Public
Public
CHAPTER ONE
INTRODUCTION TO ACCOUNTING & FINANCIAL REPORTING FOR GOVERNMENTAL
AND NOT-FOR-PROFIT ENTITIES
INTRODUCTION
Welcome to the strange new world of accounting for governmental and not-for-profit organizations!
Initially, you may find it challenging to understand the many new terms and concepts you will need to
learn. Moreover, if you are like most readers, you will question at the outset why governmental and
not-for-profit organizations find it necessary to use accounting practices that are very different from
those used by for-profit entities.
What Are Governmental and Not-for-Profit Organizations?
First it is necessary to know that Organizations are generally classified as
1) For profit (commercial, or business) organizations, and
2) Non profit (Not-for-Profit) organizations.
Generally speaking NFP entities are
Organizations, which basically arise to provide goods, and services, which are not commercially
feasible or illogical to be provided by profit seeking organizations..
an entity whose principal objective is not the generation of profit
Organizations exist because the community or society considers it necessary to provide certain
goods or services to its group as a whole.
Non-Profit-Organization Is Also Classified as:-
1. Government organizations which include
Federal Offices, Regional Offices, Municipalities, and other governmental
organizations
Educational: Schools, Colleges and Universities
Health and Welfare: hospitals, child protection agencies, clinics etc
Religious: Associations and other religion related organizations
2. Nongovernmental organizations (NGOs) which include religious organization, voluntary health
and welfare organizations, charitable organizations, etc.
Distinguishing Characteristics of Governmental and Not-for-Profit Entities
In its Statement of Financial Accounting Concepts No. 4, the Financial Accounting Standards Board
(FASB) noted the following characteristics that it felt distinguished governmental and not-for-
profit entities from business organizations.
a) Receipts of significant amounts of resources from resource providers who do not expect to
receive either repayment or economic benefits proportionate to the resources provided. Those
contributing financial resources to the organizations do not necessarily receive a direct or
proportionate share of those organizations services or goods:
b) Operating purposes that are other than to provide goods or services at a profit or profit equivalent.
c) Absence of defined ownership interests that can be sold, transferred, or redeemed, or that convey
entitlement to a share of a residual distribution of resources in the event of liquidation of
the organization.
d) General Absence of profit Motive
How Do Governmental Entities Differ From Not-For-Profit Organizations?
Power ultimately rests in the hands of the people
People delegate power to public officials through the election process
the GASB sets standards for state and local governments, including governmental
not-for-profit organizations; and the Federal Accounting Standards Advisory Board
(FASAB) sets standards for the federal government and its agencies and departments.
Thu, GASB has the responsibility for establishing accounting and financial reporting
standards for not-for-profit organizations that are considered to be governmental in
character.
GASB Concepts Statement No. 1, Objectives of Financial Reporting, states that accountability.
“Accountability is the cornerstone of all financial reporting in government. Accountability requires
governments to answer to the citizenryto justify the raising of public resources and the purposes for
which they are used. The board elaborated: Governmental accountability is based on the belief that the
citizenry has a right to know, a right to receive openly declared facts that may lead to public debate by
the citizens and their elected representatives. Comparison of Financial Reporting ObjectivesState and
Local Governments, Federal Government, and Not-for-Profit Organizations
Objectives of Financial Reporting For State and Local Governments
Financial reporting is used in making economic, social, and political decisions and in assessing
accountability primarily by:
Comparing actual financial results with the legally adopted budget.
Assessing financial condition and results of operations.
Assisting in determining compliance with finance-related laws, rules, and regulations.
Assisting in evaluating efficiency and effectiveness.
Objectives of Financial Reporting For Federal Government
Accountability is also the foundation of Federal Government financial reporting. In addition to
accountability, Federal Accounting Standards Advisory Board (FASAB) identifies the following
financial reporting objectives for Federal Government and its agencies:
To assist users in evaluating budgetary integrity
To assist users in evaluating Operating Performance
To assist users in evaluating Stewardship
To assist users in evaluating adequacy of systems and control
Objectives of Financial Reporting for NFP Entities
Financial reporting should provide information useful in:
Making resource allocation decisions.
Assessing services and ability to provide services.
Assessing management stewardship and performance.
Assessing economic resources, obligations, net resources, and changes in them.
Comprehensive Annual Financial Report (CAFR)
General purpose financial reporting includes not financial statements but also all other means of
communicating information that relate directly or indirectly to the information provided by the
accounting system. In addition to the minimum financial information, GASB Standards state: Every
governmental entity should publish, as a matter of public record, a comprehensive annual financial report
(CAFR). A CAFR includes
CAFR: Introductory Section
Introductory section includes such items as
Title page
Contents page
Letter of transmittal a letter from the chief finance officer addressed to the chief executive and
governing body of the governmental unit or it may be a narrative over the signature of the chief
executive. The letter or narrative material should cite legal and policy requirements for the report
Other (as desired by management)
being developed in 1 and 2 p h a s e s . Phase 1 has now been completed. It comprises Chapters 14
of the Conceptual Framework. These Chapters deal with:
Chapter 1: Role and Authority of the Conceptual Framework
Chapter 2: Objectives and Users of General Purpose Financial Reporting
Chapter 3: Qualitative Characteristics
Chapter 4: Reporting Entity
The other Phases of the Framework being developed deal with:
Phase 2―The definition and recognition of the elements of financial statements
Phase 3―The measurement of the elements that are recognized in the financial statements
Phase 4―The presentation of information in general purpose financial reports
Chapter 1: Role and Authority of the Conceptual Framework
To establishes the concepts that underpin general purpose financial reporting (financial
reporting) by public sector entities that adopt the accrual basis of accounting. The
International Public Sector Accounting Standards Board (IPSASB) will apply these concepts in
developing International Public Sector Accounting Standards (IPSASs) and Recommended
Practice Guidelines (RPGs) applicable to the preparation and presentation of general purpose
financial reports (GPFRs) of public sector entities.
Identifies the concepts that the IPSASB will apply in developing IPSASs and RPGs intended to
assist preparers and others in dealing with financial reporting issues. IPSASs specify
authoritative
Does not establish authoritative requirements for financial reporting by public sector entities that
adopt IPSASs, nor does it override the requirements of IPSASs or RPGs.
To provide guidance in dealing with financial reporting issues not dealt with by IPSASs or
RPGs.
Chapter 2: Objectives and Users of General Purpose Financial Reporting
Chapter 3: Qualitative Characteristics
The qualitative characteristics of information included in GPFRs of public sector entities are
relevance, faithful representation, understand ability, timeliness, comparability, and verifiability.
RELEVANCE
Relevance is the capacity of accounting information to make a difference to the external decision makers
who use financial reports. If certain information is disregarded because it is perceived to have no bearing
on a decision, it is irrelevant to that decision. Financial and non-financial information is capable of
making a difference when it has confirmatory value, predictive value, or both. Thus, Relevance can be
evaluated according to three qualitative criteria,
a) Timeliness means available to decision makers before it loses its capacity to influence their
decisions. Accounting information should be timely if it is to influence decisions, like the news
of the world, state financial information has less impact than fresh information.
b) Predictive value Accounting information should be helpful to external decision makers by
increasing their ability to make predictions about the outcome of future events. Decision makers
working from accounting information that has little or no predictive value are merely speculating.
For example, information about the current level and structure of asset holdings help users to
assess the entitys ability to exploit opportunities and react to adverse situations
c) Feedback value (confirmatory value): Accounting information should be helpful to external
decision makers who are confirming past predictions or making updates, or corrections to
predictions.
d) Materiality: Information is material if omitting it or misstating it could influence decisions that
users make on the basis of the reported financial information
RELIABILITY
Reliability means that users can depend on accounting information to represent the underlying economic
conditions or events that it purports to represent. Reliability of information is a necessity for individuals
who have neither the time nor the expertise to evaluate the factual content of financial statements. It is
especially important to the independent audit process. Like relevance, reliability must meet three
qualitative criteria.
a) Representational faithfulness Accounting information should represent what it purports to
represent and should ensure that the selected method of measurement has been used without error
or bias. This attribute is some times called Validity: - Information must give a faithful picture of
the facts and circumstances involved. Accounting information must report the economic
substance of transactions, not just their form and surface appearance.
b) Verifiability:- Verifiability pertains to maintenance of audit trials to information source
documents that can be checked for accuracy. It also pertains to the existence of alternative
information sources as backing. Verification implies a consensus and implies that independent
measures using the same measurement methods would reach substantially the same conclusions.
c) Neutrality: - Accounting information must be free from bias regarding a particular view point,
predetermined result, or particular party. Accounting information cannot be selected to favor one
set of interested parties over another. Neutrality in financial reporting is the absence of bias. It
should be factual and truthful.
