Government-Wide Statements; Fixed Assets; Long-Term Debt

Chapter 8 Government-Wide Statements; Fixed Assets; Long-term Debt

Government-wide financial statements - the purpose of this chapter is to show how to make adjustments to convert from fund accounting to full accrual accounting in the government-wide financial statements. In addition, the accounting for fixed assets and long-term debt not accounted for in the funds statements will be discussed.

A. Conversion from fund account to government-wide financial statements

There are several steps to this conversion. First, adjustments must be made to the governmental funds to convert them to a capital maintenance, full accrual accounting basis, including adjustments to record capital assets and long-term debt. Second, governmental and proprietary fund statements must be consolidated and brought into two categories, i.e., governmental activities and business-type activities. Internal service activities will be included with governmental activities, as indicated by GASB. Third, fiduciary funds are not included in government- wide financial statements. Finally, component units financial statements not included in fund accounting must be added.

 Recording capital assets, removing expenditures for capital outlays, and recording depreciation

Three adjustments are required. These are only memorandum entries on the fund accounts for conversion purposes, and are not posted to the general ledgers of the funds. First, capital assets and their related accumulated depreciation must be recorded on the books. Normally this is done by examining the memorandum fixed asset records of the governmental funds.

Next, expenditures for capital assets must be eliminated.

1 And third, depreciation expense would be recorded.

Land 1,000,000 Building 3,000,000 Equipment 7,000,000 Accum. Depr-Building 1,500,000 Accum. Depr.-Equipment 4,000,000 Net Position 5,500,000 (To record assets and accum depr as of the beginning of the year in the governmental funds.)

Equipment 500,000 Expenditures - Capital Assets 500,000 (To convert capital expenditures during the year to capital assets.)

Depreciation Expense 900,000 Accum. Depr-Building 100,000 Accum. Dept-Equipment 800,000 (To record depreciation for year.)

 Change “proceeds of bonds issuance” to debt liabilities, changing expenditures for debt service principal to reduction of liabilities, and adjusting for interest accruals

First, bond issuance must be converted from a revenue to a liability.

Other Fin. Sources-Bond Issuance 1,000,000 Other Fin. Source-Premium 12,000 Bonds Payable 1,000,000 Premium on Bond Payable 12,000 (To convert bond issuance to a liability.)

Second, the payment of principal on the bond payable should reduce the bond payable liability outstanding.

2 Bond Payable 85,000 Expenditures-Bond Principal 85,000 (To adjust bond principal for payment on it.)

Third, full accrual accounting requires the conversion to expense of expenditures for interest made during the year and amortization of the bond premium recorded above.

Interest Expense 86,000 Expenditures-Interest 86,000 (To record conversion to interest expense at year end.)

Premium on Bond Payable 1,000 Interest Expense 1,000 (To amortize bond premium from above over a 12 year period.)

 Adjusting to convert revenue recognition to the accrual basis

Governmental funds use modified accrual recognition of revenue such that revenue is recognized when it is available and measurable. Government-wide financial statements use full accrual accounting. All revenue sources need to be examined to see if there are adjustments required to convert to the full accrual basis of revenue recognition.

Deferred Revenue-Property Taxes 72,000 Revenue-Property Taxes 72,000 (Property taxes receivable expected to be received more that 60 days after year end are converted to liabilities under the modified accrual method. To convert to full accrual, reverse that journal entry.)

Revenue-Property Taxes 30,000 Net Position-Unrestricted 30,000 (To adjust receivables recognized as revenue at the beginning of the year.

3  Adjusting to record expenses on an accrual basis

Governmental funds use modified accrual recognition of expenditures, which is very similar to that for full accrual accounting, i.e., expenditures are normally recognized when they are incurred, with certain exceptions. Two exceptions are interest on long-term debt is not accrued but only recognized in the year that it is payable, and expenditures for compensated absences are not recorded in excess of the amount to be liquidated with available resources.

