Government Financial Reporting - Wiley

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C H A P T E R 3

Government FinancialReporting

CHAPTER HIGHLIGHTS

� The objectives of financial reporting and GASB Statement No. 34� Basic financial statements—government-wide statements

� Basic financial statements—fund statements

� Notes and required supplementary information

I n Chapter 2, we discussed the reasons why governments use fund accounting, and wedescribed the purposes of the funds that they maintain. In Chapters 4 through 10, we will

examine the principal transactions of the various types of funds. Our goal in this chapter is toprovide a broad understanding of the purpose, form, and general content of the basic financialstatements that are required by generally accepted accounting principles (GAAP).

The basic financial statements are the end product of the accounting system. Armed withan overview of this end product, students should find it easier to appreciate the discussions inthe next few chapters. Those chapters should fill in the blanks regarding how information isselected and recorded in the various funds, and how recorded information is summarized forexternal reporting.

In Chapter 11 we will address additional reporting issues, including the scope of thereporting entity (e.g., which affiliated organizations should be included in a government’sreport) and the supplementary information included in a government’s comprehensive annualfinancial report (CAFR). In Chapter 14, we will discuss the importance and requirements ofauditing, and in Chapter 15, we will explain the elements of financial statement analysis.

The financial statements illustrated in this chapter, and some of the statements insubsequent chapters, are from the CAFR of the City of Vero Beach, Florida, for the fiscal yearending September 30, 2008.1

HOW CAN FUNDS BE COMBINED AND CONSOLIDATED?.............................................................................................................

As discussed in Chapter 2, fund accounting provides accountability for, and control of, publicmonies. Each fund is a separate fiscal and accounting entity with its own self-balancing set ofaccounts. Thus, financial statements, such as a balance sheet and a statement of revenues and

1 Students can learnmore about Vero Beach and its financial reporting online at www.covb.org. The city’s CAFRs for2008 and other years can be found under ‘‘City Departments—Finance.’’ Management’s discussion and analysis inthe 2008 CAFR provides an introduction to and overview of the financial statements discussed in this and subsequentchapters.

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expenditures or expenses, can be prepared for each individual fund. However, governmentsmaymaintain hundreds of funds. A way is needed to summarize fund information for financialreporting so that the reports are of a manageable size but still provide useful information,including the restrictions on resources that funds represent. One possibility is simply tocombine or aggregate the funds—add them together without adjusting for interfund activitiesand balances. Another is to consolidate the funds—add them together, but eliminate interfundactivities and balances—and prepare financial statements for the government as a singleeconomic entity.

WHAT IS GASB STATEMENT NO. 34?.............................................................................................................

After years of considerable debate, the GASB issued its Statement No. 34, Basic FinancialStatements—andManagement’s Discussion and Analysis—for State and Local Governments, in June1999. Upon its release, the GASB chairman characterized Statement No. 34 as ‘‘the mostsignificant change in the history of governmental accounting.’’2 The GASB’s goal withStatementNo. 34 was to update the financial reporting requirements for governments in waysthat would further the objectives of financial reporting established in Concepts StatementNo. 1 and that would result in more useful information for the various groups of users ofgovernment financial reports.

Much of the debate centered on whether governments should prepare combined,fund-based financial statements or, instead, consolidated financial statements for the gov-ernment as a whole, similar to the financial statements of businesses. An important part of thisdebate was whether the statements should focus on current financial resources and use themodified accrual basis of accounting, or focus on all economic resources (including capitalassets) and use the full accrual basis of accounting.

The GASB concluded that the objectives of financial reporting established in ConceptsStatement No. 1 could not all be achieved by using either fund-based reporting or consoli-dated financial statements alone; nor could they all be achieved using a single measurementfocus and basis of accounting. For example, recall the discussion in Chapter 1 about theconflict between the objectives of reporting on budgetary and fiscal compliance as opposed toreporting on interperiod equity. Realization of the compliance objective requires financialstatements prepared on a budget or near-budget basis (i.e., a cash basis or a modified accrualbasis), but fulfillment of the interperiod equity objective requires financial statements on a fullaccrual basis, with a focus on economic resources.

FISCAL VERSUS OPERATIONAL ACCOUNTABILITY According to Concepts StatementNo. 1, the overriding objective of all financial reporting is accountability. The GASBconcluded that accountability has different forms that reflect variations in users’ informationneeds. Traditionally, governmental funds have focused on fiscal accountability, whereas thefocus of the proprietary (business-type) funds has been on operational accountability. TheGASB defines the two types of accountability as follows:

� Fiscal accountability is the responsibility of governments to justify that their actions in thecurrent period have complied with public decisions [e.g., the legally adopted budget]concerning the raising and spending of public monies in the short term (usually onebudgetary cycle or one year).

� Operational accountability is governments’ responsibility to report the extent to which theyhave met their operating objectives efficiently and effectively, using all resources

2GASBNews Release, ‘‘GASB Releases New Standard ThatWill Significantly Change Financial Reporting by Stateand Local Governments,’’ June 30, 1999.

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available for that purpose, and whether they can continue to meet their objectives for theforeseeable future.3

The GASB concluded that to meet users’ needs for short-term financial information andbudgetary comparisons, the governmental funds should focus on fiscal accountability, andthat the modified accrual basis of accounting, with a measurement focus on current financialresources, is appropriate for that purpose. Proprietary funds should focus on operationalaccountability (all economic resources), using the full accrual basis. However, governmentsshould also prepare consolidated financial statements to provide information on the financialposition and operating results of the government as a single economic entity. That is, theconsolidated financial statements should provide operational accountability information forboth governmental and proprietary activities, and therefore should focus on economicresources, using the full accrual basis of accounting. The GASB also concluded that fiduciaryactivities (such as pension trust funds) should be excluded from the consolidated statements(but should be reported in fund statements), because trust and agency resources belong to thebeneficiaries of the trust or agency relationship. Thus, they should not be included inassessments of the government’s financial position.

WHATARE THE REQUIRED BASIC FINANCIAL STATEMENTS?.............................................................................................................

Statement No. 34 mandates that governments’ basic financial statements (those required forcompliance with generally accepted accounting principles, or GAAP) include two separatebut related sets of financial statements. The first set, the government-wide financial statements,concentrates on the government as a whole. It consolidates all of a government’s ownoperations (excluding its fiduciary activities) and includes within its measurement focus all ofthe government’s economic resources, including capital assets. The statements are presentedon a full accrual basis. Tables 3-1 and 3-2 (discussed later in the chapter) illustrate thegovernment-wide statements of Vero Beach, Florida.

The second set, the fund financial statements, views the government as a collection ofseparate funds grouped into three categories: governmental, proprietary, andfiduciary funds. Aseparate financial statement is presented for each category, and each statement has multiplecolumns if there is more than one fund in each category. However, governments are notrequired to include a separate column for each fund they maintain in each category. Thegovernmental and proprietary funds statements focus on the major funds. For example, thegovernmental funds statement includes one column for the general fund (always consideredmajor), one for each of the other major funds (whether they are special revenue funds, capitalprojects funds, or debt service funds), and one for all nonmajor funds combined. Although thefund statements include ‘‘totals’’ columns, they combine rather than consolidate the funds.Hence, interfund items (such as receivables and payables or transfers from one fund to another)are not eliminated.

Proprietary funds are maintained on a full accrual basis and measure all economicresources. Governmental funds, however, focus on current financial resources and use amodified accrual basis of accounting.Therefore, to prepare their government-wide statements,governments must adjust the governmental fund statements to the full accrual basis. (They donot, of course, have tomaintain two sets of books.) StatementNo. 34 requires that a summary ofthe principal adjustments be presented with the statements, so that users can more readilyunderstand the relationship between the fund statements and the government-wide statements.Tables 3-3 through 3-9 (discussed later in the chapter) illustrate the governmental and

3GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and LocalGovernments (June 1999), para. 203.

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proprietary funds statements of Vero Beach, Florida. Fiduciary fund statements will bediscussed in Chapter 10.

As illustrated in Figure 3-1, the basic financial statements must include notes andmust befollowed by required supplementary information—which includes, for example, budget-to-actual comparisons and data relating to pension plans and certain types of risks. StatementNo. 34 also requires that governments present, along with the basic financial statements, amanagement’s discussion and analysis (MD&A). Similar in nature to the MD&A thataccompanies business financial statements, this narrative presents a brief, nontechnicaloverview of the government’s financial performance during the year and of its financialposition at year-end.

