Governmental and notforprofit accounting solution of c9.docx

Governmental and notforprofit accounting solution of c9.docx

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Governmentalandnotforprofitaccountingsolutionofc9

Chapter9

Business-TypeActivities

QuestionsforReviewandDiscussion

1.PerGASBStatementNo.34,whichestablishesthenewreportingmodel,governmentsmayaccountforanactivityinanenterprisefundaslongasitchargesfeestoexternalusersforgoodsandservices.Theyarerequiredtoaccountforanactivityinanenterprisefundifitsatisfiesanyoneofthefollowingcriteria:

∙Theactivityisfinancedwithrevenue,asopposedtogeneralobligation,debt.

∙Lawsorregulationsrequirethattheactivity’scostsofprovidingservices（includingcapitalcosts）berecoveredbyfeesandchargesratherthangeneralpurposetaxesorsimilarcharges.

∙Thepricingpoliciesoftheactivityestablishfeesandchargesdesignedtorecoveritscosts,includingcapitalcosts（suchasdepreciationordebtservice）.

Thus,ifthegolfcourseisfinancedbyuserfees,butdoesnotsatisfyanyoftheothercriteria,thenthegovernmentmay,butisnotrequiredto,accountforitinanenterprisefund.

2.Enterprisefundsareaccountedforonafullaccrualbasis.Thus,theyareaccountedforsimilarlytobusinesses.Governmentalfunds,bycontrast,areaccountedforonamodifiedaccrualbasis.

Theargumentsinfavorofusingthefullaccrualbasistoaccountforenterprisefundsincludethefollowing:

∙Thefullaccrualbasisofaccounting（i.e.,ameasurementfocusuponalleconomicresources）capturesalltheresourcesandobligations,includingcapitalassetsandlong-termobligations,associatedwithanactivity.Ittherebyprovidesamorecompletepictureoftheentity’sfiscalstatusandoperatingresults.

∙ThemeasurementfocusonalleconomicresourcesismoreconsistentwiththeGASB’sobjectivesthatfinancialreportingshouldprovideinformationtodeterminewhethercurrent-yearrevenuesweresufficienttopayforcurrent-yearservicesandtoassistusersinassessingserviceefforts,costsandaccomplishments.

∙Fullaccrualaccountingprovidesinformationondepreciation,whichisanessentialcostofoperations.

∙Business-typeaccountingfacilitatescomparisonswithsimilarprivateenterprises.

Thoseagainstincludethefollowing:

∙Twoseparatemeasurementfocusesandbasesforaccountingwithinthesamesetoffinancialstatementsareconfusingandlimittheusefulnessofentity-wideconsolidatedstatementsthatpurporttopresentanoverviewoftheentityasaneconomicwhole.

∙Therearenoclear-cutdistinctionsbetweenbusinessandnon-businessactivities.Despitemanysimilarities,governmentactivitiescannot—andshouldnot—becomparedtoactivitiescarriedoutintheprivatesector.Agovernmentshouldhavesoundpoliticalandeconomicreasons—otherthanmerelyearningaprofit—forconductingaparticularactivityinthepublicsector.Ifitdoesnot,thenitshouldbeprivatized.Thesereasons,bythemselves,suggestthattheactivitiesshouldbeassessedbycriteriaotherthanprofits—the“bottomline”ofbusiness-typefinancialreports.

Itcanbenotedthatinsofarasthefullaccrualbasisissuperiortothemodifiedaccrualbasis,thenarguablyitshouldbeusedtoaccountforallgovernmentactivities,notmerelythebusiness-typeactivities.Indeed,eachoftheargumentscitedabovecanbeappliedtogovernmentalaswellasenterprisefunds.

3.No.AgovernmentdoesnothavetoadheretoallpronouncementsoftheFASB.ItneverhastoadheretoaFASBpronouncementthatconflictswith,contradictsorhasbeenreplacedby,aGASBpronouncement.Itmust,however,applyallpronouncementsissuedpriortoNovember30,1989（exceptthosethatconflictwith,contradictorhavebeenreplacedby,aGASBpronouncement）.Forpronouncementsissuedafterthatdateagovernmenthasachoice.Itcaneitheradoptallpost-1989FASBpronouncementsornoneofthem.Inaccountingforitsinternalservicefundsitdoesnothavethesameoption.ItmustapplyallpronouncementsissuedpriortoNovember30,1989butonlythosepost1989FASBpronouncementsthattheGASBhasspecificallyendorsed.

4.First,thestatementofcashflowsmustbepreparedusingthedirectmethod.Governments,unlikebusinesses,cannotusetheindirectmethod.Second,thestatementofcashflowsmustclassifytransactionsinfourcategoriesratherthanthethreerequiredofbusinesses.Theseare:

∙Cashflowsfromoperatingactivities,

∙Cashflowsfromnoncapitalfinancingactivities,

∙Cashflowsfromcapitalandrelatedfinancingactivities,and

∙Cashflowsfrominvestingactivities.

Inaddition,interestexpenseisfoundinthe“cashflowsfromcapitalandrelatedfinancingactivities”orthe“noncapitalfinancingactivities”sectionofagovernmentbutunder“operatingactivities”inaprivatebusiness.

