Chapter Seventeen

Accounting for State and Local Governments

(Part II)

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Learning Objective 17-1

Account for lease contracts where the state or local government finds itself as either lessor or lessee.

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Accounting for Leases

The lease transfers ownership at the end of the lease term.

The lease has a bargain purchase option.

The lease term ≥75% of the asset’s estimated useful life.

The minimum lease payments > 90% of the PV of the asset.

For accounting purposes, leases must be identified as either Capital or Operating.GASB has adopted

the same four criteria applied by FASB to

identify a capital lease.

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Learning Objective 17-2

Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill.

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Solid Waste Landfill

The operation of a solid waste landfill creates long-term liabilities. The EPA imposes requirements that will require large outlays of resources to close a landfill in the future and to deal with such post closure activities as groundwater monitoring.

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Learning Objective 17-3

Explain the reporting of a net pension liability resulting from a defined benefit pension plan provided to employees by a state or local government.

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Defined Benefit Pension Plans

Retirees are usually entitled to future benefits based on a contractually set formula.

Future pension obligations of both companies and state governments collectively amount to trillions of dollars.

Obligations can be measured individually in billions of dollars.

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Learning Objective 17-4

Record the donation and acquisition of works of art and historical treasures.

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Works of Art and Historical Treasures

Although optional reporting is allowed, governments “should capitalize works of art, historical treasures, and similar assets at their historical cost or fair value at date of donation.”

FundFinancial Statements

Record an expenditure and the cash payment (if purchased). No entry is

made if the item is donated.

Government-Wide Financial StatementsRecord the asset and

the payment (if purchased) or revenue

(if donated).

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Learning Objective 17-5

Explain the reporting and possible depreciation of infrastructure assets.

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Infrastructure Assets and Depreciation

Infrastructure is defined as long-lived capital assets that normally are stationary in nature and can be preserved for a significantly greater number of years than most capital assets.

Government-Wide Financial Statements:

Infrastructure costs are recorded as assets in the government-wide statements.

Fund Financial Statements:

Record the acquisition as an expenditure.

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Learning Objective 17-6

Understand the composition of a state or local government’s comprehensive annual financial report (CAFR).

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Comprehensive Annual Financial Report (CAFR)

Three distinct sections:1. Management’s Discussion and Analysis (MD&A)2. Financial Statements– Government-wide Financial Statements– Fund Financial Statements– Notes to the Financial Statements

3. Required Supplementary Information

The government-wide and the fund financial statements are most often presented to the public as part of a comprehensive annual financial report (CAFR). The CAFR also includes an extensive amount of other information about the reporting government.

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Learning Objective 17-7

Explain the makeup of a primary government and its relationship to component units and related organizations as well as the combination of governments.

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Primary Government and Component Units

Reporting units start with a primary government unit (town, city, county or state).

Primary government must include all funds, activities, organizations, agencies, offices and departments that are not legally separate from it. May be difficult to determine whether certain activities should be included

Any unit legally separate from the primary government, but where financial accountability still exists, must be included.

Legally separate activities closely connected to the primary government must be included if omission from the financial statements would be misleading.

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Special Purpose Governments

Special purpose governments carry out only a single function or a limited number of functions for the public. Common examples include:

- public school districts - colleges and universities- water utilities - hospitals - transit authorities - library services.

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Mergers, Acquisitions, and Transfers of Operations

Combinations and realignment transactions are common. GASB views a combination as a merger if two legally separate entities are brought together to form a new entity and no significant consideration is exchanged.

A merger also exists if one of the entities ceases to exist while the other continues.

In a merger, net carrying values for all assets, deferred outflows of resources, liabilities and deferred inflows of resources are combined.

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Learning Objective 17-8

Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

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Government-Wide Statements

Statement of Net Position Reports economic resources controlled by the government. Includes all assets, capital assets, and liabilities. Capital assets except land, inexhaustible works of art, and

construction in progress reported net of accumulated depreciation.

Several amounts are restricted; restrictions are reported if usage of the resources has been specified.

Statement of Activities Contains information on functions of state or local government. Expenses are shown by function. Related program revenues should be shown for each function. Shows the net revenue figure for each function. General revenues are shown at the bottom of the statement.

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Governmental Funds— Fund Financial Statements

Balance Sheet Reports current financial resources (modified accrual accounting). Does not include proprietary funds, component units, or fiduciary

funds. Separate columns for the General Fund and each major fund. Identifies balances for both restricted and committed amounts.

Statement of Revenues, Expenditures, & Other Changes in Fund Balances

Net revenues not identified for specific functions. Reports expenditures, not expenses. Other financing sources and uses reflect long-term debt, sale of

property, and transfers between funds. Reconcile ending fund balance and ending change in net assets.

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Statement of Net Position Shows individual information about major enterprise

funds and all internal service funds. A single column for the summation of all other enterprise

funds. Provides a combined total for all of the enterprise funds.

Statement of Revenues, Expenses, & Other Changes in Fund Net Assets

Shows information about the same funds. Revenues, expenses, nonoperating items, and transfers

reported here.

Fund Financial Statements - Proprietary Funds

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A proprietary fund operates similarly to a for-profit business, and information about cash flows is considered just as vital. However, the physical structure is not entirely the same.

Statement of Cash FlowsFour sections…

1) Cash flows from operating activities. 2) Cash flows from noncapital financing activities.3) Cash flows from capital and related financing activities.

4) Cash flows from investing activities.

Note that the Direct Method is required for presentation.

Fund Financial Statements - Proprietary Funds

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Learning Objective 17-9

Understand the presentation of financial statements for a public college or university.

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Public Colleges and Universities

A large amount of funding for public schools comes from governments, lessening reliance on tuition and fees.

With public funding, public schools often raise and accumulate a smaller amount of endowment funds than private colleges and universities.

Public universities may operate similarly to businesses but they are special purpose governments and accountable to the citizenry.

Most public schools only need to prepare a single set of statements equivalent to those of an enterprise fund.

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