WHATARE THE GOVERNMENT-WIDE FINANCIAL STATEMENTS?.............................................................................................................

There are just two government-wide statements: a statement of net assets (or a balance sheet)and a statement of activities.

GOVERNMENT-WIDE STATEMENT OF NET ASSETS The statement of net assets (illus-trated in Table 3-1) is similar to the balance sheet of a business. However, unlike that of abusiness, it has separate columns for governmental activities, business-type activities, andtotal primary (reporting) government. If the government has component units (Vero Beachdoes not), they should be reported in an additional column or columns after the total primarygovernment column. Component units are entities (such as building or housing authorities)that are economically intertwined with the government, albeit legally separate; they will bediscussed in Chapter 11.

The governmental activities column in the statement of net assets includes consolidatedinformation (i.e., with interfund activities and balances eliminated) from the governmentalfunds (and generally also from internal service funds, as discussed later in this chapter and inChapter 9). The business-type activities column includes consolidated information from theenterprise funds. The column for the total primary government consolidates the informationreported in the governmental and business-type activities columns.

Management’s discussionand analysis

Government-widefinancial statements

Notes to the financial statements

Fund financialstatements

Required supplementaryinformation

(other than MD&A)

FIGURE 3-1 Minimum Requirements for Government Financial Reporting

Source:GASB Statement No. 34, Basic Financial Statements—andManagement’s Discussion and Analysis—for State and Local Governments (June1999), para. 7.


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The illustrated statement is in the format ‘‘assets less liabilities equals net assets.’’ Themore traditional format, ‘‘assets equals liabilities plus net assets,’’ is also acceptable.

Consistentwith the focus on economic resources and the full accrual basis of accounting,the assets section of the statement of net assets includes both capital and financial assets. Thecapital assets, including infrastructure, such as highways and bridges, as well as land,buildings, and equipment, are generally reported net of accumulated depreciation. (Anexception will be discussed in Chapter 7.) Similarly, the liabilities section includeslong-term obligations. To highlight the proportion of government resources invested incapital assets, the net assets section of the statement distinguishes between the net capitalassets (capital assets less the obligations incurred to construct or purchase them) and the netnoncapital assets.

IMPORTANCEOF RESTRICTIONS ON NETASSETS Governments differ from businesses inthat a substantial portion of their resources is restricted for specific purposes by law or byexternal parties (such as grantors or donors). It is essential that these resources be distin-guished from those that are unrestricted and thereby available to meet all the government’sneeds. Thus, the GASB requires that net assets be displayed in three separate categories:

1. Amounts invested in capital assets (net of related debt, such as mortgages or bonded debt),which obviously cannot be spent unless the assets are sold

2. Amounts restricted for specific purposes, such as capital projects or debt service, which thuscannot be used for other purposes

3. Unrestricted amounts, which can be used for any purpose.

As shown in Table 3-1, 71% of Vero Beach’s reported net assets for governmentalactivities and 82% of its business-type net assets are either tied up in capital assets or areotherwise restricted (not usable to meet general financing needs).

GOVERNMENT-WIDE STATEMENT OF ACTIVITIES In contrast to the government-widestatement of net assets, which is similar to a business balance sheet, the government-widestatement of activities (illustrated in Table 3-2) bears little resemblance to the incomestatement of a business. At first glance, it seems quite daunting, but the logic behind it is easyto follow. The statement is particularly useful to users, such as taxpayers and other resourceproviders, who are interested in how much the government’s programs and other servicescost.

Unlike a business income statement, the aim of the activities statement is to show the netcost of each of the government’s main functions and programs.4 The net cost is the amount offunctional or program expenses that must be covered by taxes and other general revenues, incontrast to fees and charges of the function or program itself. Accordingly, the first column ofthe statement of activities reports total expenses for each program or function, subdivided, asin the statement of net assets, between governmental and business-type activities of theprimary government (and followed by expenses of component units).

The next three columns report revenues that directly help defray the expenses, such asthose from charges for services and program-specific grants. Then, two columns (one forgovernmental activities and one for business-type activities) show the difference between

4A function is a group of related activities aimed at providing a major service, whereas a program is an operation ororganizational unit directed to attain a specific purpose or objective within a function. For example, culture andrecreation is a function; programs within that function might include a library service, a parks department, and amuseum.Governments are encouraged to report by program, but theminimum level of detail required is by function.The reporting level should be the same for governmental activities reported in the government-wide statement ofactivities as it is for expenditures reported in the governmental funds (GASB StatementNo. 34, para. 39, as amended).The City of Vero Beach reports by function.

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T A B L E 3 - 1Statement of Net Assets

CITY OF VERO BEACH, FLORIDA

STATEMENTOFNET ASSETS

September 30, 2008

GovernmentalActivities

Business-typeActivities Total

ASSETSEquity in pooled cash and investments $ 27,609,617 $ 17,672,314 $ 45,281,931Receivables:

Accounts receivable, net 180,835 15,617,105 15,797,940Accrued interest receivable 205,004 175,833 380,837Special assessment receivable 149,517 769,035 918,552

Due from other governments 622,160 882,593 1,504,753Internal Balances - - -Inventories 113,537 6,801,027 6,914,564Prepaid expenses - 6,435 6,435Restricted assets:

Equity in pooled cash and investments - 12,664,488 12,664,488Net pension obligation asset 1,471,761 - 1,471,761

Capital assets (net of accumulated depreciation)

Land - non-depreciable 12,820,931 10,140,182 22,961,113Buildings 7,293,329 94,893,462 102,186,791Improvements other than buildings 1,062,591 68,026,056 69,088,647Machinery and equipment 2,981,485 57,649,934 60,631,419Infrastructure 10,623,961 - 10,623,961Construction in progress 1,638,367 9,600,756 11,239,123

Power Plant omission credits - 438,525 438,525Unamortized bond costs - 626,902 626,902

Total assets 66,773,095 295,964,647 362,737,742

LIABILITIES

Accounts and contracts payable 573,385 1,992,659 2,566,044Accrued liabilities 697,315 7,808,713 8,506,028Due to other governments - 666,900 666,900Accrued interest payable - 1,120,800 1,120,800Deposits - 3,870,079 3,870,079Long-term liabilities:

Due within one year 2,515,495 4,166,776 6,682,271Due in more than one year 21,246,269 83,012,602 104,258,871

Total liabilities 25,032,464 102,638,529 127,670,993

NET ASSETS

Invested in capital assets, net of related job 20,349,914 156,249,140 176,599,054Restricted for:

Special revenue projects 2,064,183 - 2,064,183Capital projects 6,987,162 - 6,987,162Plant replacement and renewal - 2,000,000 2,000,000Plant operations - 800,000 800,000Debt service 3,739 - 3,739Law enforcement 48,832 - 48,832Perpetual care - expandable 65,499 - 65,499Perpetual care - nonexpandable 49,630 - 49,630

Unrestricted 12,171,672 34,276,978 46,448,650Total Net aaetss $ 41,740,631 $ 193,326,118 $ 235,066,749


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the total expenses for each function or program and the directly attributable revenues(called program revenues). The amounts in those two columns indicate the net cost totaxpayers (amounts that must be subsidized from general revenues) of the functions orprograms.

CALCULATING THE NET COST TO TAXPAYERS For example, in Table 3-2, Vero Beach’spublic safety function reports expenses of $8.1 million (column 1) which is partially financedby specific charges for program services ($157,792, column 2) and capital grants andcontributions to the program ($10,144, column 4). This leaves approximately $8 million

T A B L E 3 - 2Statement of Activities


STATEMENTOF ACTIVITIES

For the Year Ended September 30, 2008

Program Revenues

Net (Expense) Revenue and

Changes in Net Assets

Primary Government

Function/Program Expenses

Charges for

Services

Operating

Grants and

Contributions

Capital

Grants and

Contributions

Governmental

Activities

Business-type

Activities Total

Governmental activities:

General Government $ 11,452,290 $ 3,530,467 $ 306,748 - $ (7,615,075) - $ (7,615,075)

Public Safety 8,094,139 157,792 - 10,144 (7,926,203) - (7,926,203)

Physical Environment 185,442 146,996 - - (38,446) - (38,446)

Transportation 3,374,155 - - 174,437 (3,199,718) - (3,199,718)

Culture and Recreation 923,899 - - 402,104 (521,795) - (521,795)

Interest on long-term debt 453,842 - - - (453,842) - (453,842)

Total governmental

activities

24,483,767 3,835,255 306,748 586,685 (19,755,079) - (19,755,079)

