BAR Area III: State & Local Governments

1. The governmental reporting model GASB 34

State and local governments report under standards issued by the Governmental Accounting Standards Board (GASB), not the FASB. GASB Statement No. 34 established the financial reporting model still in use today. Its defining feature is a dual perspective: every government presents both an entity-wide (long-term, accrual) view and a fund-level (short-term, accountability) view of the same underlying activities.

Two perspectives, two purposes

• Government-wide statements answer the question, "Is the government as a whole better or worse off?" They use the economic resources measurement focus and full accrual accounting, consolidate the primary government, and report governmental and business-type activities in separate columns.
• Fund financial statements answer, "Did we comply with spending limits and use current resources appropriately?" They emphasize fiscal accountability at the individual fund level and (for governmental funds) use a near-term, modified accrual lens.

Components of the annual comprehensive financial report (ACFR)

The financial section is assembled in a required order. Two pieces sit outside the basic statements as required supplementary information (RSI), one before and one after.

1. MD&A (management's discussion and analysis). Technically RSI, but it is presented before the basic financial statements as a narrative overview.
2. Government-wide statements: statement of net position and statement of activities.
3. Fund financial statements: governmental, proprietary, and fiduciary fund statements.
4. Notes to the financial statements, which are integral to the basic statements.
5. Other RSI, presented after the notes, including the budgetary comparison schedule for the general fund and major special revenue funds, plus pension/OPEB schedules.

The key trap is remembering that MD&A is RSI yet appears first, while the budgetary comparison and other RSI appear last.

Statement of activities (net program cost format)

Unlike a business income statement, the government-wide statement of activities uses a net (expense) revenue format. It starts with each function's gross expenses, then subtracts that function's program revenues to derive the net cost (or net revenue) of each function.

Program revenues are revenues tied to a specific function and come in three buckets: (1) charges for services, (2) operating grants and contributions, and (3) capital grants and contributions. After the functions, general revenues (such as most taxes, unrestricted grants, and investment earnings) are added to arrive at the change in net position.

2. Measurement focus & basis of accounting (MFBA)

Two concepts drive governmental accounting. Measurement focus asks "what resources are we measuring?" and basis of accounting asks "when do we recognize them?" The combination differs by statement set, and matching each set to the correct pair is one of the most heavily tested points in this area.

Notice the pattern: only governmental funds use current financial resources and modified accrual. Everything else (government-wide, proprietary, fiduciary) uses economic resources and full accrual.

Economic resources / full accrual

This is the familiar business model. All assets and liabilities, current and long-term, are reported. Capital assets are capitalized and depreciated, and long-term debt sits on the balance sheet. Revenues are recognized when earned and expenses when incurred.

Current financial resources / modified accrual

This focus measures only near-term inflows and outflows of spendable resources. The governmental fund balance sheet reports current assets and current liabilities; it generally excludes capital assets and long-term liabilities (those appear only in the government-wide statements).

• Revenue recognition: revenues are recognized when they are both measurable AND available. "Available" means collectible within the current period or soon enough thereafter to pay current-period liabilities, commonly defined as within 60 days of year-end (an entity-set policy).
• Expenditure recognition: governmental funds record expenditures (not expenses), generally when the related fund liability is incurred. Note the vocabulary: governmental funds spend, so they record expenditures.

3. Fund structure & fund types GASB 54 / 84

A fund is a self-balancing set of accounts. Governments organize activity into three broad categories of funds, each with its own measurement focus and basis as shown above.

4. Governmental fund accounting GASB 33

Governmental funds run on modified accrual, with three accounting layers that distinguish them from business accounting: the budget is recorded, encumbrances track commitments, and nonexchange revenues follow GASB 33 rules.

Budgetary accounting

When the legal budget is adopted, the government records it in the accounts. The entry compares estimated inflows against authorized outflows:

• Dr Estimated revenues (anticipated inflows)
• Cr Appropriations (authorized spending)
• Dr or Cr Budgetary fund balance (the plug; a debit balance signals a planned deficit, a credit balance a planned surplus)

These budgetary accounts are reversed at year-end. They never hit the GAAP basic statements directly; the budget-to-actual comparison is reported as RSI.

Encumbrance accounting

When a purchase order or contract is issued, the government reserves budgetary authority so it is not overspent:

• Dr Encumbrances and Cr Budgetary fund balance reserved for encumbrances at the order date.
• When the goods arrive, reverse the encumbrance and record the actual expenditure and liability.

Lapsing vs non-lapsing: if appropriations lapse at year-end, open encumbrances are closed and the commitment must be re-appropriated next year (often reported as committed or assigned fund balance). If appropriations do not lapse, the encumbrance carries forward.

