Enterprise Funds

Enterprise funds are used to account for operations that fall within two basic categories:

1. Activities that are financed and operated in a manner similar to private business enterprises, where the intent of the governing body is to finance or recover costs of providing goods or services to the general public on a continuing basis primarily through user charges
2. Operations where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes Enterprise funds are primarily used to account for activities that are financed through user charges. However, the total cost of the activity does not have to be paid for by the user charges. The government (or other governmental entity) may subsidize a significant portion of the costs of the enterprise fund. Typical activities accounted for in enterprise funds include those that are similar to utilities, such as water and sewer funds and electric utility funds. Parking lots operated by governments are another example of proprietary activities accounted for in a proprietary fund.

Taken From : Governmental Accounting Made Easy

• Direct obligations of the US government (including state and local government securities, which are a type of investment that the US Treasury issues specifically to provide state and local governments with required cash flows at yields that do not exceed the Internal Revenue Service’s arbitrage limits)
• Obligations guaranteed by the US government
• Securities backed by US government obligations as collateral and for which interest and principal payments generally flow immediately through to the security holder

For advance refunding transactions that result in defeasance of debt reported in the government-wide statement of net assets, the proceeds from the new debt should be reported as “other financing source—proceeds from refunding bonds” in the fund receiving the proceeds, which this discussion is assuming is the debt service fund. Payments to the escrow from resources provided by the new debt should be reported as “other financing use—payment to the refunded bond escrow agent.” Payments to the escrow agent made from other resources of the government should be reported as debt service expenditures.

Permanent Funds

One additional type of governmental fund that was redefined by GASBS 34 is the permanent fund. Permanent funds are used to report resources that are legally restricted to the extent that only the earnings, and not the principal, may be used for purposes that support the government’s programs, meaning programs that are for the benefit of the government or its citizens. Permanent funds operate in a manner similar to endowments, where the investment earnings, and not the principal, can be spent. Note that the earnings of a permanent fund are used to support the government’s activities. This is in contrast to a type of fiduciary
fund, discussed later in this chapter, called the private-purpose trust fund, in which the principal may be spent, but not for activities or programs normally carried on by the government. An example of a permanent fund is a cemetery perpetual-care fund, which provides resources for the ongoing maintenance of a public
cemetery.

Taken From : Governmental Accounting Made Easy

Whether and When Tax Revenues Should Be Recorded Directly in a Debt Service Fund

This is a fairly narrow issue of situations where a specific revenue source, such as property taxes or sales taxes, is restricted for debt service on general long-term debt. Assuming that the government has established a debt service fund, the accounting question is whether these restricted tax revenues should be recorded directly as revenue of the debt service fund or whether they should be recorded as revenue of the general fund and then recorded as a transfer to the debt service fund.

When taxes are specifically restricted for debt service, they may be reported directly as revenue in the debt service fund, rather than in the general fund with a subsequent transfer to the debt service fund. However, circumstances such as a legal requirement to account for all revenues, including restricted taxes, in the general fund may sometimes require that restricted taxes be first reported in the general fund. In this case, an operating transfer from the general fund to the debt service fund would be recorded for the amount of the specific tax. The accounting may be influenced by the manner in which these revenues are budgeted. For example, the restricted tax revenue and the transfer to the debt service fund may both be part of the budget of the general fund, in which case it may make more sense to have the accounting follow that track than to record the revenue directly in the debt service fund. This will also be true for taxes that are partially restricted for debt service. For example, a property tax may be used to fund current debt service requirements, with any excess property tax revenue over the amount needed for debt service to be used for general operations or other functions of the government. Accounting for the entire property tax in the general fund, with a transfer of the required debt service amount to the debt service fund makes more sense than splitting the tax revenues into two funds. It will also facilitate a financial statement reader’s being able to determine how much property tax revenue was recognized during the year without having to add up amounts from two different funds.