Business-type activities:

Electric System 96,414,156 98,489,596 22,609 660,724 - 2,758,773 2,758,773

Water and Sewer System 16,400,519 14,392,131 264,423 904,231 - (839,734) (839,734)

Municipal Airport 2,753,855 2,624,696 651 2,709,295 - 2,580,787 2,580,787

Municipal Marina 1,754,468 1,652,540 1,183 - - (100,744) (100,744)

Solid Waste 2,493,815 2,433,243 10,660 - - (49,912) (49,912)

Recreation 4,125,518 620,170 56,682 - - (3,448,666) (3,448,666)

Total business-type

activities

123,942,331 120,212,376 356,208 4,274,250 - 900,504 900,504

Total primary government $ 148,426,098 $ 124,047,631 $ 662,956 $ 4,860,935 (19,755,079) 900,504 (18,854,575)

General Revenues:

Property Taxes 5,344,705 - 5,344,705

Sales Taxes 5,127,694 - 5,127,694

Utility Taxes 3,792,531 - 3,792,531

Investment Earnings 1,147,970 1,224,617 2,372,587

Miscellaneous 32,416 421,365 453,781

Total general revenues 15,445,316 1,645,982 $ 17,091,297

Transfers 3,479,999 (3,479,999) -

Total general revenues and transfers 18,925,315 (1,834,017) 17,091,297

Change in net assets (829,764) (933,514) (1,763,278)

Net assets - beginning 42,570,395 194,259,632 236,830,027

Net assets - ending $ 41,740,631 $ 193,326,118 $ 235,066,749

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(column 5) that must be financed from general revenues. Thus, the net cost of the publicsafety function to the taxpayers is $8 million.

The lower portion of the statement summarizes the taxes and other general revenues ofthe government at large—those that cannot be associated directly with specific functions orprograms and that can be used to cover the net cost of all of the government’s services. InTable 3-2, the net cost of all functions of the primary government (the City of Vero Beach) is$18.9 million (total net expense for the primary government, column 7), most of which wasfinanced from $17.1 million in general revenues (taxes, investment earnings, and otheramounts not restricted to specific functions or programs, reported in column 7 below the netexpense figure). The remaining $1.8 million of net cost reduced the government’s net assets(change in net assets, column 7) from $236.8 million at the beginning of the year to an endingbalance of $235.1 million, as reported in the statement of net assets (Table 3-1).

The government-wide statements are on a full accrual basis. Therefore, as already noted,the statement of net assets includes both capital assets and long-term debt. Correspondingly,the expenses reported in the statement of activities include charges for depreciation of capitalassets, even though they are not broken out separately.

WHATARE THE FUND FINANCIAL STATEMENTS?.............................................................................................................

The three categories of funds necessitate three sets of statements, each containing a slightlydifferent blend of statements. The following are the basic statements required for each fundcategory (illustrated in the indicated tables):

� Governmental funds:� Balance sheet (Table 3-3)� Statement of revenues, expenditures, and changes in fund balances (Table 3-5)

� Proprietary funds:� Statement of net assets (or a balance sheet) (Table 3-7)� Statement of revenues, expenses, and changes in fund net assets (Table 3-8)� Statement of cash flows (discussed and illustrated in Chapter 9)

� Fiduciary funds:� Statement of fiduciary net assets� Statement of changes in fiduciary net assets

Both statements are discussed and illustrated in Chapter 10.

GOVERNMENTAL FUNDS The general fund and each of the government’s other major fundsshould be reported in separate columns. Major funds are defined as the general fund andother funds in which total assets, liabilities, revenues, or expenditures/expenses of the fund areat least 10% of the corresponding total for the relevant fund category (governmental orenterprise) and also at least 5% of the corresponding total for all governmental and enterprisefunds combined. The remaining nonmajor governmental funds are combined into the columncaptioned other governmental funds. Tables 3-3 and 3-5 present the governmental fundsbalance sheet and statement of revenues, expenditures, and changes in fund balances for VeroBeach. The general fund is the city’s only major fund.

The governmental fund balance sheet is followed by a reconciliation (Table 3-4) of totalgovernmental fundbalances ($19.2million)with thenet assets of governmental activities ($41.7million) per the government-wide statement of net assets. A similar reconciliation (Table 3-6)ties the changes in fund balances, per the governmental fund statement of revenues, expendi-tures, and changes in fund balances ($526,125), with the change in the net assets of govern-mental activities per the government-wide statements (a reduction of $829,764).


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Governmental Funds Balance Sheet In contrast to the government-wide statement ofnet assets, the governmental funds balance sheet (Table 3-3) uses the more traditional formatthat presents assets as being equal to liabilities plus fund balances. Recall that as indicated bythe list of long-term items in the reconciliation (Table 3-4), governmental funds focus oncurrent financial resources. (Inventories and prepaid items such as insurance—discussed inChapter 5—are considered current financial resources for reporting purposes.) Thus thebalance sheet does not include capital or other noncurrent assets. Similarly, all reportedliabilities, including deferred revenues (discussed in Chapter 4), include only amountspayable or recognizable as revenue within one budgetary cycle or one year.

Classification of Fund Balances As illustrated in Table 3-3, the City of Vero Beach hassubdivided its governmental funds balance sheet into amounts that are reserved and unreserved,rather than restricted and unrestricted, as reported in the government-wide statement of netassets (Table 3-1). A reserved fund balance is similar in concept to a restriction of resources for aspecific purpose.However, each fund (except the general fund) itself represents a restriction onthe use of the resources for which it accounts. Thus, a reservation of fund balance is, in essence,an additional restriction on fund resources. It indicates within a governmental fund the amountof the fund balance that is not available for appropriation for new expenditures, because theamount either is not expendable (e.g., is tied up in inventory) or it has been legally restricted orcommitted for specified purposes—such as, in Table 3-3, encumbrances (i.e., outstandingpurchase orders or contracts), debt service, and law enforcement. As a result, although the city’sgeneral fund has a fund balance of $9,945,121, only $9,781,447 is available for appropriation.

The fund balance classification illustrated in Table 3-3 complied with GASB standards atSeptember 30, 2008, when the City of Vero Beach prepared its governmental funds balancesheet. However, in February 2009, the GASB issued its Statement No. 54, which establishednew classifications of governmental fund balances for reporting periods beginning after June15, 2010. The GASB’s research found that many financial statement users and preparers wereconfused about the distinction between restricted net assets in the government-widestatements and reserved fund balances in the governmental fund statements. Also, govern-ments were interpreting the existing standards in different ways. As a result, the reporting offund balance information was inconsistent across governments, making it difficult forfinancial statement users to understand.

GASB StandardsGASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions,requires governments to report governmental fund balances using the following classifica-tions, which reflect the relative strength of constraints on how specific amounts can be spent:

� Nonspendable fund balance comprises amounts that are not in a spendable form (e.g.,inventory) or that must be maintained intact (e.g., the principal of an endowment fund).

� Restricted fund balance comprises amounts that can be spent only for the specificpurposes stipulated by external resource providers (e.g., grantors), or constitutionally, orthrough enabling legislation (i.e., legislation that creates a new revenue source andrestricts its use). Restrictions cannot be changed or lifted without the consent of theresource providers.

� Committed fund balance comprises amounts that can be used only for the specific purposesdetermined by a formal action of the government’s highest level of decision-making authority

(continued )

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Governmental Funds Statement of Revenues, Expenditures, and Changes in FundBalances Similar to the balance sheet, the governmental fund statement of revenues,expenditures, and changes in fund balances is also presented in a more traditional format thanthe government-wide statement of activities. Statement No. 34 requires revenues (discussedin Chapter 4) to be reported by major source, such as property taxes and licenses and permits.Expenditures (discussed in Chapter 5) should be reported, at a minimum, by function, such asadministrative services and public works, similar to the functional breakdown provided in thegovernment-wide statement of activities. As indicated in Table 3-5, Vero Beach goes beyondthe minimum requirements and further groups expenditures by character—i.e., expendituresfor current operations, capital outlay, and debt service.

Revenues and Expenditures versus Other Financing Sources and Uses Followingrevenues and expenditures, the statement includes a section for other financing sources and uses.Similar to revenues and expenditures, these amounts are inflows and outflows of currentfinancial resources, and thus contribute to the net change in fund balances.

