Governmental_Accounting

Fund-Based vs. Government-Wide Financial Statements Actions of one or more governments affect every individual. As of 2007 local governments reached to 89,476, these are broken down into, 39,044 were general purpose local governments 36,011 subcounty and 3,033 county; also including 19,492 municipal and 16,519 township governments.”(pg.478) A little more than half the totals were special purpose local governments of 14,561 school districts and school system governments and 37,381 special district governments. State and local governments employed more than 14.7 million people. We are affected every day by at least one government; do you pay Income or sales taxes, maybe even property taxes' Perhaps put your garbage cans out to be collected or drive on the roads that are paved. Governmental activities are essential to our daily lives and we give money to the government, therefore it is important to understand how a government reports there expenses and revenues to see where the money is actually going. Therefore we will be discussing fund-based accounting vs. government-wide accounting and the difference between the two. State and local governments want to portray financial stability when making long-term decisions which was difficult because historically they “focused on identifying the methods used to generate financial resources and the uses made of those resources.”(pg.478) To try and satisfy both needs governments started reporting two sets of financial statements. It is vital to understand that each set of financial statements have unique principles and objectives per state and local government. The most significant step that has transpired in generally accepted accounting principles used by the state and local governments is the creation of this dual reporting system. The American Institute of Certified Public Accountants (AICPA) and the National Council on Governmental Accounting (NCGA) establishing sound accounting principles in earlier years, but in June 1984, the Governmental Accounting Standards Board (GASB) became the public sector counterpart of the Financial Accounting Standards Board. GASB is the primary responsibility for setting accounting standard for state and local government. Similarly, Financial Accounting Standards Board, GASB is independent but, the Financial Accounting Foundation oversees them. Before looking into two sets of financial statements it is important to understand Governmental Accounting and user needs. The taxpayer, government employee, the bondholder, and the public official need different types of financial info about a governmental unit. There are three categories we’d like to look into: citizenry, legislative/oversight bodies, and investor/creditor. First, citizenry want to determine the sources and uses of resources, this is important to forecast revenues in order to determine spending decisions. Also, to compare budgeted to actual results, and to be sure that those resources were used appropriately. Second, Legislative and oversight bodies want to determine the overall financial condition when compiling budgets, to monitor operations, to determine the fees and tax changes were reasonable, and to asses the ability to finance capital needs and new programs. Third, Investors and Creditors want to know the future financial resources available so they are able to measure the amount of debt. Also that they can have the ability to pay off the debt, and to review cash flow data. Governmental reporting have a huge obstacle that needs be to overcome because the needs of its users. There isn’t one set of financials or accounting principles that can quench the thirst of everyone. This therefore leads us into the two sets of financial statements. First, Fund-based Financial Statements are used to report individual activities and the amount of financial resources allocated to them, and they also help citizens assess the government’s accountability in raising and using money. These statements have been designed to show the plan of how the company wants to use of resources, or the revenues and expenses from certain activities, short-term. “For example, fund-based financial statements report the amount spent on such services as public safety, education, health and sanitation, and the construction of new roads. The timing recognition in most cases is based on modified accrual accounting. Modified accrual accounting recognizes 1) revenues when the resulting current financial resources are measurable and available to be used and 2) expenditures when they cause a reduction in current financial resources.” (pg.480) Under fund based accounting there are three main funds, government, proprietary, and fiduciary funds. What is governmental fund' This encompasses public safety, libraries, construction of town hall, etc. the general fund is subdivided into five sections: general, special, capital, debt services, and permanent fund. What is the proprietary fund' Proprietary fund statements of net assets should clearly identify the differences between current and noncurrent assets and liabilities and should portray restricted assets. Proprietary fund statements of revenues, expenses, and changes in fund net assets should distinguish between operating and nonoperating revenues and expenses. These statements should also report capital contributions, contributions to permanent and term endowments, special and extraordinary items, and transfers separately at the bottom of the statement to arrive at the all-inclusive change in fund net assets. Cash flows statements should be prepared using the direct method. Finally, what is a fiduciary fund' They are assets held in a trust so that the government cannot use these funds. Like the proprietary fund, the fiduciary fund uses the accrual accounting for revenues and expenses. Four distinct types of fiduciary funds are: investment trust, private-purpose trust, pension trust, and agency fund. A few important aspects of fund-based reporting are, required governmental fund statements are a balance sheet and a statement of revenues, expenditures, and changes in fund balances. Required proprietary fund statements are a statement of net assets which are revenues, expenses, and changes in fund net assets. To allow users to understand these statements, governments should create a summary reconciliation to the government-wide financial statements at the bottom of the fund financial statements. Also, each of the fund statements should report separate columns for the general fund, major governmental, and enterprise funds. What are major funds' Major funds are funds whose revenues, expenditures/expenses, assets, are at least 10 percent of corresponding totals for all governmental or enterprise funds. Any other fund could be reported as a major fund if the government believes that it is important to financial statement users. Nonmajor funds and internal service funds should be reported in a separate column on the proprietary fund statements. Second, government-wide financial statements will have more of a longer-term focus since they report all revenues and all expenses of services each year, not just those received or paid in the current year. “The following report a government’s financial affairs as a whole: Determine whether the government’s overall financial position improved or deteriorated, Evaluate whether the government’s current-year revenues were sufficient to pay for current-year services, Understand the cost of providing services to the citizenry, See how the government finances its programs-through user fees and other program revenues along with general tax revenues, Understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets.” (Journal of Accountancy) These financials focus on all economic resources, not just current financial resources such as cash and receivables, and these statements utilize accrual accounting for timing purposed much like a for-profit entity. They also report all assets and liabilities, and recognize revenues and expenses in a way that is similar to business-type accounting. Furthermore, a few important aspects of government-wide financial statements are: governments should report all capital assets, including infrastructure assets, in the government-wide statement of net assets and generally should report depreciation expense in the statement of activities. The net assets of a government should be reported in three categories: invested in capital assets net of related debt, restricted, and unrestricted. The government-wide statement of activities should be presented in a format that reports expenses reduced by revenues. Program expenses should include all direct expenses. General revenues should be reported separately, ultimately arriving at the change in net assets for the period. Special items are significant transactions or that is unusual or infrequent and is within the control of management. Why does the government need two sets of financial statements' The goal is to hold the government accountable to the public. Voters must be skeptical of the members of government. “Trust but verify” is what Ronald Reagan used to say to the public. “Accountability is the cornerstone of all financial reporting in government….Accountability requires governments to answer to the citizenry-to justify the raising of public resources and the purposes for which they are used. Governmental accountability is based of 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.”(GASB Concepts Statement No. 1 para. 56) Works Cited Hoyle Schaefer and Doupnik “Fundamentals of Advanced Accounting” 4th Edition, 2009 “Governmental Accounting Standards Board (GASB), http://www.gasb.org/st/summary/ gstsm34.html “City of St. George” http://www.sgcity.org/finance/pdf/2010cafr.pdf, Spring 2011