Completeness
The information in the financial statements must be complete, to the extent that an omission can
cause the information to be false or misleading.
Comparability: - Information that has been measured and reported in a similar manner for different
enterprise in a given year, or for the same enterprise in different years, is considered comparable.
Comparability is not a quality of an individual item of information, but rather a quality of the
relationship between two or more items of information.
For information to be comparable, it must be:
Measured and reported in a similar manner for different enterprises.
Useful in the allocation of resources to the areas of greatest benefit.
Useful to users in identifying real differences between enterprises
Understandability
Understandability is the quality of information that enables users to comprehend its meaning.
Understandability is enhanced when information is classified, characterized, and presented clearly and
concisely. Comparability also can enhance understandability.
Chapter 4: Reporting Entity
A public sector reporting entity is a government or other public sector organization, program or
identifiable area of activity (hereafter referred to as an entity or public sector entity) that
prepares GPFRs.
Phase 2 Elements of financial statements
Asset Income:
Liability Expenses:
Equity
Phase 3 Recognition
The conceptual framework distinguishes recognition criteria from those included in the definition of the
elements. Recognition is the second logical step in accounting. As it takes place after identification of an
element, it enables any related uncertainties to be considered:
An element is recognized when it meets the two following combined criteria:
1. The element satisfies definition
2. It can be reliably measured.
The recognizing event criterion varies according to the type of element.
Recognition of asset
CHAPTER TWO
PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND
LOCAL GOVERNMENTS (SLGS
Introduction
Principles are guidelines that should be followed by professionals in a particular field of study. In the
profession of accountancy there are financial accounting GAAPs such as valuation, matching, continuity,
monitory, revenue realization, and entity principles or concepts that are applied in profit seeking.
They are developed and monitored by Financial Accounting Standard Board (FASB). Similarly, there are
twelve GAAPs that are used by governmental units. Thus, to record, classify, summarize, and report
accounting data properly, governmental entities should follow or implement their GAAPs appropriately.
Activities of government are classified as:-
1. Governmental-type activities such as Core governmental services, together with general
administrative support, comprise the major part of what GASB Concepts Statement .Eg
Protection of life and property, police and fire protection, Public works (streets and highways,
bridges, and public building, etc
2. Business-type activities such as These activities include, among others, public utilities (e.g.,
electric, water, gas, and sewer utilities), transportation systems, toll roads, toll bridges, hospitals,
parking garages and lots, liquor stores, golf courses, and swimming pools
3. Fiduciary activities such as a government may serve as agent for other governments in
administering and collecting taxes. Governments may also serve as trustee for investments
of other governments in the governments investment pool, and for assets being held for
employee pension plans, among other trustee roles.
The twelve GAAPs used by governmental units are developed by Governmental Accounting Standard
Board (GASB) and briefly discussed as follows::
Principle # 1 Accounting & Reporting Capabilities
A government accounting system must make it possible both to:
a) To present fairly & with full disclosure the financial operation of the funds & account groups of the
governmental unit in conformity with generally accepted accounting principles (GAAP)
b) To determine & demonstrate compliance with finance-related legal and contractual provisions.
In some governmental units however under such circumstances where the laws require following
practices not consistent with GAAP, Governmental units may prepare two sets of financial statements..
1. One set in compliance with legal requirements,
2. One set in conformity with GAAP
For, example the government regulation may state that revenue should be recognized either on cash
basis. Whereas GAAPs of governmental unit states that revenue should be recognized either on accrual
or modified accrual basis. But, if there are no difference between legal requirements and GAAP, one set
of financial statement satisfies both requirements. This option is generally true in business organizations.
Example
Two examples follow to illustrate the concept of fund.
First the ministry of education operates several colleges. Although all are part of the MINISTRY as a
whole each one is treated as a fund. Each college will be given money that is specifically for its
operations, is not to be mixed up with other institutions. Therefore each college will keep its own set of
books, and issue its own Financial Reports, irrespective of the performance of other individual
institutions or the ministry as a whole.
Or take the case of Nongovernmental organizations. For instance, a single NGO will likely have several
projects; it may have the following different projects, which are funded by different donors.
1. Construction of a Dam in region 1
2. Water development project in region 2
3. Cattle development project in region 3
Under this case the donor for each project will not necessarily be given the financial statement of the
NGO as a whole. The donor for a cattle development project will want financial statements for only the
project, which he is funding. There for, each project will have its own set of books & produce its own
financial statements. So each project will be a separate distinct fund. The very reason of setting up of
funds accounting in governmental entity is that of legal requirement & good financial management..
Principle #3 Types of Funds
To accomplish different purposes of the government unit, the unit establishes a variety of funds. The
governing bodies or other internal parties may assess the financial performance of each fund in the
fulfillment of the specific purpose for which it was established.
Governmental entities use seven types of funds, which are generally classified in to three major
categories based on the similarity of accounting and reporting methods used.
I. Governmental funds: Includes
Governmental funds account for everything else. This is where the bread-and-butter services can be
foundpolice, fire, social services, sanitation, and so on. There are five types of governmental funds:
1. The General Fund
2. Special Revenue Funds
3. Capital Project Fund-
4. Debt Service Funds
5. Permanent Fund
II. Proprietary Funds: Includes
1. Enterprise Funds
2. Internal Service Funds-
III. Fiduciary Funds
1. Trust And Agency Funds
I. Governmental funds:
The General Fund-
Fund- It is established to account for all financial resources except those required to be
accounted for in another fund. This fund includes transactions for general government services provided
by the executive, legislative, and judicial operations of the government unit. In addition, public services
such as fire and police protection and public cultural and recreation activities are included here.
Special Revenue Funds-
Funds- It is maintained to accounts for the proceeds of specific revenue sources (other
than expendable trusts or for major capital projects) that are legally restricted to expenditure for specific
purposes. It implies that specific sources of financial resources to be used for specified purposes may be
accounted for in special revenue fund. How ever, special revenue fund accounted for resources and
expenditures for operations of such items as public libraries. An example of a special revenue fund
might be The Unity and safety of the motherland tax that was collected during the derg regime.
Another example is the oil price contingency fund which was established by the government specifically
for the purpose of controlling the fluctuation of oil prices in the country.
2. Capital Project Fund-
It is opened and used to account for financial resources to be used for the acquisition or
construction of major capital facilities other than those financed by proprietary & trusts funds.
Capital projects, such as public parks and municipal buildings that provide benefits to everyone are
accounted for by this fund. An example of Capital Projects Funds could be the construction of new
building for the city government Administration. The costs incurred in the construction of the
building are quite different from the operating cost of the city administration and would need to be
accounted for and reported on as an entity in itself
4. Debt Service Funds
-It is opened to account for the accumulation of resources for & the payment of general long term debt
principal & interest. As its name implies, this fund is responsible for servicing the long-term debt of the
governmental unit. Assume that 10,000,000 birr was borrowed at 10 % simple interests and is to be
repaid in full in 10 years, each year 2,000,000 birr would be needed to be put in a debt service fund-
1,000,000 for the payment of the principal plus 1,000,000 for the payment of each year s interest
5. Permanent fund -The fifth type of governmental fund is the permanent fund. A permanent fund is
used to account for permanent endowments created when a donor stipulates that the principal amount of
a contribution must be invested and preserved but earnings on amounts so invested can be used for some
public purpose. Public purposes include activities such as maintenance of a cemetery or aesthetic
enhancements to public buildings. If the earnings from a permanent fund can be used to benefit only
private individuals, organizations, or other governments, rather than supporting a program of the
government and its citizenry, a private-purpose trust funda fiduciary fund is used instead of a
permanent fund.