However, the terms revenue and expenditure are generally used only for amounts thatincrease or decrease the net assets of the government as a whole—not just those ofindividual funds. In contrast, most other financing sources and uses affect individualfund balances but not the net assets of the government as a whole. Common examplesare interfund transfers and proceeds of debt (see Table 3-5). Interfund transfers areessentially non-repayable subsidies from one fund to another. Proceeds of debt increasea governmental fund balance, because they are an inflow of current financial resources.However, they do not increase the government’s net assets, because the government hasincurred a corresponding liability, which is reported in the government-wide statement of

(e.g., a legislature or city council). Commitments may be changed or lifted only by the sameformal action that imposed them.

� Assigned fund balance comprises amounts that the government intends to use for specificpurposes. Intent can be expressed by the governing body or by an official or entity towhich the governing body delegates the authority. In governmental funds other than thegeneral fund, assigned fund balance represents the amount that is not restricted orcommitted. This indicates that resources in other governmental funds are, at minimum,intended to be used for the purpose of that fund.

� Unassigned fundbalance is the residual classification for the general fund and comprises allamounts not included in the other classifications. Unassigned amounts are available for anypurpose.Only the general fund can report positive unassigned amounts.However, if anothergovernmental fund has a fund balance deficit, it would be reported as a negative amount inthe unassigned classification in that fund.

Governments should disclose their fund balance classification policies and procedures inthe notes to the financial statements.Thedisclosures should include the order of spendingwhenamounts for a particular purpose are available in more than one fund balance classification.

Statement No. 54 also clarifies the definitions of some governmental fund types, whichhad been subject to various interpretations. For example, it clarifies that a special revenuefund may only be established to report a revenue source (or sources) that is restricted orcommitted to a specified purpose other than capital projects or debt service. The revenuesource should constitute a substantial portion of the resources reported in the fund.

GASB STANDARDS (Continued )


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net assets. Inasmuch as the proceeds of debt are recognized as a liability in the government-wide statements but as a financing source in the fund statements, they must be included inthe reconciliation between the two sets of statements. (See the deduction of capitalimprovement notes in Table 3-6.)

The net effect of other financing sources and uses can be to convert a potentially negativechange in fund balance resulting from an excess of expenditures over revenues to a positivechange due to the receipt of transfers or bond proceeds. Correspondingly, transfers-out canconvert an excess of revenues over expenditures into a negative change in fund balance. Vero

T A B L E 3 - 3Governmental Funds Balance Sheet


BALANCE SHEET

GOVERNMENTAL FUNDS

September 30, 2008

General

OtherGovernmental

Funds

TotalGovernmental

Funds

ASSETS

Equity in pooled cash and investments $ 10,084,994 $ 9,253,629 19,338,623Accounts receivable, net 180,835 - 180,835Accrued interest receivable 85,421 51,261 136,682Special assessments receivable 23,265 126,252 149,517Due from other governments 439,047 183,113 622,160Inventories 113,537 - 113,537

Total assets $ 10,927,099 $ 9,614,255 $ 20,541,354

LIABILITIES AND FUND BALANCES

Liabilities:

Accounts and contracts payable $ 295,176 $ 254,380 $ 549,556Accrued liabilities 686,802 14,578 701,380Deferred revenues - 126,252 126,252

Total liabilities 981,978 395,210 1,377,188

Fund balances:

Reserved for:

Inventory 113,537 - 113,537Encumbrances 50,137 - 50,137Debt Service - 3,739 3,739Law enforcement - 24,053 24,053Police education - 24,779 24,779Cemetery care - 115,129 115,129

Unreserved for:

General fund 9,781,447 - 9,781,447Special revenue funds - 2,064,183 2,064,183Capital projects funds - 6,987,162 6,987,162Total Fund Balances 9,945,121 9,219,045 19,164,166

Total Liabilities and Fund Balances $ 10,927,099 $ 9,614,255 $ 20,541,354


E1C03 03/29/2010 11:57:52 Page 50

Beach’s general fund, for example, reports a revenue/expenditure deficiency of $3.7 millionbut a positive net change in fund balance of $87,803 (Table 3-5). Users should be aware thatonly revenues and expenditures contribute to a change in the net assets of the government as awhole (a total of $1.8 million in Table 3-2).

PROPRIETARY FUNDS Proprietary Funds Statement of Net Assets The statement ofnet assets of proprietary funds (illustrated in Table 3-7) focuses on the major enterprise fundsbut also should include a column for all nonmajor enterprise funds combined5 and a columnfor all internal service funds combined. The measurement focus of proprietary funds is oneconomic resources; accordingly, the funds are accounted for on a full accrual basis. Notsurprisingly, therefore, the format of the proprietary fund statement of net assets closelyresembles that of a business balance sheet. To help users assess liquidity, assets are classified

T A B L E 3 - 4Reconciliation of the Governmental Funds Balance Sheet

to the Government-wide Statement of Net Assets


RECONCILIATIONOF THE BALANCE SHEETTOTHE STATEMENTOFNET ASSETS

GOVERNMENTAL FUNDS

September 30, 2008

Fund balances—total governmental funds $ 19,164,166Amounts reported for governmental activities in the statement of net assetsare different because:

Capital assets used in governmental activities are not financial resourcesand, therefore, are not reported in the funds. 36,409,823

Internal service funds are used by management to charge the costs ofcertain activities, related to medical and liability insurance, to individualfunds. The assets and liabilities of internal service funds are not included ingovernmental activities in the statement of net assets. 4,391,766

A negative net pension obligation is not considered to represent a financialasset and therefore is not properly reported in a governmental fund,but is reported as a restricted asset in the government-wide statement ofnet assets. 1,471,761

Some revenues in the statement of activities that do not provide current financialresources are not reported as revenues in the funds. 126,252

Long-term liabilities are not due and payable in the current period and therefore,are not reported in the funds. These liabilities and other bond related deferredcharges are composed of the following:

Notes payable (16,070,750)Accrued compensated absences (2,775,387)Net OPEB Obligation (NOO) (977,000)

Net assets of governmental activities $ 41,740,631

5Vero Beach has no nonmajor enterprise funds.


E1C03 03/29/2010 11:57:52 Page 51

T A B L E 3 - 5Governmental Fund Statement of Revenues,Expenditures, and Changes in Fund Balances


STATEMENTOF REVENUES, EXPENDITURES,ANDCHANGES IN FUND BALANCES

GOVERNMENTAL FUNDS


General

OtherGovernmental

Funds

TotalGovernmental

FundsREVENUES:

Taxes $ 9,769,741 $ 2,094,532 $ 11,864,273Charges for services 3,172,536 146,996 3,319,532Special assessments - 31,706 31,706Fines and forfeitures 95,746 36,434 132,180Intergovernmental 1,723,664 1,029,515 2,753,179Investment earnings 436,853 323,202 760,055Miscellaneous 86,035 - 86,035Grants 316,892 - 316,892Licenses and permits 115,056 - 115,056Rental 90,400 - 90,400Total revenues 15,806,923 3,662,385 19,469,308

EXPENDITURES:

Current:

General government 8,003,090 - 8,003,090Public safety 7,065,511 863,050 7,928,561Physical environment - 185,442 185,442Transportation 3,195,291 - 3,195,291Culture and recreation 875,843 - 875,843

Capital outlay 321,840 1,515,130 1,836,970Debt Service:

Principal - 12,462,000 12,462,000Interest - 453,842 453,842Total expenditures 19,461,575 15,479,464 34,941,039

Excess (deficiency) of revenues over(under) expenditures (3,654,652) (11,817,079) (15,471,731)

OTHER FINANCING SOURCESAND (USES)

Transfers in 6,980,411 13,608,592 20,589,003Transfers out (8,734,440) (8,374,562) (17,109,002)Capital Contributions - 402,104 402,104Loan proceeds 5,496,484 6,619,267 12,115,751

Total Other Financing Sources (uses) 3,742,455 12,255,401 15,997,856

Net change in fund balances 87,803 438,322 526,125

Fund balances - beginning 9,857,318 8,780,723 18,638,041

Fund balances - ending $ 9,945,121 $ 9,219,045 $ 19,164,166


E1C03 03/29/2010 11:57:53 Page 52

by whether they are current or noncurrent amounts—just as they are in the balance sheets ofbusinesses. In addition, consistent with the emphasis on restrictions previously described forgovernment-wide and governmental fund financial statements, proprietary fund net assets aresubdivided between restricted and unrestricted amounts.

Inasmuch as proprietary funds, unlike governmental funds, are accounted for on a fullaccrual basis in both the government-wide and the fund statements, the net assets section fortotal enterprise funds (Table 3-7) has the same content and amounts as the net assets sectionof the business-type activities column of the government-wide statement of net assets (Table3-1).6 Thus, no reconciliation is necessary between the fund financial statements and thegovernment-wide statements such as is required for the governmental funds.

