liab is also required for the statements of net position as it is for the financial statements of business

-net postion section of the statemetn is displayed in three components:

1. net investment in capital assets

2. Restricted (distinguishing between major categories of restrictions)

3. Unrestricted

Capital assets

-long term assets, including land, land improvements, easements, buildings, building improvements, vehicles, equipment, works of art and historical treasures, and infrastructure assets

-they are initially recorded at historical cost, including any costs that are directly attributable to asset aquisition

-when govt receives donations from citizens, these donated assets are initially recorded at their fair value

-capital assets should be depreciated over their estimated UL unless they are indefinite lived assets or are exempted from depreciation and reported using the modified approach

-any rational and systematic manner of depreciation can be used including streight line, accelerated, and composit. If depreciated, capital assets should be reported net of accumulated depreciation

-infrastructure assets that are part of a network are not reqiured to be depreciated as long as two requirements are met

1. the govt manages the infrastructre assets using an asset management system

2. the government documents that the infrastructure assets are being preserved approximatly at least at a condition level established and disclosed by the government

If the infrastructure assets meed those two, they do not need to be depreciated and may be accounted for using the modified approach

→ all maintenence expenditures made for those assets should be expensed in the period incurred

works of art and historical treasures

purchased works of arts and historical treasures should be recordedat their purchase price at the date of acquisition. Sometimes governments receive donations of works of art and historical treasures. If donated, they should be recorded at fair value whether held as individual items or in a collection

-The capitalization of works of art and historical treasures is encouraged, but is not required for collections that are:

1. held for public exhibition, education, or research in furtherence of public service,rather than financial gain

2. protectd kept unencumbered, cared for, and preserved

3. -subject to an organizational body that requires the proceeds from sales of collection items to be used to acquire other items for collections

-governments might perfer to expense rather than to capitalize works of art and historical treasures in order to avoid reporting the assets. An increase in net position might give citizens the impression that the resources of the government that are avaliable to fund governmental activities have incresaed. And since these works of art or historical treasure will not be converted to cash, that impression would be incorrect

-if the works of art or historical treasures are capitalized, whether as individual works of art and historical treasures or a collection of these items, they should be depreciated over their estimated useful lives, unless the items that are deemed to be ‘inexhaustible.’ In that case, depreciation is not required

Net investment in Capital Assets

-should the municipality incur liab that relate specifically to the acquisition, construction, or improvement of capital assets, those asssets should be reported net of teh related debt in addition to the reduction for accumulated depreciation in the statement of net potition as follows:

As we duscussed above, the net position should be displayed in three componentsL net investment in capital assets, restricted, and unrestricted. THe net investment in capital assets described above is one of three components and now we describe the remaining two components

Restricted and Unrestricted net position

-net position should be reported as restricted when governments are not free to use the asset as they wish. Such restrictions may be imposed by loan covenants, donar restrictions, laws or regulations. Restictions may also be imposed as a result of constitutional provisions or enabling legislation

-the restricted designation informs users of the financial statements that all of the net positon may not be avaliable to meet the ongoing financial needs of the government

-the remainder of the net position is classified as unrestricted. Unrestricted means that the net positon is avaliable to meet the needs of the general operations of the government

Statement of net position

-Cash and investments: cash on hand, demand deposits, and short term investments with original maturities of three months or less from the date of aquisition. Investments are reported at fair value

• real estate, personal property taxes, and tax liens; motor vehicle excise taxes; user charges and clause 41A property taxes; special assignments; departmental; intergovernmental

-Capital assets: include land, vehicles, building and improvements, capital improvements, machinery and equipment, infrastructure, and construction in progress are reported in the applicable governmental or business type activities column of the government wide financial statemnts and the proprietary fund financial statements. Capital assets are recrded at historical cost, or at esimated historical costif actual historical cost is not avaliable. Donated capital assets of the governmental activities column in the government wide fianncail statemetns, construction

-interfund receivables and payables: transactions of a buyer/seller nature between and within governmental funds are eliminated from the governmental activities in the stateemtn of position. Any residual balances outstanding between the governmental activities and business type activities are reported in the statement of net position as internal balances