II. PROPRIETARY FUNDS
Proprietary fund is used in governmental accounting to account for activities that involve business-
like interactions, either within the government or outside of it. These activities are similar to what
would be found in the private sector, so the reporting resembles what would be used by a private
business.
1. Enterprise Funds-
It is established to accounts for operations: A public park could be an example of an Enterprise
Fund. The park would charge a user fee, from which it could pay the expenses (eg. Salaries) of
operating the park
That are financed and operated in a manner similar to private business enterprises-where the
intention of the governing body is that the costs or expenses, including depreciation of providing
goods or services to the general public on a continuing basis be financed or recovered primarily
through user charges; or
Where the governing body has decided that periodic determinations of revenues earned, expenses
incurred and/or net income is appropriate for capital maintenance, public policy, management
control, accountability, or other purposes. Examples include sports stadium, Municipal electric
utilities, and municipal bus companies.
3. Internal Service Funds-
Funds-
This fund is established to account for the financing of goods or services provided by one
department or agency to another department or agency of the governmental unit, or to the other
governmental units on a cost reimbursement basis. A shared garage is a common example of an
Internal Service Fund in government ministry offices. The garage would repair all the ministries`
vehicles regardless of which project, offices or a fund uses them
III. FIDUCIARY FUNDS
Fiduciary funds contain resources held by a government but belonging to individuals or entities
other than the government. A prime example is a trust fund for a public employee pension plan.
This fund is maintained to account for assets held by the government unit for other.
Trust funds may be further classified as
1. Expandable trust funds
2. Non-expendable trust funds
3. Pension trust funds
4. Agency funds
Kinds of Funds Expendable and Non-expendable
Expendable funds used to account resources which have to be expended (entirely used up), usually
within one year. All governmental funds are Expendable Funds; expendable funds are meant to be
expended or their resources are used up entirely usually within one fiscal year. The accounting equation
for an expendable fund is slightly different from an FP. recall the accounting equation for an FP: A - L =
C. The accounting equation for an expendable fund (from the definition of Fund above) is cash plus
other financial resources minus liabilities = fund balance. (C + OR - L = FB). There are no ownership
interests in an NFP. So there is no capital or owners equity. There is only a balance remaining to be used
for specific purpose.
Non-Expendable Funds are used when maintenance of capital is desired, and the unexpended funds are
not meant to be returned. All proprietary funds are non-expendable funds
A clear distinction should be made between general capital assets and capital assets of proprietary and
fiduciary funds. Capital assets of proprietary fundsshould be reported in both the government-wide and
fund statements. Capital assets of fiduciary funds should be reported in only the statement of fiduciary
net assets. All other capital assets of the governmental unit are general capital Assets. They should not be
reported as assets in governmental funds but should be reported in the Governmental Activities column
in the government-wide statement of net assets.
Principle #6 Valuation of Capital Assets
Capital assets should be reported at historical cost. The cost of a capital asset should include capitalized
interest (not applicable to general capital assets) and ancillary charges necessary to place the asset into its
intended location and condition for use. Donated capital assets should be reported at their estimated fair
value at the time of the acquisition plus ancillary charges, if any.
basis. For example, consider that on December 31, 1999, the General Fund of a governmental entity is
required to transfer money to the Capital Projects Fund to help pay for construction of a new office
building . The transfer would be recorded at that time, even if the cash did not actually change hands
until July 31, 2000.
The difference between Expenses and Expenditure must be known properly to understand the
distinction between NFP and FP accounting. In the dictionary these words have almost exactly the same
meaning. However in fund accounting, they have been given specialized meanings.
1. An Expense is a current period consumption of resources.
2. Expenditure is a decrease in the fund financial resources.
For example in a profit making accounting a car would be considered as an asset and depreciation would
be recorded as an expense as the car is used up or wears out. In a governmental fund, the car would
be considered as expenditure at the time of purchase.
Principle# 10 Budget and Budgetary Accounting
i. An annual budget (s) should be adopted by every governmental unit.
ii. The accounting system should provide the basis for appropriate budgetary control.
iii. Budgetary comparison schedules (statements) should be included (as a supplementary
information) in the appropriate financial statements and schedules for governmental
funds for which an annual budget has been adopted . The budgetary comparison
should present: (i) the original budget(s), (ii) the final appropriated budge t(s) for the
reporting period and (iii) the actual in and out flows and the balances
1. Budgeting is the process of allocating of resource to meet unlimited demands. There are three
primary questions to ask when preparing a budget.
Q, How much will we spend?
Q, Why will we spend it?
Q, Where will we get the money?
Principle #11 Budgetary Reporting
a. Budgetary comparison schedules should be presented for the General Fund and each major
special revenue fund that has a legally adopted budget as part of the required supplementary
information (RSI). Governments may elect to present the budgetary comparisons as part of the
basic financial statements.
a. Transfers should be classified separately from revenues and expenditures or expenses in the basic
financial statements.
b. Proceeds of general long-term debt issues should be classified separately from revenues and
expenditures in the governmental fund financial statements.
c. Governmental fund revenues should be classified by fund and source. Expenditures should be
classified by fund, function (or program), organization unit, activity, character, and principal classes of
objects.
d. Proprietary fund revenues should be reported by major sources, and expenses should be classified in
essentially the same manner as those of similar business organizations, functions, or activities.
e. The statement of activities should present governmental activities at least at the level of detail required
in the governmental fund statement of revenues, expenditures, and changes in fund balanceat a
minimum by function. Governments should present business-type activities at least by segment.
Principle #13 Financial Reporting
Interim financial reports
A. Appropriate interim financial statements & reports of financial position, operating results & other
pertinent information should be prepared to facilitate management control of financial operations,
legislative oversight & where necessary or desired for external reporting purpose.
Comprehensive Annual Financial Reports (CAFR)
The five combined statements that comprise the GPFS and that must be included in the financial section
of a CAFR are
1. Combined balance sheet- all fund types and account groups
2. Combined statement of revenues, expenditures and changes in fund balances- all governmental fund
types.
3. Combined statement of revenues, expenditures and change in fund balances- budget and actual-general
and special revenue fund types
4. Combined statement of revenue, expenses, and changes in retained earnings (or equity)- all proprietary
fund types.
5. Combined statement of cash flows- all proprietary fund types and non-expendable trust funds. The
notes to the financial statement are also an integral part of the GPFS.
The government-wide financial statements and the proprietary and fiduciary fund financial
statements report financial information on a full accrual basis. The governmental fund financial
statements, however, report what is commonly referred to as current financial resources on a
modified accrual basis.
The Balance Sheet
The governmental funds balance sheet presents first a government's assets, resources it controls that
enable it to provide services. The "balance" in the balance sheet is between assets on the one hand
and liabilities and fund balances on the other.
FUND BALANCE
Fund balance is the difference between assets and liabilitiesin essence, what would be left over if
the assets were used to satisfy the liabilities. It is, quite literally, the balance of each fund. Fund balance
may be the most widely used information in the entire governmental financial report, but it is also highly
problematic because of inconsistencies in the way governments interpret the relevant standards.
Fund balance is reported in two basic componentsreserved and unreserved. Fund balance may be
reported as reserved because it is related to resources that cannot be spent, like inventory, or because
there is a constraint on how the resources may be spent that limits them to use more specific than the
purpose of the fund.
Unreserved fund balance represents resources that are available to be used for the purposes of the fund
they are reported in. For the general fund, unreserved fund balance is legally available for any purpose
CHAPTER 3
IMPAIRMENT OF NON CASH GENERATING ASSET [IPSAS 21]
Example 1
The Ministry for Finance has a hall used for events organized by governmental departments. No fees are
charged for using such venue. However, occasionally same hall is rented out to third parties for private
events since they specifically request the use of such hall to enjoy its historical surroundings. In such
case, the ministry charges a rental fee at a commercial rate for the use of this hall.
Given that this hall generates a commercial return in the form of rental income is incidental and it is
mainly used for administration purposes, thus IPSAS 21 will apply.