Internal service funds, like enterprise funds, are proprietary, and are maintained on a fullaccrual basis. In the funds statements they are reported as proprietary funds, along with theenterprise funds. However, internal service fund activities typically serve the functionaldepartments (e.g., police, fire, and administration), the operations of which are consideredgovernmental. As a consequence, per Statement No. 34, internal service fund balancesgenerally are included in the governmental activities column of the government-widestatement of net assets rather than in the business-type activities column. To highlightthis change in category in the government-wide statements, the internal service funds columnin the proprietary funds statement of net assets is reported to the right of the totals column forthe enterprise funds and is captioned governmental activities.

Proprietary Fund Statement of Revenues, Expenses, andChanges inNet Assets Theformat of the operating statement for proprietary funds (illustrated in Table 3-8) is similar tothat of a business income statement. It differs, therefore, from the format of the correspondingstatement (i.e., the business activities column) in the government-wide statement of activities(Table 3-2). The fund statement separates operating revenues and expenses, such as chargesand fees for services, from nonoperating revenues and expenses, such as investment incomeand interest expense on borrowings. Thus, users are provided the information necessary todistinguish between operating income or loss and total income or loss.

Contributed Capital and Transfers The statement also distinguishes capital contribu-tions (e.g., initial infusions of resources to establish the fund) and transfers to and from otherfunds from operating and non-operating revenues and expenses. As discussed previously withrespect to governmental funds, transfers are separately reported, because they do not enhancethe government’s net assets, although they increase fund net assets. Also, the separate reportinginforms users of the extent to which enterprise funds, which users may expect to beself-supporting, are, in fact, subsidized by other funds.

FIDUCIARY FUNDS Fiduciary activities are excluded from the government-wide statements,because the assets of fiduciary funds (per the definition of this fund type) benefit organizationsor individuals other than the government itself. Therefore, per StatementNo. 34, they shouldnot be included in the financial position or operating results of the government. Thegovernment cannot use these funds for its own programs. Nevertheless, the governmentis accountable for the fiduciary activities that it carries out on behalf of others, and for theresources in these funds. Hence, governments are required to include the fiduciary funds inthe fund statements, following those of the governmental and proprietary funds. Transac-tions and reporting requirements for fiduciary funds will be addressed in Chapter 10.

6Net assets restricted for plant replacement and emergencies and net assets restricted for renewal and replacement inTable 3–7 are reported as one amount—restricted for plant replacement and renewal—in Table 3–1.


E1C03 03/29/2010 11:57:53 Page 53

T A B L E 3 - 6Reconciliation of the Governmental Funds Statement of Revenues, Expenditures,and Changes in Fund Balances to the Government-wide Statement of Activities


RECONCILIATIONOF THE STATEMENTOF REVENUES, EXPENDITURES,

ANDCHANGES IN FUND BALANCES TOTHE STATEMENTOF ACTIVITIES

GOVERNMENTAL FUNDS


Net change in fund balances—total governmental funds $ 526,125

Amounts reported for governmental activities in the statement ofactivities are different because:

Governmental funds report capital outlay as expenditures.However, in the statement of activities, the cost of those assets isallocated over their estimated useful lives and reported asdepreciation expense. This is the amount by which capital outlayexceeded depreciation in the current year.

Expenditures for capital assets $ 1,836,970

Less current year depreciation (1,675,647)

161,323

The net effect of various miscellaneous transactions involvingcapital assets (i.e. sales, trade-ins, and contributions or donations)is to decrease net assets. (26,818)

Repayment of bond principal is an expenditure in thegovernmental funds, but the repayment reduceslong-term liabilities in the statement of net assets. 12,462,000

The addition of new capital improvement notes is a revenueincluded under other financing sources in the governmentalfunds, but the addition increases long-term liabilities in thestatement of net assets. (12,115,751)

Some revenues in the statement of activities that do notprovide current financial resources are not reported asrevenues in funds. (31,706)

Some expenses reported in the statement of activities do notrequire the use of current financial resources and therefore, arenot reported as expenditures in governmental funds. (323,637)

Internal service funds are used by management to charge the costsof certain activities to individual funds. The net of the internalservice funds is reported with governmental funds. (556,373)

Changes in the net pension obligations of the government do notrequire the use of current financial resources and therefore, arenot reported as expenditures in governmental funds. (924,927)

Change in net assets of governmental activities. $ (829,764)

WHAT ARE NOTES AND REQUIRED SUPPLEMENTARY INFORMATION? 53

E1C03 03/29/2010 11:57:54 Page 54

TABLE

3-7

Pro

prietary

Fund

sStatem

entof

Net

Assets

CIT

YOFVERO

BEACH,FLORID

A

STATEM

ENT

OFNET

ASSETS

PROPRIE

TARYFUNDS

Sep

tember

30,2

008

Business-type

Activities-Enterprise

Funds

ASSETS

Electric

System

Water

andSew

er

System

Municipal

Airport

Municipal

Marina

Solid

Waste

Recreation

Totals

Govern

men

tal

Activities

Intern

alService

Funds

Curren

tAssets:

Equityin

pooledcash

andinvestmen

ts$

14,467,206

$1,119,935

$1,775,662

$213,742

$95,222

$547

$17,672,314

$8,270,994

Accountsreceivable,n

etofallowance

forestimated

uncollectibles

13,025,167

2,225,172

12,684

-354,082

-15,617,105

-

Accrued

interestreceivable

150,20

28,53

117

,100

--

-175,833

Specialassessmen

treceivable

-76

9,03

5-

--

-769,035

68,322

Duefrom

other

governmen

ts-

97,425

785,16

8-

--

882,593

-

Inventories

6,54

2,50

821

5,48

6-

43,033

--

6,801,022

-

Prepaiditem

s4,513

--

--

1,922

6,435

-

RestrictedAssets

-

Equityin

pooledcash

andinvestmen

ts4,24

8,405

636,037

--

--

4,884,442

-

TotalCurren

tAssets

38,438,001

5,071,621

2,59

0,61

4256,775

449,304

2,469

46,808,784

8,339,316

Noncu

rren

tAssets:

RestrictedAssets

Equityin

pooledcash

andinvestmen

ts6,98

0,046

800,000

--

--

7,780,046

-

Totalrestricted

Assets

6,98

0,046

800,000

--

--

7,780,046

-

CapitalAssets

Property,P

lantandEquipmen

t229,642,630

107,956,533

44,544,304

6,569,114

3,022,922

19,755,230

411,490,733

31,816

Less:AccumulatedDepreciation

107,193,271

55,585

,327

8,09

9,67

8914,241

2,060,567

6,928,015

180,781,099

20,975

122,449,359

52,371,206

36,444,626

5,654,873

962,355

12,827,215

230,709,634

10,841

Constructionin

Progress

1,49

7,594

2,197,966

5,82

3,67

81,500

-80,018

9,600,756

-

TotalProperty,P

lantandEquipmen

t,net

123,946,953

54,569

,172

42,268

,304

5,65

6,37

3962,355

12,907,233

240,310,390

10,841

54

E1C03 03/29/2010 11:57:55 Page 55

Other

Assets

Power

Plantem

issioncredits

438,525

--

--

-438,525

-

Unam

ortized

bondcosts

541,138

59,765

-25

,999

--

626,902

-

TotalOther

Assets

979,663

59,765

-25

,999

--

1,065,427

-

TotalNoncu

rren

tAssets

131,90

6,66

255,428,937

42,268

,304

5,68

2,37

2962,355

12,907,233

249,155,863

10,841

TotalAssets

$170

,344

,663

$60,500,558

$44

,858

,918

$5,939

,147

$1,411,659

$295,964,647

$295,964,647

$8,350,157

LIA

BIL

ITIE

S

Curren

tLiabilities(P

ayab

lefrom

Curren

tAssets)

Accountsandcontractspayable

$546,072

$740,318

$648,555

$35,867

$2,289

$19,558

$1,992,659

$23,829

Accrued

liabilities

7,50

9,61

017

1,59

724

,775

11,552

40,337

50,842

7,808,713

6,515

Dueto

other

governmen

t-

666,900

--

--

666,900

-

Claim

spayable

--

--

--

-1,317,774

Customer

deposits

--

172,168

34,610

-27,423

234,201

-

Compen

satedabsences

71,806

52,285

7,948

2,203

20,700

8,760

163,702

3,690

TotalCurren

tLiabilities(Payablefrom

Curren

t

Assets)