Interest expense 50,000 Interest payable 50,000 (To accrue interest payable on long-term debt at year end.)

 Changing proceeds on sale of land to gain on sale of land

Sales of land and other capital assets require adjustments to convert them to a full accrual basis. Since governmental funds don’t carry long-term assets, the full amount of the proceeds are recognized as revenue, whereas under full accrual accounting the carrying cost of the capital asset would have to be removed and only the difference is recognized as a gain or loss on the sale.

Special Item--Sale of Land 400,000 Land 170,000 Gain on sale of land 230,000 (To adjust for carrying cost of land sold.)

 Adding internal service funds to governmental activities

Internal service funds are classified as a proprietary fund and so are not included in governmental fund statements for fund accounting purposes. However, since they primarily serve other governmental departments, GASB has decided that they should be included with governmental activities in the preparation of government-wide financial statements.

4 Three steps are used for the conversion. First, the balance sheet accounts for the internal service funds are brought into the governmental fund category.

Second, the Statement of Activities would be examined for any transaction the Internal Service funds had with external entities to the government, which would be added to the governmental activities.

And third, all transactions with other governmental funds would be eliminated.

Cash 10,000 Investments 90,000 Due from other funds 8,000 Inventory of Supplies 12,000 Land 34,000 Building 85,000 Equipment 72,000 Accum. Depr-Bldg. 29,000 Accum. Dept-Equipment 35,000 Accounts Payable 55,000 Advances from Water Utility Fund 22,000

Net Position 170,000 (To bring balance sheet of Internal Service Fund into that of the governmental fund category.)

Net Position 15,000 Investment income 15,000 (To record any transactions of Internal Service fund with parties external to the government.)

Net Position 32,000 Expenditures-General Government 32,000 (To eliminate all transactions of the Internal Service fund with other governmental funds.)

5 Net Position 123,000 Transfers In 123,000 (To recognize the capital contribution of the General Fund in establishing the Internal Service fund—which is to be eliminated next!)

 Eliminating interfund activities and balances within governmental Activities

Need to eliminate all interfund activities and loans to and from the various governmental funds. Have to go through the various funds and identify them so that they can be eliminated. You would not eliminate those owed to outside entities.

Transfers In 300,000 Transfers Out 300,000 (To eliminate transfers between the various funds.)

Due to other funds 8,000 Advances to other funds 10,000 Due from other funds 8,000 Advances from other funds 10,000 (To eliminate short and long-term receivables and payables between the various funds.)

 Eliminating Fiduciary Funds

Fiduciary funds are not incorporated into the government- wide financial statements, since they deal with trusts and agency funds for individuals, organizations and other governments outside the reporting government. No adjustments are necessary.

6  Worksheet to illustrate the adjustments

Ill. 8-5 shows a worksheet to reflect the adjustments made to convert the governmental funds to the government-wide financial statements.

B. Government-wide Financial Statements

 Two government-wide financial statements are required: Statement of Net Position and the Statement of Activities. The Statement of Net Position for the Village of Elizabeth is shown in Ill. 8-6.

Notice that the Statement of Net Position is broken up into two categories, i.e., governmental activities and business- type activities. Assets, liabilities, and net position are shown for these categories. The three categories of net position are: Invested in capital assets net of related debt, restricted, and unrestricted.

 The Statement of Activities is shown in Ill. 8-7.

Governmental and business-type activities are broken up by either function, e.g., public safety, or program, e.g., water utility. Related expenses and revenues are indicated, and the net of the two are shown in either the governmental or business-type activities column. Next, general revenues are listed in a section below, and added to either the governmental or business-type activities columns. The result is shown in Change in Net Position, which is added to Net Position-Beginning to get Net Position-Ending.