EFFECT OF IMPAIRMENT LOSS
Impairment loss indicates that the company has overstated its earnings by not recognizing
enough depreciation/amortization expense in past. The impairment loss has the following effect on
various financial statements and ratios:
Book value/carrying amount of the asset is reduced on the balance sheet.
Net income is reduced on the income statement.
Since it reduces the book value of the fixed assets, the fixed asset turnover ratio and the debt-to-total
assets ratio will improve.
Basis Impairment Depreciation
Meaning Permanent reduction/decline in value of Distributing the cost of the asset
Asset over its useful life.
Reason Due to customer preference, Natural Due to normal wear and tear or the
disaster, legal, economic or operational use of the asset for day-to-day
reasons operations or obsolescence
Treatment Treated As Loss Treated as Expense
Duration Not recurring in nature Recurring in nature
method Subtract the fair value of an asset from its There are many methods to
book value calculate depreciation, such as
straight-line method, diminishing
balance method.
Types of Asset Tangible, Intangible and natural resource Only Tangible asset
Segment Reporting
IPSAS 18, Segment Reporting, requires the disclosure of certain information about the service
delivery activities of the entity and the resources allocated to support those activities for
accountability and decision-making purposes. Unlike the sectors reported under statistical bases
of financial reporting, segments reported in accordance with IPSAS 18 are not based on a
distinction between market and nonmarket activities.
Statistical Bases of Financial Reporting
The objectives of financial statements prepared in accordance with IPSASs and those
prepared in accordance with statistical bases of financial reporting differ in some respects. The
objectives of financial statements prepared in accordance w i t h I PSAS s are to provide
information useful for decision
Disclosure of information about the GGS is consistent with enhanced transparency of financial
reporting, and will assist users of the financial statements to better understand:
(a) The resources allocated to support the service delivery activities by the GGS, and the
governments financial performance in delivering those services; and
(b) The relationship between the GGS and the corporations sectors, and the impact each has on
overall financial performance.
PRESENTATION OF BUDGET INFORMATION IN FINANCIAL STATEMENTS [IPSAS 24]
IPSAS 24, Presentation of Budget Information in Financial Statements, requires that
financial statements include a comparison of budget and actual amounts on a basis consistent with that
adopted for the budget. Where government budgets are prepared for the GGS rather than the
government as whole, financial information about the GGS disclosed in accordance with this
Standard will be relevant to the comparisons required by that IPSAS.
In presenting financial information about the GGS, entities shall not apply the requirements of IPSAS
6, Consolidated and Separate Financial Statements, in respect of entities in the PFCs and public NFCS
sectors.
The GGS shall recognize its investment in the PFC and public NFCS sectors as an asset, and shall
account for that asset at the carrying amount of the net assets of its investees.
Disclosures
Disclosures made in respect of the GGS shall include at least the following:
(a) Assets by major class, showing separately the investment in other sectors;
(b) Liabilities by major class;
(c) Net assets/equity;
(d) Total revaluation increments and decrements and other items of revenue and expense
recognized directly in net assets/equity;
(e) Revenue by major class;
(f) Expenses by major class;
(g) Surplus or deficit;
(h) Cash flows from operating activities by major class;
(i) Cash flows from investing activities; and
(j) Cash flows from financing activities.
CHAPTER 4
BUDGETING AND PERFORMANCE REPORTING
Budgeting is a process of looking at a business estimated incomes (the money that comes into the
business from selling products and services) and expenditures (the money that goes out form paying
expenses and bills) over a specific period in the future. It allows a business to see if they will be able to
continue operating at their expected level with these projected incomes and expenditures.
Budgeting is the process of allocating scarce resources to unlimited demands. More specifically, it can be
defined as a plan of financial operation embodying an estimate of proposed expenditures for a given time
and the proposed means of financing them. Budget is a statement that shows the financial plan for
2. Governmental goods/services (education, health, police etc) are often among the most critical to the
public interest
3. The immense scope and diversity of modern government activities make comprehensive, thoughtful
and systematic planning a pre-requisite to orderly decision making
4. Government planning and decision making is generally a joint process involving its citizens
Classifications of budgets
States and local governments typically prepare and utilize several types of financial plans. It is therefore
important to distinguish among the various types of budgets, to understand the phases through which
each may pass and to be familiar with commonly used budgetary terminology. There are five
classifications of budgets and two types within each classification.
Capital or Current
Sound governmental fiscal management requires continual planning for several periods in to the future.
Most governments are involved in programs to provide certain goods and services continuously and/or
for acquisition of capital items. Multi-year schedule for acquisition of capital items is called capital
program. At the beginning of each year the balance that fall in the current period will be included in the
capital budget.
Capital budgets deal with the acquisition of fixed assets. The legislature will likely approve the
acquisitions one year at a time. But planning for the acquisitions several years in advance (called the
Capital Program) is very helpful to wise management of resources.
Typically used for acquisitions requiring several years Typically contains portion for current year and for
future years
Current budgets are concerned with the current years operating expenditures, sometimes called
recurring expenditures, because similar sorts of expenditures are needed year after year. Contains
proposed expenditures for current operations, debt service, & estimates of expendable resources to be
available during the year
Tentative or enacted
One key distinction among budgets is their legal status. Various documents may be called budgets prior
to approval by the legislative body. As the name implies, the tentative budget is still in process. It has not
yet been officially approved. An enacted budget has been officially approved and is a binding legal
document.
General or Special
The names of this classification are not quite as they sound. Budgets of governmental activities
commonly financed through the General, Special Revenue, and Debit Service Funds are referred as
General budges.
General budget is typically used for general governmental activities financed through General Fund,
Special Revenue Funds, & Debt Service Funds
A budget prepared for any other fund is Special. Special budgets are commonly limited to Capital project
funds, though Enterprise and Internal service funds do sometimes formally budgeted.
Special Budget is a budget enacted for any other type of activity
Fixed or Flexible
Fixed budgets are for a fixed total dollar (or Birr) amount and cannot be exceeded. The allocated amount
should not be exceeded. A flexible budget, on the other hand, fixes the cost per unit of goods and
services. If more units of goods and services are desired because of a change in circumstance or need, the
dollar amount of a flexible budget can increase.
Approaches to Budgeting
There are different types of budgetary approaches which differ to each other in their emphasis on planning,
control and evaluation. These approaches fall in to two categories: Modern and Traditional Approaches
ZBB is one method of continually evaluating programs and services. The primary idea of ZBB is that
each program must justify its existence every year. No program is assumed to be continuing from one
year to the next. In this approach, the starting point for the budget each year is zero. First the program
itself must be justified, then different ways of carrying out the program are examined and the best is
chosen.
The basic tenet of zero-based budgeting (ZBB) is that program activities and services must be justified
annually during the budget development process. The budget is prepared by dividing all of a
government's operations into decision units at relatively low levels of the organization.
TRADITIONAL APPROACH TO BUDGETING
For the reasons stated above, the modern approaches have not been adopted as widely as might be
expected. The traditional approach, called object-of-expenditure (OOE) is still the most widely used. The
objective of the OOE budget has an expenditure control orientation. It is to simply list expected
expenditures, and then say how much is required for each one. This approach involves three facets:
1. First, subordinate agencies submit budget requests to the chief executive in terms of the type of
expenditures to be made. These requests include the number of people to be hired in each specified
position and salary level and the specific goods or services to be purchased during the upcoming period.
2. Next, the chief executive compiles and modifies the agency budget requests and submits an overall
request for the organization to the legislature in the same object of - expenditure terms
3. Finally, the legislative body usually makes line - item appropriations, possibly after revising the
requests, along object - of expenditure lines.
of handling of ship. Outturn Reports is a collective term used to refer to a number of specific reports
designed to track and control the movement of cargo throughout the supply chain.