8,12

7,48

81,63

1,10

0853,446

84,232

63,326

106,583

10,866,175

1,351,808

Curren

tLiabilities(P

ayab

lefrom

RestrictedAssets)

Accrued

interestpayable

826,40

520

1,03

7-

93,358

--

1,120,800

-

Customer

deposits

3,63

5,87

8-

--

--

3,635,878

-

Reven

uebondsandloanspayable-curren

t3,42

2,00

0435,000

-146,074

--

4,003,074

-

TotalCurren

tLiabilities(Payablefrom

RestrictedAssets)

7,88

4,28

3636,037

-239,432

--

8,759,752

-

TotalCurren

tLiabilities

16,011

,771

2,26

7,13

7853,446

323,664

63,326

106,583

19,625,927

1,351,808

Noncu

rren

tLiabilities

Compen

satedabsences

1,295,925

943,621

143,446

39,752

373,587

158,095

2,954,426

66,603

Claim

spayable

--

--

--

-2,539,980

Bondsandloanspayable,n

etofunam

ortized

bond

discount

61,150

,000

14,398,000

-4,51

0,17

6-

-80,058,176

-

Totalnoncurren

tLiabilities

62,445

,925

15,341,621

143,446

4,54

9,92

8373,587

158,095

83,012,602

2,606,583

TotalLiabilities

78,457

,696

17,608,758

996,892

4,87

3,59

2436,913

264,678

102,638,529

3,958,391

Net

Assets

Invested

inCapitalassets,n

etofrelateddebt

59,374

,953

39,736

,172

42,268

,304

1,00

0,12

396

2,35

512,907,233

156,249,140

10,841

Restrictedforplantoperations

-80

0,00

--

--

800,00

-

Restrictedforplantreplacemen

tandem

ergencies

1,00

0,00

0-

--

--

1,000,000

-

Restrictedforrenew

alandreplacemen

t1,000

,000

--

--

-1,000,000

-

Unrestricted

30,512

,014

2,35

5,62

81,59

3,72

265

,432

12,391

(262,209)

34,276,978

4,380,925

TotalNet

Assets

$91,88

6,96

7$

42,891,800

$43

,862

,026

$1,065

,555

$974,746

$12,645,024

$193,326,118

$4,391,766

55

E1C03 03/29/2010 11:57:56 Page 56

TABLE

3-8

Pro

prietary

Fund

sStatem

entof

Reven

ues,

Exp

ense

s,an

dCha

nges

inFu

ndNet

Assets

CIT

YOFVERO

BEACH,F

LORID

A

STATEM

ENT

OFREVENUES,EXPENSES,AND

CHANGESIN

FUND

NET

ASSETS

PROPRIE

TARYFUNDS

FortheYearEnded

Sep

tember

30,2

008

Enterprise

Funds

ASSETS

Electric

System

Water

andSew

erSystem

Municipal

Airport

Municipal

Marina

Solid

Waste

Recreation

Totals

Govern

men

tal

Activities

Intern

alService

Funds

OperatingReven

ues

Chargesforservices

(pledgedas

security

forrevenue

bonds)

$98,48

9,59

6$

14,392,131

$2,62

4,69

6$

1,65

2,54

1$

2,433,243

$620,170

$120,212,377

$6,460,139

TotalOperatingReven

ues

98,489

,596

14,392,131

2,62

4,69

61,65

2,54

12,433,243

620,170

120,212,377

6,460,139

OperatingExp

enses

Production

72,05

3,72

04,26

2,48

4-

--

-76,316,204

-Transm

issionanddistribution

5,81

7,44

11,749

748

--

--

7,567,189

-Administrativeandgen

eral

5,17

2,41

63,17

3,74

1-

--

-8,346,157

-Pollutioncontrol

-2,57

5,41

0-

--

-2,575,410

-Customer

service

1,44

1,54

5-

--

--

1,441,545

-Claim

sexpen

se-

--

--

--

6,411,709

Operatingcharges

--

1,931,335

1,509,247

2,321,656

3,764,320

9,526,558

989,182

Depreciationexpen

se6,22

6,51

22,67

4,44

682

2,52

051,752

172,159

361,198

10,308,587

3,536

TotalOperatingExpen

se90

,711

,634

14,435,829

2,75

3,85

51,56

0,99

92,493,815

4,125,518

116,081,650

7,404,427

OperatingIncome(Loss)

7,777,962

(43,689)

(129,159)

91,542

(60,572)

(3,505,348)

4,130,727

(944,288)

Non-O

peratingReven

ues

(Exp

enses)

Investmen

tearnings

1,035,275

113,571

71,907

2,515

1,348

-1,224,616

387,915

Interest/amortizationexpen

se(5,702

,522

)(1,964

,690

)-

(193

,469

)-

-(7,860,681)

-FederalandState

grants

22,609

264,42

365

11,18

310

,660

56,682

356,208

-Miscellaneous

199,472

25,949

76,900

109,112

8,721

1,211

421,365

-

TotalNon-O

peratingReven

ues

(Expen

ses)

(4,445

,166

)(1,560,747)

149,45

8(80,659)

20,729

57,893

(5,858,492)

387,915

Income(Loss)Before

ContributionsandTransfers

3,332,796

(1,604,445)

20,299

10,883

(39,843)

(3,477,455)

(1,727,765)

(556,373)

CapitalContributions

660,724

904,231

2,709,295

--

-4,274,250

-TransfersIn

--

--

-3,500,412

3,500,412

-TransfersOut

(5,893

,000

)(867

,193

)-

(74,300)

(145,918)

-(6,980,411)

-

Change

inNet

Assets

(1,899

,480

)(1,567,407)

2,72

9,59

4(63,417)

(185,761)

52,957

(933,514)

(556,373)

Net

Assets-BeginningofPeriod

$93,786,447

$44,459,207

$41

,132,432

1,128,972

1,160,507

12,592,067

194,259,632

4,948,139

Net

Assets-EndofPeriod

$91,88

6,96

7$

42,891,800

$43

,862,026

$1,06

5,55

5$

974,746

$12,645,024

$193,326,118

$4,391,766

56

E1C03 03/29/2010 11:57:57 Page 57

WHATARE NOTES AND REQUIRED SUPPLEMENTARY INFORMATION?.............................................................................................................

As with business financial statements, notes are considered an integral part of the basicfinancial statements of governments. Voluminous though they may be, notes are tooimportant to be ignored. Per Statement No. 34, and consistent with existing standards,notes should include explanations of the accounting principles used in preparing thefinancial statements, schedules of changes in capital assets and long-term liabilities,schedules of future debt service requirements, disclosures about contingent liabilities,and other information that might affect users’ interpretation of the amounts reported in thestatements themselves.

Required supplementary information (RSI) is information that the GASB requires tobe presented with, but not as part of, the basic financial statements. It includes manage-ment’s discussion and analysis (MD&A), which is presented before the basic financialstatements, as well as information (such as budgetary comparisons and pension schedules)that is presented after the notes. RSI has much in common with notes. Both includeGASB-mandated schedules and data. However, whereas notes are considered part of thebasic financial statements, RSI is not. Therefore, RSI may be subject to a lower level ofauditor scrutiny than notes.

BUDGETARY COMPARISONS As discussed in Chapter 1, demonstrating compliance withthe legally adopted budget is a primary objective of government financial reporting.Accordingly, Statement No. 34 requires that governments include in their annual reports,as RSI, a comparison of actual results with the budget for the general fund and with thebudget for each special revenue fund for which an annual budget has been adopted.7

Governments unable to present the information for their general and special revenue fundsbecause of significant budgetary perspective differences should present budgetary compari-son schedules as RSI based on the fund, organization, or program structure used for thegovernment’s legally adopted budget.8

TheGASB specifies the accounting principles (GAAP) to which governments must adherein reporting in their external financial reports. It does not have the authority to establishbudgetary principles, which often differ from GAAP. A comparison between the budget andactual results would not be meaningful unless the two sets of information were calculatedusing the same principles. Therefore, per Statement No. 34, the GASB requires thatgovernments present their budget versus actual comparisons on a budgetary basis and includea schedule that reconciles the actual amounts per the budgetary comparison with the GAAPamounts per the financial statements.

Budget-to-actual comparisons may demonstrate either legal compliance or managerialeffectiveness in adhering to budget estimates. Statement No. 34 requires governments topresent both their original and their final appropriated budgets, so that readers can comparethe actual results with both budgets.