Taken From : Governmental Accounting Made Easy

• If the government is obligated in some manner to assume the payment of the debt related to the special assessment in the event of default by the property owners, all transactions related to the capital improvements related to the special assessment are accounted for in the same manner as any other capital improvement and financing of the government. Transactions of the construction phase of the project should be reported in the capital projects fund (assuming one is being used), meaning the proceeds from the bonds would be recorded as an “other financing source” and spending on the project would be recorded as expenditures. However, one other set of accounting entries is required. At the time of the levy of the special assessment, a receivable for special assessments should be recorded in the capital projects fund. Because this receivable is not a current financial resource, a deferred revenue amount should also be recorded. As the payments are collected from the property owners, the receivable amount is reduced. As the receivable is reduced, the deferred revenue account is also reduced with a corresponding amount of revenue being recognized.
• If the government is not obligated in any manner for the debt related to a special assessment, the construction phase is treated like other capital projects, meaning that expenditures are recognized in the capital projects fund. The source of the funds in the capital projects fund, however, should be identified by a description other than “bond proceeds,” for example, “contributions from property owners.” Although in both cases the capital projects fund receives the proceeds from debt, in the case where the government is not obligated in any manner for the debt, the accounting reflects the fact that conceptually the property owners are receiving the debt proceeds and then turning them over to the government. The government records the receipt of these funds in the capital projects fund as a contribution from the property owners. In addition, the government will not use a debt service fund (discussed in the next section) to record the collection of special assessments and their payment to bondholders, because the debt is not a debt of the government.

Taken From : Governmental Accounting Made Easy

The capital projects fund typically accounts for capital projects financed with the proceeds of special assessment debt. More often than not, special assessment projects are capital in nature and are designed to enhance the utility, accessibility, or aesthetic value of the affected properties. The projects may also provide
improvements or additions to a government’s capital assets, including infrastructure. Some of the more common types of capital special assessments include streets, sidewalks, parking facilities, and curbs and gutters. For example, the government will build sidewalks in a neighborhood that previously had no sidewalks.

The costs of a capital improvement special assessment project are usually greater than the amount the affected property owners can or are willing to pay in one year. To finance the project, the affected property owners effectively mortgage their property by allowing the government to attach a lien on their property so that the property owners can pay their pro rata share of the improvement costs in installments. To actually obtain funds for the project, the government usually issues long-term debt. Ordinarily, the assessed property owners pay the assessments in installments, which are timed to be due based on the principal and interest payments that must be made for the debt. The assessed property owners may also elect to pay for the assessment immediately, or at any time thereafter, but prior to the installment due dates. When the assessed property owners satisfy their obligations, the government removes the liens from the respective properties.

Taken From : Governmental Accounting Made Easy

The question as to the accounting for demand bonds centers around whether a demand bond that matures in ten years but may be redeemed by the bondholder at any time with thirty days’ notice is a long-term liability or a short-term liability. The accounting for demand bonds was established by GASB Interpretation
No. 1, “Demand Bonds Issued by State and Local Governments” (GASBI 1). It addresses the accounting for demand bonds that have demand provisions that are exercisable at the balance sheet date or within one year from the date of the balance sheet. Interpretation No. 1 requires that these bonds be reported as a liability of the fund (usually the capital projects fund) unless all of the following conditions are met:

• The government bond issuer has entered into a financing (takeout) agreement to convert the bonds into some other form of long-term obligation. (Also, this takeout agreement must be with an unrelated third party.)
• The takeout agreement does not expire within one year from the date of the government’s balance sheet.
• The takeout agreement is not cancelable by the lender or the prospective lender during that year, and obligations incurred under the takeout agreement are not callable during the year.
• The other party to the takeout agreement is expected to be financially capable of honoring the takeout agreement.

So what does all this mean in English? If a government has a fairly ironclad ability to avoid paying demand bonds out of current financial resources by using a takeout agreement, the liability does not have to be recorded in the governmental fund and would appear only on the government-wide statement of net assets
since it would be considered a long-term liability. However, if there is no takeout agreement, or if the takeout agreement has some loopholes, the assumption is that current financial resources may have to be used to pay the demand bonds, and the liability for the demand bonds would be recorded as a liability on the balance sheet of the governmental fund as well as on the government-wide statement of net assets.

Taken From : Governmental Accounting Made Easy