Examples of Outturn Reports in a sentence
It is an abbreviated message that is based on Advance Cargo Notices received by SARS, but stripped of
all consignor/consignee data, which is sent to licensees of Container Depots and licensees of De-
grouping Depots to enable those parties to timeously complete the Outturn Reports that they must submit
to SARS in respect of the cargo received at their premises. The focus now moves on to the completion of
the Annual Accounts and the Final Out-turn Reports, which will be the main priority until June. The
range of projections are based on increases in fares of between 0% and 6.25%.20 Labor market statistics:
Scotland, Office for National Statistics, July 2011.21 Efficient Government Efficiency Outturn Reports,
Scottish Government, November 2009 and October 2010.22 Improving public sector efficiency, Audit
Scotland, February 2010
PERFORMANCE BUDGETING AND REPORTING
Budget Performance Report is the comparison of planned budget and actual performance. It allows
comparing the actual account transactions in a specific period with the budget figures of the same
periods.
A performance report is a report on the performance of something. They are routinely produced by
government bodies which, being financed by public money, are required to show that the money was
spent efficiently and usefully.
A performance report should compare results in relation to prior years' results in order to show whether
performance is stable, improving or declining. Purpose: To better contextualize the performance
information in relation to historical performance and targets or goals that might have been set.
CHAPTER FIVE
GENERAL FUND & SPECIAL REVENUE FUNDS
General Fund is
Used for general governmental activities such as police, administration and the like.
Account for all financial resources for which a separate fund is not required. All governmental
entities have a general fund (GF). Although it may be called the operating fund, the current fund
or something similar, the general fund will exist as long as the entity exists.
Used to account for all financial resources except those required to be accounted for in another
fund.
General fund refers to revenues accruing to the state from taxes, fees, interest earnings, and
other sources which can be used for the general operation of state government
Special Revenue Fund
Special revenue funds are established to account for general governmental financial resources that
are restricted by law or contractual agreements to specific purpose (s) and special revenue funds
are exist for the life of restriction. For example, they may be used to account for federal (state)
grants which are restricted as to purpose or to account operating activities of libraries and other
services supported by special taxes. Another example might be when a tax or other revenue
source is restricted to a specific purpose by a legislative body; its use assists in demonstrating
compliance with that purpose.
Special revenue fund (SRF) in contrast to GF is used to account for resources, which are
collected for a specified purpose. Fees for rubbish collection, state taxes on diesel fuel that is
required to be used only for road maintenance, tax on hotel rooms to be used to improve tourist
facilities, traffic violation fines are examples of governmental units revenues that may be
accounted for in a separate special revenue fund.
A special revenue fund is an account established by a government to collect money that must
be used for a specific project.
The general fund and the special revenue funds have different purposes, but they are both revenue
funds, and the accounting and reporting procedure is the same for both.
They differ in that the General fund accounts for revenues and other financing sources raised to
provide for all day-to-day-operating activities, whereas Special Revenue Funds are used to account for
a specific revenue source that must be used only to finance a specified activity
Special revenue funds provide an extra level of accountability and transparency to taxpayers that their tax
dollars will go toward an intended purpose.
3.3 ACCOUNTING CHARACTERISTICS
Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the same as
for salaries or utilities. Such fixed assets are not accounted for by these funds, because, they are not
normally converted into cash. Similarly the same categories of funds account for only those liabilities
incurred for normal operations that will be liquidated by use of fund assets.
Budgeted inter fund transfers and debt issue proceeds may be recorded in Estimated Other Financing
Sources and Estimated Other Financing Uses control accounts supported by subsidiary accounts as
needed.
Both revenues and other financing sources are temporary accounts that increase fund balance at year-
end when closing entries are made. Similarly, expenditures and other financing uses are temporary
accounts that decrease fund balance when closing entries are made. GASB standards emphasize,
however, that other financing sources (uses) should be distinguished from revenues and expenditures
BUDGETARY ACCOUNT
The two classifications of budget for governmental units are the same as those for business enterprises.
Annual budgets include the estimated revenues & appropriations for expenditures for a specific fiscal
year of the governmental unit. Annual budgets are appropriate for the general fund & special revenue
funds.
Three general ledger control accounts are needed to provide budgetary control; Estimated Revenue,
Appropriations and Encumbrances.
Budgetary Accounts include Estimated Revenues, Appropriation, Encumbrance, Estimated OFSs, and
Estimated OFUs
Estimated Revenues different sources revenue for the governmental unit expected to be collected
during the year. It is an account maintained to show the amount of revenue that will be collected in
future. Major revenue source classes commonly used are:
Taxes Intergovernmental Revenues
Special Assessments Charges for Services
Licenses and Permits
Appropriations is both an authorization to spend and limitation of spending. Appropriation could be
further subdivided- by month or other periods; these subdivisions are called Allotments.
Encumbrances Purchase orders (P.O.) in governmental entities have the function of keeping track of
coming expenditures so that the budget is not exceeded. This is done by actually recording the P.O in the
ledger account as an Encumbrance.
Encumbrance is an account used to record the estimated amount of purchase orders or contracts
An encumbrance differs from expenditure in the following perspectives.
The encumbrance is an estimate of liability to be incurred while expenditure is an actual
liability which has been incurred. The reason that encumbrance is only an estimate is that
invoiced amounts sometimes differ from purchase order amounts.
Solution a)
July 1,2002 Estimated Revenues 500,000
Appropriations 480,000
Fund Balance 20,000
To Record Budget at the beginning of the fiscal period
b)
june 30,2002 Appropriations 480,000
Fund Balance 20,000
Estimated Revenues 500,000
To Close Budget at the end of fiscal period
2. When the goods/order is received, the above entry is reversed and another entry to account
actual liability would be recorder: a debit to Expenditure and a credit to Cash/ Accounts
Payable
Example 1- Adis Abeba city administration G.Fund places a purchase orders/ p.o no. 010/06/ for
equipment s to a supplier in an amount of 150,000.
Encumbrance 150,000
Fund Balance Reserved for Encumbrances 150,000
(To record encumbrances for p.o no. 010/06 to WABE company.)
The order is received from Adis Abeba city under purchase order no. 0010
Fund Balance reserved for Encumbrances 150,000
Encumbrances 150,000
/To reverse encumbrance for purchase order no. 0010 to WABE company
The suppliers Received 180,500 invoice price .
Expenditures 180,500
Vouchers payable 180,500
As indicated by the example above the invoice amount may differ from the amount of the governmental
units purchase order because of such items as shipping charges, Sales Taxes, and price changes.
Encumbrances are not necessary for every single expenditure. Expenditures that are regular and
predicable, such as payroll are not typically encumbered. Correct sequence in the expenditure process
in governmental accounting is
APPROPRIATION ENCUMBRANCE EXPENDITURE
DISBURSEMENT
5) 5. Invoice for services and supplies received from enterprise fund and internal service fund
totaled 300,000 and 200,000 respectively.
6) Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund and
the internal service fund were 250,000 and 140,000 respectively.
7) Previous orders were received and the invoice totaled $4000,000
8) Approved budgets by the town council for the fiscal year ended on June 30, year6.
Estimated revenues:
- General property taxes.......................... 7,000,000
- Licenses and permits .......................... 400,000
- Charges for services ......................... 500,000
- Fines and for fits ............................... 300,000
- Miscellaneous revenues ........................ 200,000 8,400,000
Estimated other financing sources (transfer from EF) 100,000
Appropriation:
- General government .......................... 4,700,000
- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
9) Assuming that the total (Actual) revenue and Expenditure for the Adis Abeba city town is
composed of the following sources,
Revenues:
The following trail balance and balance sheet data is available for Adis Abeba city as of June 30,2006
Adis Abeba city town General fund
Trial Balance
June 30, 2006
Account title Debit Credit
Cash 1,420,000
Taxes Receivable- Delinquent 560,000
Inventory of Supplies 500,000
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Reserved Fund Balance 1,670,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000 .