 Required reconciliation to government-wide statements

7 A reconciliation from the funds financial statements to the government-wide financial statements is required by GASB. Since the proprietary funds are already using full accrual accounting, reconciliation schedules are needed for the governmental funds. For example, Ill. 8-8 shows a reconciliation for the Balance Sheet of Governmental Funds to the Statement of Net Position, and Ill. 8-9 shows a reconciliation for the Statement of Revenues, Expenditures, and Changes in Fund Balance of governmental funds to the Statement of Activities.

C. Accounting for Fixed Assets, Including Infrastructure

While governmental funds do not report capital assets, proprietary and fiduciary funds do report and depreciate capital assets. The capital assets of proprietary funds are included and depreciated in the government-wide financial statements. In addition (as shown earlier in this chapter) the capital assets of governmental funds are converted to a full accrual basis of accounting on a memo basis and incorporated and depreciated in the government-wide financial statements. Fiduciary fixed assets are shown in its section of the funds financial statements.

 Capital Assets

The governmental funds are required to keep up with capital assets on a memorandum basis. Though no guidance is provided on how to do so, it is assumed that a General Fixed Asset Account Group will normally be used. Guidance is provided regarding depreciation, and any of several generally accepted depreciation methods may be used. In addition, significant disclosures are required of capital assets. Major classes of capital assets, e.g., land, building, equipment, are to be shown, separated between those used for governmental and business-type activities. In addition the beginning balance, acquisitions, sale and disposal, ending balance, and current depreciation must be shown. Disclosure should include charges to the various functions on the Statement of Activities, and summary information is to be discussed in the Management’s D & A.

8  Collections

While governments are encouraged to capitalize collections of art, they are not required to do so. Donated collections may also be charged to an expense account and an equal amount to a revenue account under certain conditions. Collections must be held for public exhibition, cared for and preserved, and proceeds from sales used to acquire other items for the collection.

 Infrastructure

Infrastructure assets of a city are long-lived capital assets such as roads, bridges, tunnels, water and sewer systems, dams, and lighting systems. Under GASB No. 34, a government’s infrastucture assets must be capitalized and depreciated. Since most governments did not account for infrastructure in the past, the GASB requires that governments account for it prospectively, i.e., on or after adoption of GASB 34. Retroactive adjustment is also required according to a phase in schedule starting in June 2005.

Governments are now required to capitalize infrastucture assets, however, they do not have to be depreciate if certain conditions are met. This method is called the modified approach. The requirements are: 1) an asset management structure system must be set up to keep an inventory record of those assets, assess their condition each three years, and estimate the amount needed to maintain the condition of the assets, and 2) documentation is required that the condition of the assets has been preserved at (or above) the established level. When this method is used, expenditures to extend the life of the assets are expensed, whereas these expenditures would be capitalized and written off over the extended life of the asset if infrastructure assets had been capitalized and were being depreciated.

9 D. Accounting for Long-Term Debt

While governmental funds do not report long-term debt, proprietary and fiduciary funds do report and account for long-term debt. The long-term debt of proprietary funds are included and accounted for in the government-wide financial statements. In addition (as shown earlier in this chapter) the long-term debt of governmental funds is converted to a full accrual basis of accounting on a memo basis and incorporated and accounted for in the government-wide financial statements. Fiduciary funds are included in the funds statements at the back of the CAFR.

 The long-term liabilities of the government are generally referred to as “general long-term debt” or “general obligation debt.” They include all long-term liabilities to be paid out of general governmental resources.

 Examples of general long-term debt are: principal of unmatured bonds, the non-current portion of capital lease obligations, and the net pension obligation.

 Governmental funds are to keep up with long-term debt on a memorandum basis, e.g., using the General Long-term Debt Account Group method.

 A number of debt disclosures are required for general long-term debt of a government, e.g., the class of debt, the beginning balance, increases or decreases, and ending balances. Among the schedules prepared are the Schedule of Changes in Long-term Debt, Schedule of Debt Service Requirements, and the Schedule of Legal Debt Margin, and the Schedule of Direct and Overlapping Debt.