Archive for February, 2009

The number of separate funds that a government establishes is based on both legal requirements and management’s judgment as to how many funds it needs to enable sound administration of the financial affairs of the government. In other words, where statute or law requires the establishment of particular funds, certainly the government is going to establish those funds. Similarly, contracts, such as debt indentures, may also require the establishment of certain funds and certainly the government will establish the funds required by contract. Beyond these legal and contractual requirements, the government’s (more…)

A fund is a separate accounting and financial reporting entity. It is what is called a “self-balancing” set of accounts. This means that a fund’s assets will equal the total of its liabilities and its fund balance (or net assets), similar to the way financial statements for a legal entity work, although funds are usually not separate legal entities. Fund accounting for governments was developed in response to the need for governments to be fully accountable for their collection and use of public resources. The use of funds is an (more…)

The discussion of the governmental funds also considers how the accounting for various types of transactions differs using the modified accrual basis of accounting for the fund financial statements versus using the accrual basis of accounting for the government-wide financial statements. Be forewarned that some of the accounting for governmental funds in the fund financial statements will be different from accounting for the same transaction in the government-wide financial statements. The GASB used to call (more…)

If you have read the first two chapters of this book, you may be asking yourself why more time has not been spent on fund accounting. Under the new financial reporting model for governments brought about by GASBS 34, fund accounting, or more correctly fund financial statements, are not the primary reporting tool for governments. Rather, fund financial statements are one of the two methods used by GASBS 34 to present a government’s financial position and results of operations. The first method is the government-wide financial statements. These use the accrual basis of accounting and use the accounting concepts as the (more…)

One final note in discussing net assets is that these categories may have negative amounts on the financial statements. While it should be rare that restricted net assets would be negative, the invested in capital assets net of related debt, and as well as unrestricted net assets can be negative. For example, if a government depreciates capital assets faster than it pays off the related debt, the invested in capital assets net of related debt may be negative. Unrestricted net assets may be negative as a result of accumulated (more…)

A common example of restricted assets for governments is that of debt service reserve funds. Many times in a debt issuance, the government agrees to put a certain amount (sometimes equal to one year’s debt service) in a special account that it cannot use for any purpose other than paying debt service if it happens to default on the debt, which means this money basically cannot be touched. Displaying these types of assets subject to these types of restrictions as “restricted” net assets alerts the financial statement reader that these net assets cannot be freely used by the government. (more…)

Net assets are easy to understand in that they represent the difference between a government’s total assets and its total liabilities. Looking at it a different way, if you add a government’s net assets to its liabilities, the amount will equal the government’s total assets. What makes the concept of net assets a little more difficult to understand for a government’s financial statements is that GASBS 34 requires that net assets be divided into three categories, assuming that they all apply to a particular government. (more…)

The liabilities discussed in the preceding pages are relatively easy to understand. However, liability for deferred income requires a little more conceptual thinking to understand. The idea of recording deferred income is matching the recording of income with the period in which the revenue is earned, which in some cases also matches the revenue to the costs incurred to generate that revenue. When cash is received by a government prior to its either having earned the income or the right to keep the income, it records the cash along with a liability-type account called deferred income. (more…)

All types of debt incurred by governments will give rise to interest expense. Interest expense follows similar concepts for accruing other types of expenses. (The fund accounting discussion in Chapter 3 will point to some important differences as to how principal and interest are accounted for in governmental funds.) Interest expense is recognized as an expense when it is earned by the holder of the government’s debt, regardless of when the interest is actually paid, as explained in this example. (more…)

In addition to the accounts payable and accrued expense liabilities described above, governments almost always have a liability for some form of debt that they have issued. Debt is known by several different names, usually based on how long the debt has before it becomes due, or matures. For example, a short-term loan is generally evidenced by some type of legal instrument, commonly referred to as a note. These types of loans are usually recorded in the financial statements as notes payable, and generally mature in five years or less. There are a wide variety of transactions that may give rise to notes payable, some of which are very common. (more…)