Total 19,150,000 19,150,000
Required
a) Prepare necessary journal entry
b) Prepare statement of revenue expenditure and change in Fund balance
c) Prepare Balance sheet
SOLUTION
a)
1. Property tax receivable- current 7,200,000
Allowance for uncollectible prop. taxes -current 140,000
Revenue 7,060,000
2. Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
3. Allowance for uncollectable Property taxes current 130,000
Property taxes receivable- current 130,000
4. Encumbrances 3,600,000
Reserved for Encumbrances 3,600,000
5. Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
6. Vouchers payable 7,700,000
Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
7. Reserve for encumbrance 3,600,000
Encumbrance 3,600,000
Expenditure 4000,000
Vouchers payable 4000,000
Cash 8,090,000
8 Estimated revenues 8,400,000
Estimated other financing sources 100,000
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
Closing Entries for a General Fund
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
9 Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
Revenue 8,480,000
Other Financing Sources 100,000
/ To close Revenues, Expenditures, Other Financing Sources and Uses
Revenue 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
b) Adis Abeba City General fund
Statement of Revenues, Expenditures and Change in Fund Balance
For the Year ended June 30, 2006
Bud Ac Vari
Assets Dr Cr
Cash 1,420,000
Property Taxes Receivable- Delinquent 560,000
Inventory of Supplies 500,000
Total Assets 2,480,000
Liabilities and Fund Balance
Liabilities
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Reserved Fund Balance 1,670,000
Total Liabilities and Fund Balance 2,480,000
1) The town council adopted a budget for the special revenue fund for the year ending June 30
2007, providing for estimated revenues (from the special Assessments) of 800,000 and
appropriations for reimbursement to the General fund for expenditures made by that fund
for the services provided to the village of gute residents) of 750,000.
2) Special Assessments tax totaling 820,000 were levied which are to be paid in full in sixty
days.
3) Cash Receipts from Special Assessment Taxes of 820,000 were collected in full.
4) Out of the cash receipts, 630,000 was invested in Treasury bills with face amount of 650,000.
The treasury bills mature on June 30 , 2007 and were redeemed in full on that date.
5) Billings from the Adis Abeba City General fund, requesting reimbursement of expenditures
of that fund, totaled 760,000; of that amount, 620,000 was paid to the General Fund by
June 30, 2007
REQUIRED
1. Prepare necessary Journal entry
2. Prepare statement of Revenue expenditure and change in fund balance
3. Prepare Balance sheet
SOLUTION
1. Journal entry
1. Estimated Revenues 800,000
Appropriations 750,000
Budgetary Fund Balance 50,000
2. Special Assessment Tax Receivable- current 820,000
Revenues 820,000
/ To record special assessments billed, all of which are estimated to be collectable/
3. Cash 820,000
Special Assessment Tax Receivable- current 820,000
/ To record collection of special assessment tax in full during the year/
4. Short Term Investments 630,000
Cash 630,000
=/To record acquisition of 65,000 face amounts of treasury bills/
Cash 650,000
Short Term investments 630,000
Revenues 20,000
/ To record receipts of cash for matured U.S treasury bills..
5. Expenditures 760,000
Payable to General Fund 760,000
/To record billings from general fund for reimbursement of expenditures for street
cleaning and street light maintenance for residents of the village of Gute
3. Bance sheet
Adis Abeba city Special Revenue fund
Balance Sheet
June 30, 2007
Assets
Cash 220,000
Total Asset 220,000
Liabilities and Fund Balance
Payable to General fund 140,000
Fund Balance Designated for Reimbursement of General fund 80,000
Total Liabilities and Fund Balance 220,000
TERMINOLOGY AND CLASSIFICATION FOR GOVERNMENTAL FUND BUDGETS AND
ACCOUNTS
I. Classification of Appropriations and Expenditures
The budgeted appropriations are often called estimated expenditures, and the appropriation budget is
called expenditure budget..
According to GASBs Principles, Expenditures should be classified by: -
1. Fund
2. Function or program
3. Organization unit
4. Activity
5. Character (fiscal period)
6. Object
1. Classification by Fund
The primary classification of governmental expedition is by fund, since funds are the basics fiscal &
accounting entity of governmental unit.
Eg. G,F SRF CPF, DSF
2. Classification by Function or Program
Functions are group related activities that are aimed at accomplishing a major service or regulatory
responsibility..
General Governmental -Health & welfare
-Public safety -Culture & recreation
Cash 50,000
Due to the General fund 50,000
(To record a loan from the general fund)
Inter fund loans and advances are not increases or decreases in f und net assets. On the creditor
funds books they only move resources from one current asset (cash) to another (Due from ). On the
debtor funds books, they increase a current asset (cash) by increasing a current liability (Due to..). In both
cases, the effect on net assets is zero. As such inter fund loans and advances are not closed at the end of the
year
2) Quasi external transaction
These are transactions that would be treated as revenues, expenditures, or expenses if they involved
organizations external to the governmental unit.
GF
Expenditure xxx
Due to ISF xxx
SRF
Due from GF xxx
Revenues xxx
If a car repair of 1,000 Birr was done to a vehicle the general fund was responsible by internal service fund,
the following entries would be needed
On the books of the General Fund
Expenditures 1,000
Due to Internal service Fund 1,000
On the books of the Internal service fund
Due from the General fund 1,000
Revenues 1,000
The revenues and expenditures arising from quasi-external transactions are closed simply as part of closing
the other revenues and expenditures for the year. Due From accounts are not closed, because they are balance
sheet accounts.
3) Reimbursements
Expenditures made by it on behalf of another fund i.e. one fund pays a bill on behalf of another & is
then reimbursed.
Reimbursement is money you get back from a previous transaction you have made while buying
something for yourself or making a payment on behalf of a third party.
Expenditure xxx
Cash xxx
= To record payment of bill on behalf of ---
Cash xxx
Expenditure xxx
= To record reimbursement
For example, the Ministry of Health operates clinic in Addis Ababa and South Omo. The Addis Ababa Clinic,
for convenience, might pay a bill of 3000 Birr for medicine on behalf of South Omo clinic. The South Omo
clinic would then reimburse the AA clinic. The AA clinic would charge expenditure at the time of purchase,
and then credit expenditures to zero (0). Payment of the reimbursement would then create expenditure for the
South Omo clinic.
On the books of the AA Clinic
Expenditure 3,000
Cash 3,000
(To record payment of bill on behalf of south Omo clinic)
Cash 3,000
Expenditure 3,000
(To record reimbursement from south Omo clinic)
On the books of the South Omo Clinic
Cash 3,000
Expenditure 3,000
(To reimburse the AA clinic for medicine purchase)
Any expenditures arising from reimbursement transactions are closed simply as part of closing the
other revenues and expenditures for the year. No special attention is given to reimbursements in the year-
end closing process.
4) Residual Equity transfers
Residual Equity transfers are non-recurring or non-routine transfers of equity between funds made in
connection with the formation, expansion, contract or discontinual of a fund. not only are they not Revenues
or Expenditures, they are not Other Financing Sources or Uses, even though they are technically increase /
decreases in fund financial resources.
Equity transfer out xxx
Due to ISF xxx
Due from GF xxx
Equity transfer in xxx
For example, the GF might transfer the amount of 10,000 Birr to an internal service fund to open a
central supply store.
On the books of the General Fund
Equity Transfers Out 10,000
Due to Internal Service fund 10,000
On the books of the Internal Service Fund
Due from the General Fund 10,000
Equity transfers In 10,000
5) Operating transfers
Operating transfers are made in connection with the normal operation of the recipient fund. They are legally
authorized transfers from a fund, which receives revenue to the fund through which the resources are to be
expended. These transfers are other financing source of the receiving fund, other financing uses of the paying
fund.
Other Financing Uses-Operating Transfers Out xxx
Due to DSF xxx
Due from GF xxx
Other Financing Sources-Operating Transfers In xxx
For example, the general fund may make an annual transfer of 8,000 Birr to a Debit service Fund for payment
of interest on a general long-term debit. At time the transfer is authorized, the following entries are needed:
On the books of the General Fund
Operating Transfers Out 8,000
Due to Debt Service fund 8,000
(To record a transfer to the debit service fund)
On the books of the Debit service fund
Due from General fund 8,000
Operating Transfers In 8,000
(To record a transfer from the general fund)
These transfers are similar to (residual) equity transfers in that they increase the net assets of the receiving
fund, and decrease the net assets of the giving fund. Therefore, they also must be closed to fund balance at the
end of the year
- 4 & 5 are properly called transfers & 1,2,3 are merely transfers.
CHAPTER 6
CAPITAL PROJECT FUNDS
Capital Projects Funds (CPF) account for financial resources to be used for the acquisition or construction of
major capital facilities (other than those financed by proprietary funds & trust funds).