5.Ifthegovernmentaccountsforthelandfillinanenterprisefund,thenitwillbasethereportedexpense（andadditiontotheliability）ontheproportionofthelandfillusedduringtheyear.Thereportedexpensewouldbethetotalamountthatshouldhavebeenrecognizedasanexpense（addedtotheliability）uptothedateofcomputation,lesstheamountthathasactuallybeenrecognizedsofar.

Inagovernmentalfund,bycontrast,thereportedexpenditurewouldbeonlythatportionofcostrequiringtheuseofcurrentlyavailablefinancialresources.Thebalanceofanycostwouldbereportedasaliabilityonthegovernment-widestatements,whichareonafullaccrualbasis,andthescheduleoflong-termobligations.

6.Internalservicefundsareusedtoaccountforgovernmentalunitsordepartmentsthatprovidegoodsorservicestootherdepartmentsoragenciesonacostreimbursementbasis.Examplesofactivitiesaccountedforinaninternalservicefundincludedataprocessingservices,suppliesstores,vehiclerepairservices,andself-insurance.Agovernmentmayalsoaccountforthoseservicesinitsgeneralfund.Therearenorequirementsthatspecificactivitiesbeaccountedforinaninternalservicefund.

7.Internalservicefundsareexpectedtoestablishtheirbillingratestoassurethattheircostsarefullyreimbursed.Insofarastherearenogenerallyacceptedprinciplesof“cost”,thentherevenuesmaynotbe“objective.”Becausetherevenuesoftheinternalservicefundarealsotheexpendituresofthegeneralfund,thentheexpendituresofthegeneralfundwouldalsonotbeobjective.

8.Theessenceofinsuranceisthetransferofrisktoanindependentparty.Whenagovernment“self-insures”itdoesnotinsure.Itacceptstheriskitself.Evenifthegovernmentaccountsforitsself-insuranceinaninternalservicefund,thegovernmentasawholeisultimatelyresponsibleforanylosses.Anypaymentsfromthegeneralfundtotheinternalservicefundare,ineffect,internaltransfersratherthanexpenditures.Fromtheperspectiveofthegovernmentasawhole,theonly“true”expenditures,arethoseincurredwhenalossisincurredandthegovernmenthastopaytheclaim.

9.Ifthegovernmentaccountsforitsself-insuranceinaninternalservicefund,thenthepremiumrevenuecanbebasedonactuarialestimatesandcanincludeaprovisionforcatastrophes.If,however,itaccountsforitsself-insuranceinagovernmentalfund,thenthepremiumrevenuemustbelimitedtoactualclaimsexpenditures.Anychargesinadditiontoactualclaimsexpendituresmustberecognizedasanoperatingtransfer.

10.Youwouldwanttotakeintoaccountbothoperationalandeconomicdata.Examplesincludeoperationaldataregardingphysicalplant,occupancyrates,andfeesandeconomicdataonthecommunitythatthefacilityserves.

11.Ingovernment-widestatements,enterprisefundsareclassifiedasbusiness-typeactivities,whereasinternalservicefundsareclassifiedasgovernmentalfunds.Thatis,anyoftheassetsandliabilitiesoftheinternalservicefundsthatarenoteliminatedintheconsolidationprocessareincludedinthecolumnforgovernmentalactivities.Moreover,theexpensesofinternalservicefundsare“charged-back”tothefundstowhichtheinternalservicefundsprovidedservices.Therationaleforthedifferenceisthatinternalservicefundsprovideservicesmainlytogovernmentalfunds,whereasproprietaryfundsprovideservicesmainlytopartiesexternaltothegovernment.However,ifaninternalservicefundprovidesservicesmainlytoenterprisefunds,thenthebalancesthatarenoteliminatedintheconsolidationprocessshouldbereportedasbusiness-typeactivities.

12.Intheproprietaryfundstatementsofnetassetsandrevenues,expensesandchangesinnetassets,majorenterprisefundsarepresentedundertheheading“business-typeactivities”andatotalofthefundsispresented.Bycontrast,internalservicefundsarecombinedintoasinglecolumnandpresentedundertheheading“governmentalactivities.”

13.Themostcommonrestrictionstowhichproprietaryfundsaresubjectarisefromrevenuebondcovenants.Thesemayrequirethatthegovernmentusebondproceedsforspecificprojectsorthatitsetasideresourcestoservicethebonds.Insofarastherestrictedassetsareoffsetbyliabilities,theyneednotalsobeoffsetbyadesignationofnetassetsasrestricted.Thus,forexample,ifagovernmenthasunspentbondproceedsthatmustbeusedforaspecificpurpose,theseresourceswouldbeoffsetby“bondspayable.”Theyshouldnotalsobeoffsetbyanadditionalrestrictionofnetassets.Todoso,would,ineffect,beoffsettingtherestrictedresourcestwice.

Exercises

EX9-1

1.d

2.d

3.a

4.b

5.c

6.c

7.d

8.c

9.a

10.d

EX9-2

1.c

2.a

3.a

4.b

5.c

6.a

7.a

8.c

9.d

10.b

EX9-3

a.Journalentries

（1）

Equipment$70,000

Nonreciprocaltransfer-in$70,000

Torecordtheinitialcontributionofequipment

（2