Nonexchange revenues (GASB 33)

In a nonexchange transaction the government gives (or receives) value without directly receiving (or giving) equal value in return. GASB 33 sorts these into four classes:

Property-tax recognition

Property taxes are imposed nonexchange revenue. A receivable is recorded when an enforceable legal claim arises (typically the levy date). Revenue is recognized in the period the taxes are levied, but on modified accrual only to the extent the amounts are available (collected during the year or within the 60-day availability window). Amounts levied but not yet available are reported as a deferred inflow of resources, not revenue.

5. Fund balance & net position classifications GASB 54

Governmental funds report equity as fund balance (a hierarchy based on spending constraints), while the government-wide and proprietary statements report net position (three components). Do not mix the two vocabularies.

Governmental fund balance (GASB 54)

• Nonspendable: not in spendable form (inventory, prepaids) or legally/contractually required to be maintained intact (permanent fund principal).
• Restricted: constraints imposed externally (creditors, grantors, other governments) or by enabling legislation or the constitution.
• Committed: constraints imposed by the government's highest level of decision-making authority (for example, the council by ordinance); changing or removing the constraint requires that same formal action.
• Assigned: the government intends to use the resources for a specific purpose; the intent can be expressed by a delegated official, so it is less binding than committed.
• Unassigned: the residual classification for the general fund. Other governmental funds report a negative unassigned amount only when a deficit exists.

The distinction examiners probe: restricted = external constraint; committed = formal action by the highest authority (hard to undo); assigned = intent only (easy to change).

Government-wide net position (three components)

1. Net investment in capital assets: capital assets net of accumulated depreciation, reduced by the outstanding debt that financed them.
2. Restricted: subject to external constraints or enabling legislation.
3. Unrestricted: the residual.

6. Proprietary & fiduciary funds; interfund activity GASB 9 / 84

Proprietary and fiduciary funds both use the economic resources focus and full accrual, but they present different statement sets.

Proprietary fund statements (three)

1. Statement of net position (or balance sheet), reporting net position in the same three components as government-wide.
2. Statement of revenues, expenses, and changes in fund net position, distinguishing operating from nonoperating items.
3. Statement of cash flows, prepared using the direct method with four categories.

Enterprise vs internal service: both are proprietary. An enterprise fund serves external users (the public) for a fee. An internal service fund serves other departments of the same government on a cost-reimbursement basis. Because internal service funds primarily serve governmental activities, they are usually folded into the governmental activities column at the government-wide level.

Fiduciary fund statements (two)

1. Statement of fiduciary net position.
2. Statement of changes in fiduciary net position (additions and deductions).

Under GASB 84, custodial funds replaced the old agency funds and now present a statement of changes (additions and deductions), whereas agency funds previously reported only assets equal to liabilities.

Interfund activity

Remember: reciprocal activity (loans and services) mirrors exchange transactions between funds, while nonreciprocal activity (transfers and reimbursements) does not.

7. Government-wide statements & reconciliation GASB 34

Governmental fund statements are prepared on modified accrual, but the government-wide statements need full accrual. GASB 34 therefore requires a reconciliation that bridges the two. You convert by adding back the long-term elements the funds left out and by re-timing certain items.

Conversion: modified accrual to full accrual

• Add capital assets (net of accumulated depreciation). Funds expensed them as capital outlay expenditures; the government-wide view capitalizes them.
• Add long-term liabilities (bonds payable, net pension/OPEB liabilities, compensated absences) that the funds did not report.
• Convert expenditures to expenses: remove capital outlay and debt-principal expenditures, then record depreciation expense instead and adjust for the difference between expenditures and accrued expenses.
• Recognize accrued items not booked under modified accrual, such as accrued interest payable and revenues that were measurable but not "available."

Reconciliation of fund balance to net position

This reconciles total governmental fund balance to net position of governmental activities. Common reconciling items:

• (+) Capital assets used in governmental activities, net of accumulated depreciation, not reported in the funds.
• (−) Long-term liabilities (bonds payable, net pension liability) not due and payable currently, not reported in the funds.
• (+/−) Deferred outflows and deferred inflows of resources (for example, revenues deferred as unavailable in the funds are now recognized).
• (−) Accrued interest payable on long-term debt.
• (+/−) Internal service fund net position folded into governmental activities.

Reconciliation of change in fund balances to change in net position

This reconciles the net change in fund balances (statement of revenues, expenditures, and changes) to the change in net position (statement of activities). Common reconciling items:

• (+) Capital outlay expenditures capitalized (added back).
• (−) Depreciation expense (now recognized).
• (−) Bond proceeds removed (an other financing source in the funds, but a liability government-wide).
• (+) Debt principal repayments removed (an expenditure in the funds, but a liability reduction government-wide).
• (+/−) Revenues earned but not "available" (recognized now) and changes in accrued expenses (interest, compensated absences, pension expense).