Governmental and notforprofit accounting solution of c9.docx

1、Governmental and notforprofit accounting solution of c9Chapter 9Business-Type ActivitiesQuestions for Review and Discussion 1. Per GASB Statement No. 34, which establishes the new reporting model, governments may account for an activity in an enterprise fund as long as it charges fees to external us

2、ers for goods and services. They are required to account for an activity in an enterprise fund if it satisfies any one of the following criteria: The activity is financed with revenue, as opposed to general obligation, debt. Laws or regulations require that the activitys costs of providing services

3、(including capital costs) be recovered by fees and charges rather than general purpose taxes or similar charges. The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service). Thus, if the golf course is

4、financed by user fees, but does not satisfy any of the other criteria, then the government may, but is not required to, account for it in an enterprise fund. 2. Enterprise funds are accounted for on a full accrual basis. Thus, they are accounted for similarly to businesses. Governmental funds, by co

5、ntrast, are accounted for on a modified accrual basis. The arguments in favor of using the full accrual basis to account for enterprise funds include the following: The full accrual basis of accounting (i.e., a measurement focus upon all economic resources) captures all the resources and obligations

6、, including capital assets and long-term obligations, associated with an activity. It thereby provides a more complete picture of the entitys fiscal status and operating results. The measurement focus on all economic resources is more consistent with the GASBs objectives that financial reporting sho

7、uld provide information to determine whether current-year revenues were sufficient to pay for current- year services and to assist users in assessing service efforts, costs and accomplishments. Full accrual accounting provides information on depreciation, which is an essential cost of operations. Bu

8、siness-type accounting facilitates comparisons with similar private enterprises. Those against include the following: Two separate measurement focuses and bases for accounting within the same set of financial statements are confusing and limit the usefulness of entity-wide consolidated statements th

9、at purport to present an overview of the entity as an economic whole. There are no clear-cut distinctions between business and non-business activities. Despite many similarities, government activities can not and should not be compared to activities carried out in the private sector. A government sh

10、ould have sound political and economic reasons other than merely earning a profit for conducting a particular activity in the public sector. If it does not, then it should be privatized. These reasons, by themselves, suggest that the activities should be assessed by criteria other than profits the “

11、bottom line” of business-type financial reports.It can be noted that insofar as the full accrual basis is superior to the modified accrual basis, then arguably it should be used to account for all government activities, not merely the business-type activities. Indeed, each of the arguments cited abo

12、ve can be applied to governmental as well as enterprise funds. 3. No. A government does not have to adhere to all pronouncements of the FASB. It never has to adhere to a FASB pronouncement that conflicts with, contradicts or has been replaced by, a GASB pronouncement. It must, however, apply all pro

13、nouncements issued prior to November 30, 1989 (except those that conflict with, contradict or have been replaced by, a GASB pronouncement). For pronouncements issued after that date a government has a choice. It can either adopt all post-1989 FASB pronouncements or none of them. In accounting for it

14、s internal service funds it does not have the same option. It must apply all pronouncements issued prior to November 30, 1989 but only those post 1989 FASB pronouncements that the GASB has specifically endorsed. 4. First, the statement of cash flows must be prepared using the direct method. Governme

15、nts, unlike businesses, cannot use the indirect method. Second, the statement of cash flows must classify transactions in four categories rather than the three required of businesses. These are: Cash flows from operating activities, Cash flows from noncapital financing activities, Cash flows from ca

16、pital and related financing activities, and Cash flows from investing activities.In addition, interest expense is found in the “cash flows from capital and related financing activities” or the “non capital financing activities” section of a government but under “operating activities” in a private bu

17、siness. 5. If the government accounts for the landfill in an enterprise fund, then it will base the reported expense (and addition to the liability) on the proportion of the landfill used during the year. The reported expense would be the total amount that should have been recognized as an expense (

18、added to the liability) up to the date of computation, less the amount that has actually been recognized so far. In a governmental fund, by contrast, the reported expenditure would be only that portion of cost requiring the use of currently available financial resources. The balance of any cost woul

19、d be reported as a liability on the government-wide statements, which are on a full accrual basis, and the schedule of long-term obligations. 6. Internal service funds are used to account for governmental units or departments that provide goods or services to other departments or agencies on a cost

20、reimbursement basis. Examples of activities accounted for in an internal service fund include data processing services, supplies stores, vehicle repair services, and self-insurance. A government may also account for those services in its general fund. There are no requirements that specific activiti

21、es be accounted for in an internal service fund. 7. Internal service funds are expected to establish their billing rates to assure that their costs are fully reimbursed. Insofar as there are no generally accepted principles of “cost”, then the revenues may not be “objective.” Because the revenues of

22、 the internal service fund are also the expenditures of the general fund, then the expenditures of the general fund would also not be objective. 8. The essence of insurance is the transfer of risk to an independent party. When a government “self-insures” it does not insure. It accepts the risk itsel

23、f. Even if the government accounts for its self-insurance in an internal service fund, the government as a whole is ultimately responsible for any losses. Any payments from the general fund to the internal service fund are, in effect, internal transfers rather than expenditures. From the perspective

24、 of the government as a whole, the only “true” expenditures, are those incurred when a loss is incurred and the government has to pay the claim. 9. If the government accounts for its self-insurance in an internal service fund, then the premium revenue can be based on actuarial estimates and can incl

25、ude a provision for catastrophes. If, however, it accounts for its self-insurance in a governmental fund, then the premium revenue must be limited to actual claims expenditures. Any charges in addition to actual claims expenditures must be recognized as an operating transfer.10. You would want to ta

26、ke into account both operational and economic data. Examples include operational data regarding physical plant, occupancy rates, and fees and economic data on the community that the facility serves.11. In government-wide statements, enterprise funds are classified as business-type activities, wherea

27、s internal service funds are classified as governmental funds. That is, any of the assets and liabilities of the internal service funds that are not eliminated in the consolidation process are included in the column for governmental activities. Moreover, the expenses of internal service funds are “c

28、harged-back” to the funds to which the internal service funds provided services. The rationale for the difference is that internal service funds provide services mainly to governmental funds, whereas proprietary funds provide services mainly to parties external to the government. However, if an inte

29、rnal service fund provides services mainly to enterprise funds, then the balances that are not eliminated in the consolidation process should be reported as business-type activities.12. In the proprietary fund statements of net assets and revenues, expenses and changes in net assets, major enterpris

30、e funds are presented under the heading “business-type activities” and a total of the funds is presented. By contrast, internal service funds are combined into a single column and presented under the heading “governmental activities.”13. The most common restrictions to which proprietary funds are su

31、bject arise from revenue bond covenants. These may require that the government use bond proceeds for specific projects or that it set aside resources to service the bonds. Insofar as the restricted assets are offset by liabilities, they need not also be offset by a designation of net assets as restr

32、icted. Thus, for example, if a government has unspent bond proceeds that must be used for a specific purpose, these resources would be offset by “bonds payable.” They should not also be offset by an additional restriction of net assets. To do so, would, in effect, be offsetting the restricted resources twice.ExercisesEX 9-11. d2. d3. a4. b5. c6. c7. d8. c9. a10. dEX 9-21. c2. a3. a4. b5. c6. a7. a 8. c9. d10. bEX 9-3a. Journal entries(1)Equipment $ 70,000Nonreciprocal transfer-in $ 70,000To record the initial contribution of equipment(2