Table 3-9 shows the ‘‘revenues and transfers’’ section of Vero Beach’s budget-to-actualcomparison of revenues, expenditures, and transfers for its general fund. The columnreporting the variances between actual results and the final budget is encouraged, but isnot required by GASB standards. Governments may also present a column with variancesfrom the original budget.

7Governments may elect to include the required budgetary comparison information in a statement as part of the basicfinancial statements (GASB Statement No. 34, para. 130, footnote 53).8GASB Statement No. 41, Budgetary Comparison Schedules—Perspective Differences, an amendment of GASB State-ment No. 34 (May 2003), para. 3.

WHAT ADDITIONAL INFORMATION DO GOVERNMENTS TYPICALLY REPORT? 57

E1C03 03/29/2010 11:57:58 Page 58

T A B L E 3 - 9General Fund Budgetary Comparison Schedule


SCHEDULE OF REVENUES AND

TRANSFERS—BUDGET AND

ACTUAL—GENERAL FUND


Budget Amounts 2008

Variance with

Final Budget

Positive

(Negative)Original Final Actual

Taxes:

Property taxes $ 5,257,149 $ 5,341,149 $ 5,344,703 $ 3,554

Utility taxes 2,480,000 2,480,000 2,372,305 (107,695)

Telecommunications tax 1,437,941 1,437,941 1,420,226 (17,715)

Local option gas tax 512,370 512,370 454,420 (57,950)

Local business tax 200,000 200,000 178,087 (21,913)

9,887,460 9,971,460 9,769,741 (201,719)

Licenses and Permits:

Sign permit fees 2,000 7,000 7,540 540

Burglar alarm permit fees 30,000 30,000 24,652 (5,348)

Vehicles for hire permits 1,050 1,050 960 (90)

Miscellaneous license fees 85,000 85,000 81,904 (3,096)

118,050 123,050 115,056 (7,994)

Intergovernmental Revenue:

State revenue sharing 582,991 582,991 565,518 (17,473)

State sales tax revenue 1,288,612 1,288,612 1,158,146 (130,466)

Forestry Tree Grant - 54,669 54,669 -

Hurricane FEMA Reimb - - 220,817 220,817

FDEP Grant - 31,262 31,262 -

LLE Block Grants 10,000 10,000 10,144 144

1,881,603 1,967,534 2,040,556 73,022

Charges for Services:

Planning department 60,000 60,000 57,356 (2,644)

Administrative service 3,023,510 3,023,510 3,023,510 -

Airport security 91,670 91,670 91,670 -

3,175,180 3,175,180 3,172,536 (2,644)

Fines, Forfeitures and Seizures 94,800 94,800 95,746 946

Miscellaneous Revenues:

Investment earnings 535,000 535,000 436,853 (98,147)

Rental 90,650 90,650 90,400 (250)

Miscellaneous 115,000 115,000 86,035 (28,965)

740,650 740,650 613,288 (127,362)

Total Revenues 15,897,743 16,072,674 15,806,923 (265,751)

Transfers from:

Electric revenue fund 5,893,000 5,893,000 5,893,000 -

Water and Sewer revenue fund 1,085,100 1,085,100 867,193 (217,907)

Solid Waste fund 169,300 169,300 145,918 (23,382)

Marina fund 74,300 74,300 74,300 -

Total Transfers 7,221,700 7,221,700 6,980,411 (241,289)

Other Sources: Loan Proceeds - 5,496,484 5,496,484 -

Total Transfers and Other Sources 7,221,700 12,718,184 12,476,895 (241,289)

Total Revenues, Transfers

and Other Sources $ 23,119,443 $ 28,790,858 $ 28,283,895 $ (507,040)


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WHATADDITIONAL INFORMATION DO GOVERNMENTSTYPICALLY REPORT?.............................................................................................................

In addition to the basic financial statements and RSI, many governments include in theirCAFRs combining statements for the nonmajor funds—that is, financial statements thatpresent each of the nonmajor funds in a separate column. Governments also providestatistical information relating to trends in revenues and expenditures, population, employ-ment, and property values. This expanded approach to reporting helps users better assess thegovernment’s financial position and its economic condition—its ongoing ability to provideservices and meet its obligations—by providing information that will have a direct bearing onboth the demand for the government’s services and the government’s ability to finance them.The statistical information that governments typically include in their financial reports isdiscussed in Chapters 11 and 15.

QUESTIONS FOR REVIEWAND DISCUSSION............................................................................................................

1. Distinguish between a financial statement thatcombines funds and one that consolidates them.

2. What is the GASB’s rationale for requiring twosets of financial statements, each with a differentmeasurement focus and basis of accounting forgovernmental activities?

3. How many government-wide statements arerequired? What are they?

4. In what key ways does the format of the gov-ernment-wide statement of activities differ fromthat of a traditional income statement?

5. What are the three categories of fundstatements?

6. What is a committed fund balance in a govern-mental funds balance sheet? How does it differfrom a restricted fund balance?

7. What are internal service funds? Why are theyclassified differently in government-wide thanin fund statements?

8. What are major funds? In what keys ways aremajor funds reported differently than nonmajorfunds?

9. What are fiduciary funds? Why are they notreported in the government-wide statements?

10. How does required supplementary informationdiffer from notes to the financial statements?

EXERCISES AND PROBLEMS.........................................................................................................

3-1

1. Which of the following best describes govern-ment-wide statements?

a. combined on a full accrual basis

b. combined on a modified accrual basis

c. consolidated on a full accrual basis

d. consolidated on a modified accrual basis

2. How many government-wide statements is amajor city (e.g., New York, Chicago) requiredto prepare?

a. two

b. three

c. four

d. six

3. The net assets section of a government-widestatement of net assets would typically nothave a separate category to show amountsinvested in

a. capital assets

b. unrestricted assets

c. restricted assets

d. current assets

EXERCISES AND PROBLEMS 59

E1C03 03/29/2010 11:58:0 Page 60

4. Which of the following funds would not beincorporated into the government-widestatements?

a. enterprise funds

b. permanent funds

c. internal service funds

d. fiduciary funds

5. Which of the following funds is least likely tobe separately reported in the governmentalfunds balance sheet?

a. a general fund

b. a nonmajor special revenue fund

c. a major capital projects fund

d. a major permanent fund

6. Which of the following items is least likely tobe reported on Midlake County’s governmen-tal funds balance sheet?

a. the county courthouse

b. amounts due the internal service fund

c. amounts due from other governments

d. amounts invested in federal securities

7. How should a fund balance amount resultingfrom a city council’s formal action to acquireaudiovisual equipment for the city high schoolbe classified in a governmental funds balancesheet?

a. nonspendable fund balance

b. committed fund balance

c. unassigned fund balance

d. restricted fund balance

8. The year-end balance of inventory should bereported in a governmental funds statement asan asset and

a. assigned fund balance

b. nonspendable fund balance

c. restricted fund balance

d. unrestricted fund balance

9. Which of the following would not be shown asa revenue of the function ‘‘public safety’’ onMillburg Township’s government-wide state-ment of activities?

a. a grant from the federal government toacquire radar equipment

b. amounts charged to local funeral homes toprovide police escorts

c. an appropriation from the town council topay police officers

d. fees charged to the surrounding county toprovide services outside of township limits

10. Which of the following would be most likelyto be reported among restricted net assets on acity’s government-wide statement of netassets?

a. the balance in the city’s debt service fund

b. the amount owed to city employees forservices rendered since they received theirlast paychecks

c. the actuarial liability of the city’s pensionfund

d. the cost, less accumulated depreciation, ofthe city’s highway system

3-2

1. Internal service funds are reported as

a. business-type activities in government-widestatements and governmental funds in fundsstatements

b. proprietary funds in funds statements andgovernmental activities in government--wide statements

c. business-type activities in government-widestatements and proprietary funds in fundsstatements

d. governmental funds in funds statements andgovernmental activities in government--wide statements

2. In which of the following statements woulddepreciation not be reported?

a. internal service fund statement of revenues,expenses, and changes in fund net assets

b. government-wide statement of activities

c. capital projects fund statement of revenues,expenditures, and changes in fund balance

d. enterprise fund statement of revenues,expenses, and changes in fund net assets