CPF do not account for the fixed assets acquired only for the construction of the fixed assets. It exists
only for the period of acquisition or construction of the fixed assets. After the acquisition or
construction is completed, the Capital Projects Fund will be abolished.
The Fixed Assets constructed are accounted for in the GFAAG.
It does not also account for the repayment & servicing of any debt obligations issued to raise money to
finance the acquisition of capital facilities. Such debt & debt related servicing activities are accounted
for in the General Long Term Debt Account Group (GLTDAG) & Debt service fund (DSF).
Capital projects funds differ from the General Fund and special revenue funds in that the latter
categories have a year-to-year life, whereas capital projects funds have a project-life focus
Since the purpose of capital projects fund is to account for the acquisition and deposition of revenues
for specific purpose, it contains balance sheet accounts for only liquid assets and for the liabilities to
be liquidated by those assets.
Establishment & operation
C.P.F are usually established on a project-by-project basis, because legal requirements may vary from
one project to another. So the existence of the C.P.F as any other fund will depend on the legal
requirement & the need for good financial management.
The focus of the CPF is the entire life of the project. It is by definition an expendable fund, and all its
resources are expected to be used up. However, CPFs do not have the same year-by-year focus as the
G.F because of the multi-year focus of CPFs, some accountants prefer not to close a CPF annually,
but others do. Whether or not to close the CPF annually will depend on the unique factors of each case
& will be strongly influenced by the requirement of the financing source.
BUDGETING FOR THE PROJECT
Unlike other governmental funds that are required to have an annual budget, the budget of a capital project is
project-oriented and is typically undertaken separately from (but may influence) the local government s
formal annual budget process. However, each capital project needs a budget, and the budget should be
recorded in the accounting records. The project budget should be for the projects life and amended only if the
budgeted amount changes during the project. At fiscal year-end, the capital projects fund s budget is not
closed out, unlike all other governmental funds. However, revenues and expenditures are closed out to fund
balance.
The decision to use budgetary accounts will also depend on the features & financing source of the particular
CPF. The decision to use or not to use budgetary accounts is influenced by factors such as.
The number of projects in the C.P.F
The amount of detail in the C.P.F budget
The use of an annual budget (rather than a project life budget) in the CPF
Financing a capital project
Capital projects project obviously need large amount of financing. Typically source of financing include;
Long term debit issue proceeds
Grants from other governmental units
Transfers from other funds with in the governmental entity
Interest income from temporary investments.
Gifts from individuals or foundations
Special taxes or;
Governmental Funds and Government-wide
Government Fund Government-wide Governmental
Activities
General capital assets acquired are not recorded General capital assets acquired Under
in the governmental Fund. Fixed asset is not government funds are recorded at the
capitalized government-wide level.
depreciation Is not recognized depreciation Is recognized as expense
Recognize only current liabilities. Recognize both current Long term
Debit expenditure and credit cash/AP when liabilities.
fixed asset is acquired Debit purchased fixed asset eg. Building
Property Taxes Receivable is recorded and credit cash(A/P) when fixed asset is
purchase orders are reported and recorded acquired
Budget entries are t reported and recorded Property Taxes Receivable is recorded
Record Other Financing Uses and Other purchase orders are not reported
Financing source Budget entries are not reported
Use Expenditure did not Record Other Financing Uses and
Other Financing source
1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be settled from the bond
issue proceeds.
Cash 500,000
Notes Payable 500,000
2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
Remaining is supposed to be susceptible to accrual
Cash 5,000,000
Due from State Grant 15,000,000
Revenue 20,000,000
3. Preliminary engineering and planning costs of 320,000 were paid to the contractor.
There had been no encumbrances for this cost.
Construction Expenditure 320,000
Cash 320,000
4. The Bonds were sold at 101 the bond indenture agreement requires that any premium to be set aside in the
related Debt Service Fund.
Cash 30,300,000
OFS-Bond proceeds 30,000,000
Due to DSF 300,000
5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal Government treasury
bills.
Short Term Investment-Treasury Bills 10,000,000
Cash 10,000,000
6. A construction contract for 44,270,000 is authorized and signed.
Encumbrances 44,270,000
Fund Balance Reserved for Encumbrances 44,270,000
7. Orders were placed for materials estimated to cost 550,000.
Encumbrances 550,000
Fund Balance Reserved for Encumbrances 550,000
8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.
a) Fund Balance reserved for Encumbrance 550,000
Encumbrance 550,000
b) Construction expenditure 510,000
Construction Payable 510.000
9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for the services of the
engineers; of this amount 3,100,000 was paid.
Encumbrances 3,900,000
Fund Balance Reserved for Encumbrances 3,900,000
Fund Balance Reserved for Encumbrance 3,900,000
Encumbrance 3, 900,000
Construction Expenditure 3, 900,000
Construction Payable 3, 900,000
Construction Payable 3,100,000
Cash 3,100,000
10. Received cash of 1,000,000 from the General fund as an operating transfer.
Cash 1,000,000
OFS- Operating transfers in 1,000,000
11. A partial payment of 10,000,000 was received from the state irrevocable Grants and also
the General Fund loan was repaid with interest amounting to 10,000.
Cash 10,000,000
Due from State Grant 10,000,000
Notes Payable 500,000
Interest Expenditure 10,000
Cash 510,000
See transaction No 5 and 1 respectively
12. When the project was approximately half finished, the contractor submitted billing for a payment of
12,000,000.
Fund Balance Reserved for Encumbrance 12,000,000
Encumbrance 12, 000,000
Construction Expéditeur 12, 000,000
Construction Payable 12, 000,000
13. The contractors initial claim was fully verified and paid.
Construction Payable 12,000,000
Cash 12,000,000
Town of X library Capital Projects Fund
Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 6
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,000 16,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,000 31,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add:
Add: Fund Balance - July 1, Year 5 -
Fund Balance - June 30, Year 6 34,260,000
CHAPTER 7
DEBT SERVICE FUND
From time to time governmental entities have a shortage of cash to carry out their activities. In such cases,
governmental entities may turn to borrowing to supply the needed cash.
GENERAL CHARACTERISTICS OF DEBT SERVICE FUND
Debt service fund is used to account for both the repayment of the principal and payment of interest of
the long-term debt when they are due.
DSF is governmental funds and therefore is Expendable. Although, like a CPF, they have focus more
than a year.
As expendable funds, DSF use the modified accrual basis of accounting. An application of modified
accrual, which is of special interest to DSF I.e. Interest payable is not accrued in the DSF.
Accounts recommended for use by a serial bond Debt service fund is similar with that of General
Fund and Special Revenue fund.
The operations of DSF do not involve the use of purchase orders and contracts for goods and
services. So the Encumbrance accounting is not needed.
The ledger accounts of a Serial Bond Debt Service fund include liquid assets and current liabilities
and Fund Balance Accounts.
The appropriations budget of a DSF must provide for the payment of all interest on General long-term debt
that will become legally due during the budget year, and for the payment of any principal amounts that will
become legally due during the budget year. GASB standard currently require DSF accounting to be on the
same basis as is required for general and Special Revenue Funds. *** One peculiarity of the accrual basis
used by the governmental fund types which only relates to DSF is that, interests on long term debt is not
accrued. For Example:
Example: If the fiscal year of a governmental units ends on December 31, 20x5 and the interest
on its bond is payable on January 1 and July 1of each year, the amount payable on January 1, 20x6 would not
be considered a liability in the Balance sheet of The Debt Service Fund prepared as of December 31, 20x5.
The rationale for this recommendation is that the interest is not legally due until January 1, 19x6. The same
reasoning applies to principal amounts that mature on the first day of the fiscal year. They are not liabilities to
be recognized in statements prepared as of the day before. In the events 20x5 appropriations include January
1, 20x6 interest and /or principal payments, the appropriations expenditures (and resulting liabilities) should
be recognized in 20x5.
Persons budgeting and accounting for DSF should seek competent legal advice on the permit table use of both
premium on debt sold & residual equity transfer. In the some cases, one or both of these items must be held
for eventual debt repayment and may not be used for interest payments. In other cases both Premium Revenue
and Residual Equity Transfer- In may be used for interest payments.