-intra-entity activitiy and balances: resources flow between a primary government and its discretly presented component units should be reported as if they were external transactions. Amounts payable and recaivable between the primary government and its discretly presented component units or between those components should be reported on a seperate line

-Deferred inflows of resources: deferred inflows of resoruces at the governmental fund financial statement level represent billed receivablesthat do not meet the avaliable criterion in accordance with the current fianncial resources measurement focus and the modified accrual basis of accounting. Deferred inflows of resources are recognized as revenue in the conversion to the government-wide financial statements

-noncurrent liabilities: long-term debt is reported as liabilities in the government-wide and proprietary fund statement of net position. Current and noncurrent liabilities also include the accrual for compensated absences as well as pension and other post employment obligations

-Net position: 3 categories

• net investment in capital assets: consists of capital assets net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortages notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets

• Restricted: consists of resources with constraints placed on the use either by external groups such as creditors, grantors, contributors, or laws or regulations of other governments; or law through constitutional provisions or enabling legislation. Net postion has been resticted for special rev and expendable and nonexpendable permanent funds

• Unrestricted: all other resources that do not meet the definition of restricted or net investment in capital assets

Landfill closure liability

-usually, solid waste is transported to a disposal facility where it is burried. The minicipality incurs labor and equipment costs to manage the facility while its operational. When the site is filled, the minicipality then incurs costs to ‘cap’ the landfill and monitor it for the next 30 years

-the cost of landfill closure and post closure care includes the following items

1. the cost of equipment expected to be installed and facilities expected to be constructed near or after the date that the landfill stops accepting solid waste and during the post closure period.

2. the cost of final cover (capping) expected to be applied near or after the date that the landfill stops accepting solid waste

3. the cost of monitoring and maintaining the expected usable landfill area during the post-closure period

-the liab should be adjusted each year for the effects of inflation or deflation or when changes in the closure or post closure care plan or landfill operating conditions increased or decrease estimated costs

Statement of activities

The statement of activities presents the operations of the reporting government in two parts

1. The net (expense) or revenue of each governmental function (general govt, public saftey, public works, culture, rec) and each business-type activitiy (sanitation, sewer, nursing enterprise funds

2. general revenues (tax receipts, excise taxes, grants, investment income)

-the change in net positon for the year. This change, when added to the beg balance of net positon yeilds the net positon of the current year that is reported in the statement of net position

-report the relative financial burden of each reporting governments functions on its taxpayers. This format identifies the extent to which each function of the government draws from teh general rev of the govt or its self financing through fees and intergovernmental aid.

-At a minimum, the statement of activities should present activities accounted for in governmental funds by function to coincide with the level of detail required in the governental fund statement of revenues, expenditures, and changes in fund balances AND activities accounted for in the enterprise funds by different identifiable activities

-present information accross two pages in protrait format

Revenues in statement of net postion

Broken down into two categories:

Program revenues: derive directly from the program itself or from parties outside the reporting governments taxpayers or citizenry as a whole. They reduce the net cost of the function to be financed from the governments general revenues

• includes charges for services, program specific grants and contributions (operating and capital), earnings on endowments

General revenues: all revenues are general revenues unless they are required to be reported as program revenues. All taxes, even those that are levied for a specific purpose, are general revenues and should be reported by type of tax. All other nontax revenues that do not meet the criteria to be reported as program revenues should also be reported as general revenues. General revenues should be reported after total net expense of the governments functions

Required reconciliation to government wide statements

-governments are required to present a summary reconciliation from the governmental fund financial statements to the governmental activities column on the govenrment wide financial statements at the bottom of the fund financial statements or in an accompanying schedule

-reflects the difference between the current financial resources measurement focus and the modified accrual basis of accounting used in governemntal fund accounting and the economic resources measurementfocus and the accrual bassis of accounting used in the preparation of the governement wide financial statements

-the statment of net position and the statemtn of activities in the govt wide financial statemnt reflect the recognition of long term assets and long term liab and the recognition of reveneues that is deferred in fund financial statemetns