Kế toán, kiểm toán - Chapter 6: Proprietary funds - Internal service and enterprise funds

Essentials of Accounting for Governmental and Not-for-Profit OrganizationsChapter 6Proprietary Funds -- Internal Service and Enterprise FundsMcGraw-Hill/IrwinCopyright © 2015 McGraw-Hill Education. All rights reserved.Chapter 6 - ObjectivesApply the accrual basis of accounting in the recording of typical transactions of internal service and enterprise fundsPrepare the fund-basis financial statements for proprietary fundsIdentify when an activity is required to be reported as an enterprise fundContrast statements of cash flow prepared under GASB and FASB guidelinesReview of Proprietary Type FundsProprietary Funds use the accrual basis Match Revenues and Expenses, including depreciation Emphasis is on income measurement Typically do not record budgets or encumbrancesReview of Proprietary Type FundsProprietary Funds use the Economic Resources Measurement Focus:Report related capital asset acquisition and debt service activities within the proprietary fundsConstruction of enterprise fund capital assets are reported in the proprietary fund, not in a capital project fundPayments for interest and principal are made from the proprietary fund, not a debt service fundStatement of Net Position includes both current and long-term assets and liabilities Proprietary Fund Closing EntriesAll revenue and expense type accounts, as well as transfers, are closed to Net PositionNet Position is reported within three categories:Net Investment in Capital Assets = [Capital Assets – Accumulated Depreciation] - outstanding balance of debt incurred to acquire capital assets.Restricted (if needed) andUnrestricted for the remainderInternal Service FundsUsed for sales of service primarily to other departments within the government unit (typically on a cost reimbursement basis)The purpose is to pool resources for more efficient operationsOften it is more efficient to have a single (separate) department responsible for these types of services and charge their costs back to other departments Internal Service FundsExamples of internal service fund uses:Motor pool, Telecommunications, Maintenance, Purchasing /supplies/central stores,Insurance/risk managementSelf-Insurance and Risk ManagementGovernments have a choice of using the General Fund or an Internal Service fund for self-insurance activitiesIf an ISF is used, the interfund premium is treated as a revenue to the ISF and as an Expense or Expenditure to other funds (provided that the amount paid is a reasonable amount calculated in a manner that will yield an amount roughly equal to the amount of average long-term claims).“Reasonable Premium” Requirement The purpose of this accounting requirement is to prevent governments from managing their budgets by shifting resources (through overpayments) to an internal service fund when they have a surplus and or undercharging for services in other yearsOtherwise, the payments are to be treated as TransfersEnterprise FundsUsed for sales of service primarily to others outside the government unit such as the general publicMandatory if:Have debt backed solely by fees and chargesLegally required to charge fees that will recover the cost, including depreciationGovernment policy of requiring cost recovery from feesUse of Enterprise FundNot mandatory, but is permitted if: None of the three mandatory requirements are met, but management would like to see the activity’s “net cost” after depreciation expense Implication—some services charging fees (recreational facilities or civic centers) can be handled in governmental or proprietary type funds – depending on the wishes of the governmentCommon Examples of Enterprise FundsWater utilitiesGas or electric utilitiesAirportsBus systemsSwimming pools, golf coursesHospitals, parking garage, toll roads, public housingBonds in Enterprise FundsRevenue Bonds: Revenue bonds promise bondholders that enterprise revenues will be used to make payments. These are listed as Bonds Payable in the enterprise funds.General obligation bonds: These are backed by the full faith and credit of the government (i.e. the taxing authority of the government).Sometimes General Obligation Bonds Are Use to Finance Enterprise ActivitiesPurpose:This may be done to get a better credit rating (lower interest cost)Reporting:If this is just a formality, the bonds are still listed as a liability in the Enterprise FundBonds are omitted from Enterprise Funds only if the government agrees and fully intends to pay the bonds from other resourcesSolid Waste Landfills Enterprise FundAccrual basis – treatment of post-closure costsCosts of complying with environmental protection laws after closure have to be estimated and accrued as a cost of operating the landfill during its life. Each year accrue: Post-closure expenses XXX Liability for post-closure care XXX(units of production method used to determine $)After closure, as maintenance costs are incurred: Liability for post-closure care XX Cash XXSolid Waste Landfills – Governmental ActivitiesAlternatively, some governments may operate landfills within the Governmental Activities. In this case, the long-term portion of any liability for closure and post-closure care costs will appear in the government-wide statement of net position and the periodic expense in the government-wide statement of activities.Proprietary Fund StatementsProprietary Funds are required to present three financial statements:Statement of Net Position Statement of Revenues, Expenses and Changes in Fund Net PositionStatement of Cash FlowsStatement of Net PositionGovernments must classify assets and liabilities as current or noncurrent Net Position is reported within three categories: unrestricted, restricted, and net investment in capital assets Restricted means restricted by external parties or by legislation, including legislation enacted by the government’s governing bodyStatement of Revenues, Expenses and Changes in Fund Net Position Format: Revenues - Expenses = Operating Income - nonoperating revenues and expenses- capital contributions and transfers = Change in Net Position+ Beginning Net Position = Ending Net PositionFour Categories of Cash Flows1. OperatingInterest and dividend revenue not in this section (in contrast to Statements of Cash Flows prepared following FASB standards).2. Capital Related FinancingFASB’s Statement of Cash Flows show only principal payments on debt in financing, GASB’s approach includes principal and interest payments here. Purchases of long-term assets are here not in investing per business Statements of Cash Flows.3. Noncapital Related Financing short term loans and repayments including interest4. InvestingInvestments and their associated revenues. Does not include purchase and sale of other long-term assets. Comparison of Cash Flow StatementsCommercial StatementsMay use Direct or Indirect Methods for Cash Flows from Operating ActivitiesInterest and dividends received are reported in operating sectionInterest payments are reported in operating sectionPurchases or sales of long-term assets are reported in investingThe reconciliation of income and cash flows from operations starts with Net Income Proprietary Fund StatementsDirect Method is required for Cash Flows from Operating ActivitiesInterest and dividend revenue is reported in investing sectionInterest Payments are reported in capital or noncapital related financing sectionFixed asset transactions are reported in capital related financingThe reconciliation of income and cash flows from operations starts with Operating IncomeProprietary Funds and the Government-Wide StatementsEnterprise Funds are “Business-Type Activities.” They are included in the Government-Wide statements without adjustment.Internal Service Funds are generally classified as “Governmental Activities” because they service departments reported in the General Fund Their assets and liabilities are included in the Statement of Net Position. Only revenues and expenses on outside sales are reported in the Statement of Activities. Fiduciary Funds are not included in government-wideEnterprise funds appear in the business activities column of the government-wide statements. Internal service funds are most commonly included in the Governmental Activities column.Government-wideStatement of Net Position and Statement of Activities