Cash 44,333.33
Short term Investment- Note 100,000
Interest Receivable 1,666.67
Tax Receivable 10,000
Allowance for Uncollectable Current Taxes 10,000
Unreserved and Undesignated Fund Balance -
Tax Revenue 330,000
Investment Revenue 7,500
Expenditure 191,500
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000
Appropriation 190,000
Budgetary Fund Balance . 190,000
Total 727,500 727,500
C)
Town of X Serial Bond Debt Service Fund
Balance sheet
June 30, 20x8
Assets
Cash 44,333.33
Short Term Investment- Note 100,000
Interest Receivable 1,666.67
Tax Receivable 10,000
Less: Allowance for Uncollectable current Taxes 10,000 0
Total Assets 146,000 .
Liabilities and Fund Balance
Unreserved and Undesignated Fund Balance 146,000
CHAPTER 8: ACCOUNTING FOR PROPRIETARY FUNDS
INTERNAL SERVICE FUNDS AND ENTERPRISE FUNDS
INTRODUCTION
Internal Service Fund (ISF) and Enterprise Fund (EF) are both classified by the GASB as Proprietary funds.
Internal service funds, as indicated on the principles of governmental accounting, are used to account for
services provided by one department or Agency of a governmental unit to other department or agencies, or
to other governmental units on a user charge basis. Enterprise Funds are used by governmental units to
account for services provided to the general public on a user charge basis.
. Depreciation on fixed assets is recognized as an expense,
INTERNAL SERVICE FUND (ISF)
Enterprise funds and internal service funds are distinguished primarily by the kinds of customers they serve.
Enterprise funds provide goods or services to the public, whereas internal service funds mainly serve
departments of the same government.
ISF (sometimes called Intergovernmental Service Funds, Working Capital Funds and Revolving Funds)
arose to meet the need to offer services within the entity in a more reliable or/and less expensive manner than
obtaining the same service outside.
Reason for ISF Establishment and Operations
ISFs are established to meet some need within the entity, if it is believed that the entity can provide
the service to itself in a more reliable and/or less expensive manner than obtaining the same service
outside.
ISF is to improve financial management of scarce resources, it should be stressed that a fund is a fiscal
entity as well as an accounting entity; consequently establishment of a fund is subject to legislative
approval.
ISFs are established to improve the management of resources, it is generally considered that they
should be operated and accounted for on a business basis.
Accounting and Other Related Issues
Under ISF, the donated fixed assets should be recorded at fair market value .If fixed assets are
purchased for cash; they should be recorded at historical cost.
If a grant is given specifically for the purchase of fixed assets, it should be recorded as Contributed
Equity not as Revenue.
Cost is the focus of an ISF rather than budgetary control.
They also have retained earnings in their equity accounts and contributed equity should be kept
separate from retained earnings on the Balance sheet.
FINANCIAL STATEMENTS-
It is far more like that of a profit business than that of an expendable fund.
It is of a classified Balance Sheet type i.e Current Assets are segregated from Fixed Assets and other
assets and Current Liabilities are segregated from Long Term Debt.
The main difference from that of a profit business is the Contributed Equity shown in the equity
section..
OPERATING STATEMENTS-
The results of operations of an ISF should be reported periodically in a statement of Revenues,
Expenses and Changes in Retained Earnings and contributed equity, which is equivalent of an Income
Statement for a profit seeking entity.
ISF operating Statement shows change in retained earnings and contributed equity rather than change
in fund balance.
ISFs do not have Fund Balance rather than they have retained earnings like for a profit business.
The other difference from a profit income Statement is that changes in equity are shown of the face of
the operating statement of an ISF (like that of a Governmental Fund)
STATEMENT OF CASH FLOWS--
GASB requires the preparation of the cash flows in the FS for all Proprietary funds and non-expendable trust
funds. The standard provides four categories of Cash Flows..
a. Cash Flow from operating activities- includes receipts from customers, receipts from quasi-
external operating transactions with other funds, payments to suppliers of goods or services,
payment to employees, payment of Quasi-External transactions with other funds (including
payment in lieu of Taxes) and other operating cash receipts and payments.
b. Cash flow from non capital financing activities- includes proceeds from debt not clearly
attributable to acquisition, construction of improvement of Capital assets, receipts from
grants, subsidies or taxes other than those specifically restricted for Capital Purposes, or those
for specific operating activities, payment of interest on and repayment of principal of non
capital financing debt, grants and Subsidies paid to other governmental funds or organization
except payment for specific operating activities of the grantor government..
c. Cash Flow from Capital and related Financing activities- includes proceeds of debt and receipt
from special assessments and taxes specifically attributable to acquisition, construction or
improvement of Capital Assets, Receipts from Capital grants, receipts from the sale of capital
assets, proceeds of insurance on Capital assets that are stolen or destroyed, payment of interest
and/or repayment of refunding of capital and related financing debt..
d. Cash Flows from investing activities- includes receipt from collection of loan, interest and
dividends received on loans, debt instruments of other entities, Equity securities and cash
management and investment pools, receipt from the sale of debt on equity instrument,
withdrawals from investment pools not used as demand accounts, disbursement for loans,
payments to acquire debt on equity instruments and deposits into investment pools not used as
demand accounts.
ENTERPRISE FUND (EF)
Enterprise funds provide services to the General Public. EF provides service on a user- pays basis.
Enterprise funds Provide services that are either should not be, cannot be, or otherwise are not
provided by for profit entities.
The difference between Efs and Governmental Funds is that, Governmental funds typically provide
service to the citizens as needed (eg. the police) regardless of the citizens ability to pay, while Efs
provide services on the basis that the user of the service pay at least part of the cost.
The most common example of EF is public utilities, notably Water and Sewer Utilities. Electric and Gas
Utilities, Transportation system, Airports, etc. services of the kinds mentioned are generally accounted for by
EF because they are intended to be largely self supporting..
Illustrative Case for Internal service fund
The administrators of the town of X obtain approval from the town council to centralize the purchasing,
storing and issuing functions as of January 1, year 2
1. The towns General Fund transferred to the new Supplies Fund a cash of 25,000 and its Inventory of
supplies of 61,500 to be used for working capital and which are not to be repaid.
Cash 25,000
Inventory of Supplies 61,500
Equity Transfer In 86,500
Exp- Transfer of this nature are initially are accounted for by the recipient fund as Equity transfer in as
shown in entry 1. The equity transfer in account is closed at the end of the fiscal period to an appropriately
named fund Equity account- Contribution from the General Fund, in this case and reported in the changes in
fund equity section of the operating statement.
2. Town of X Water Utility Fund advances of br 100,000 long term debt so as to be used for acquisition of
building and equipment by the Supplies Fund. The advances are to be paid in 20 equal annual installments.
Cash 100,000
Advance from Water Utility Fund 100,000
3. A Warehouse building is purchased for 70,000; of which 10,000 of the purchase price is considered the
cost of the land. Warehouse machinery and equipment is purchased for 20,000. Delivery equipment is
purchased for 10,000 (all for cash).
Land 10,000
Building 60,000
Machinery & Equipment- warehouse 20,000
Equipment- Delivery 10,000
Cash 100,000
Exp- If the purchases are made for cash, the acquisition of the assets would be recorded in the books of the
supplies fund in such manner
4. Supplies are acquired at cost of 179,800 and the invoices are approved for payment.
Inventory of Supplies 179,800
Vouchers Payable 179,800
Exp- encumbrances need not be recorded for purchase orders if issued and so information about the value of
purchase orders if any is omitted from being recorded.
5. The Supplies fund issued cost of supplies used 170,000 to the GF. (A mark up of 35% on the cost of the
supplies used was billing to Department to cover its after cost.
Supplies expense 170,000
Inventory of Supplies 170,000
=> (170,000 x 135% = 229500);
Due from General Fund 229,500
Billings to Departments 229,500
6. Collections from General fund during the year from customer totaled 213,000.
Cash 213,000
Due from General fund 213,000
8. Payments on vouchers during the year for customers totaled 157,000.
Vouchers Payable 157,000
Cash 157,000
9. The Advance from the Water Utility Fund, first repayment has been made