3. Which of the following is ‘‘required supple-mentary information’’?

a. explanation of accounting principles used inpreparing the financial statements

b. schedule of changes in capital assets

c. budgetary comparison

d. ten-year trend of assessed property values

4. Which of the following is not required to beincorporated into the budgetary comparison?

a. expenditures per the originally adoptedbudget


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b. expenditures per the amended budget

c. actual expenditures

d. variance between the actual expendituresand those per the amended budget

5. The management’s discussion and analysis(MD&A) ismost likely to include informationon

a. service efforts and accomplishments

b. market values of government-owned capitalassets

c. the condition of infrastructure assets

d. financial performance during the periodcovered by the financial statements

6. Which of the following is not one of the threemain categories of funds?

a. governmental funds

b. permanent funds

c. proprietary funds

d. fiduciary funds

7. ‘‘Major’’ funds include

a. all governmental funds plus proprietaryfunds that have fund balances greaterthan 10% of those of all proprietary fundscombined

b. the general fund, special revenue funds,capital projects funds, and debt servicefunds

c. the general fund plus all funds having assetsgreater than 50% of those of the generalfund

d. the general fund plus other funds in whichtotal assets, revenues, or expenditures/expenses of the fund are at least 10% ofthe corresponding total for the relevantfund category (governmental or enterprise)and also at least 5% of the correspondingtotal for all governmental and enterprisefunds combined

8. The assets and liabilities of nonmajor govern-mental funds would be

a. aggregated and reported in the governmen-tal funds balance sheet in a single column

b. excluded from the government-wide state-ment of net assets

c. shownonly innotes to thefinancial statements

d. reported as required supplementaryinformation

9. Which of the following would not be reportedon a government-wide statement of activities?

a. a transfer of cash from the general fund tothe debt service fund

b. costs incurred by the recreation departmentfor electricity purchased from the city-owned electric utility

c. depreciation on traffic lights

d. interest on bonds issued by the electricutility department

10. Which of the following is not required to beincluded in a government’s basic financial state-ments or required supplementary information?

a. a reconciliation between proprietary fundfinancial statements and the business-typeactivities column of the government-widefinancial statements

b. a reconciliation between governmentalfund financial statements and the govern-mental activities column of the govern-ment-wide financial statements

c. a reconciliation between revenues reportedon the basis of GAAP and those reported ona budgetary basis

d. a comparison between actual expendituresand expenditures per the amended budget

3-3

Even at this early stage of the course, it is possible toreconstruct journal entries from a balance sheet.

The Sherill Utility District was recently estab-lished. Its balance sheet after one year is presentedbelow. Note the following additional information:

a. The general fund received all of its revenue—$150 million—from taxes (all collected). It hadoperating expenditures, excluding transfers toother funds, of $100 million (all paid for).

b. The general fund transferred $20 million to thedebt service fund. Of this, $15 million was torepay the principal on bonds outstanding; $5million was for interest.

c. The district issued $130 million in bonds tofinance construction of plant and equipment. Ofthis, it expended $40 million.

1. Prepare journal entries to summarize all trans-actions in which the district engaged. Youneed not make closing entries. Do not beconcerned as to the specific titles of accountsto be debited or credited (e.g., whether atransfer from one fund to another should becalled a ‘‘transfer,’’ an ‘‘expense,’’ or an‘‘expenditure,’’ or whether proceeds frombonds should be called ‘‘bond proceeds’’ or‘‘revenues’’).


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2. Comment on how the district’s government-wide (full accrual) statement of net assetswould differ from the balance sheet presented.

Sherill Utility DistrictBalance Sheet as of End of Year 1

(in millions)

GeneralFund

CapitalProjectsFund

DebtServiceFund Totals

Assets:

Cash $30 $ 30

Investments $90 $20 110

Total assets $30 $90 $20 $140

Liabilities andfund balances:

Fund balances $30 $90 $20 $140

3-4

Funds can be ‘‘consolidated,’’ but only at the risk of lost ormisleading information.The balance sheet below was adapted from the

financial statements of the Williamsburg RegionalSewage Treatment Authority (dates have beenchanged):

Williamsburg Regional SewageTreatment Authority

Balance SheetOctober 31, 2012

GeneralCapitalProjects

Assets:

Cash $ 751 $ 5,021

Time deposits 16,398

Due on insurance claim 9,499

Due from general fund 9,000

Due from participants 66,475 4,414

Total assets $76,725 $34,833

Liabilities and fund balance:

Accounts payable $17,725

Due to capital projects fund 9,000

26,725

Fund balance 50,000 34,833

Total liabilities and fund balance $76,725 $34,833

Fund Types

The transactions of the authority are accounted forin the following governmental fund types:

� General fund—To account for all revenues andexpenditures not required to be accounted for inother funds.

� Capital projects fund—To account for financialresources designated to construct or acquire capi-tal facilities and improvements. Such resourcesare derived principally from other municipal util-ity districts to which the Williamsburg RegionalSewage Treatment Authority provides certainservices.

1. Recast the balance sheets of the two funds intoa single consolidated balance sheet. Show sepa-rately, however, the restricted and the un-restricted portions of the consolidated fundbalance account (not each individual asset andliability). Be sure to eliminate interfund pay-ables and receivables.

2. Which presentation (the unconsolidated or theconsolidated) providesmore complete informa-tion? Explain. Which presentation might beseen as misleading? Why? What advantages,if any, do you see to the presentation that is lesscomplete and more misleading?

3-5

Consolidated balances are not substitutes for individualfund balance sheets.

The combined governmental funds balancesheet of the town of Paris is presented on thefollowing page.

Per schedules included in the notes to thefinancial statements, the town had $1,450 of capitalassets (net of accumulated depreciation) and $1,315in long-term liabilities associated with the capitalassets.

1. Recast the balance sheets in the form of asingle consolidated, full accrual balance sheet.

2. Put yourself in the place of an analyst. Thetown mayor presents you with the consoli-dated balance sheet. He asserts that the town’sfinancial position is excellent, as measured bythe exceedingly ‘‘healthy’’ fund balance. Basedon the combined balance sheet that shows theindividual fund-types, why might you be skep-tical of his claim?

3. Comment on why a consolidated balance sheetis no substitute for a combined balance sheetthat reports upon major funds.


E1C03 03/29/2010 11:58:2 Page 63

3-6

Exploring Vero Beach’s financial reportRefer to the financial statements of the City of

Vero Beach that are included in this chapter.

1. Per the government-wide statement of activi-ties, howmuch did the city incur in expense forpublic safety? Of this amount, how much hadto be covered from general tax and otherunrestricted revenues?

2. Per the governmental funds statement of rev-enues, expenditures, and changes in fund bal-ances, how much did the city incur inexpenditures for public safety? How do youaccount for the difference between thisamount and your response to question 1?

3. Per the government-wide statement of activi-ties, what was the ending balance in net assetsassociated with governmental activities? Is thisconsistent with the government-wide state-ment of net assets?

4. How much was transferred (net) from business-type to governmental activities during the year?

5. How much in taxes did the city direct to thesupport of business-type activities?

6. Vero Beach’s statements include a schedule(Table 3-6) that reconciles its statement of

revenues, expenditures, and changes in fundbalances of governmental funds to the govern-ment-wide statement of activities. However,the city’s statements do not include a corre-sponding reconciliation of the statement ofrevenues, expenses, and changes in fund netassets of proprietary funds to the govern-ment-wide statement of activities. Why not?

7. As noted in the text, government-wide state-ments areona full accrual basis, so the statementof activities includes charges for depreciation.How much did Vero Beach charge for depreci-ation on capital assets used during the year forgovernmental activities?

8. How much of the city’s governmental activi-ties assets are classified as capital? How muchof the city’s governmental activities liabilitieswere used to finance those capital assets?

9. Almost 90% of the total amount of capitalassets reported in the government-wide state-ment of net assets are devoted to busi-ness-type activities. What is the most likelyexplanation of why the proportion of assetsdirected to business-type activities is so muchgreater than that devoted to governmentalactivities?

Town of ParisCombined Balance Sheet

GeneralFund

SpecialRevenueFund

CapitalProjectsFund

DebtServiceFund

Permanent(Endowment)

Fund Totals

Assets:

Cash $ 38 $ 20 $ 35 $340 $ 10 $ 443

Investments 105 60 480 136 960 1,741

Due from other funds — 120 46 39 — 205

Total assets $143 $200 $561 $515 $970 $2,389

Liabilities and fundbalances:Accounts payable $ 8 – – – – $ 8

Due to other funds 205 – – – – 205

Fund balances (70) $200 $561 $515 $970 2,176

Total liabilities andfund balances

$143 $200 $561 $515 $970 $2,389


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