Proprietary funds use the economic resources measurement focus and the accrual basis of accounting. Fiduciary funds are reported consistent with proprietary funds except for the recognition of certain liabilities of defined benefit pension plans. Generally accepted accounting principles GAAP are uniform minimum standards of and guidelines to financial accounting and reporting.
Governmental funds are used to account for most typical governmental functions. There are five types of governmental funds: General Fund - used to account for all financial resources of the state not required to be accounted for in some other fund.
Includes both the Basic Account and Administrative Accounts. Special Revenue Funds - used to account for the proceeds of specific revenue sources other than trusts for individuals, private organizations, or other governments or for major capital projects that are restricted or committed to expenditures for specified purposes other than debt service or capital projects.
Debt Service Funds - used to account for the accumulation of resources that are restricted, committed or assigned for, and the payment of, general long-term debt principal and interest. Capital Projects Funds - used to account for financial resources that are restricted, committed, or assigned to expenditures for the acquisition and construction of major capital facilities other than those financed by proprietary funds or in trust funds for individuals, private organizations, or other governments.
Permanent Funds - used to account for resources that are restricted to the extent that only earnings, and not principal, may be used for the benefit of the state or its citizenry. There are two types of proprietary funds: Enterprise Funds - used to account for any activity for which a fee is charged to external users for goods or services. Activities are required to be reported as enterprise funds, in the context of the activity's principal revenue sources , if any one of the following criteria is met: The activity is financed with debt that is secured solely by pledge of the net revenues from fees and charges of the activity, Laws or regulations require that the activity's costs of providing services, including capital costs such as depreciation or debt service , be recovered with fees and charges, rather than with taxes or similar revenues, or The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs such as depreciation or debt service.
There are four types of fiduciary funds: Pension and other employee benefit Trust Funds - used to report resources that are required to be held in trust by the state for the members and beneficiaries of defined benefit pension plans, defined contribution pension plans, and other employee benefit plans. Investment Trust Funds - used to report the external portion of the Local Government Investment Pool, which is reported by the state as the sponsoring government.
Private-Purpose Trust Funds - used to report trust arrangements, other than pension and investment trusts, under which principal and income benefit individuals, private organizations, or other governments. The resources held under these arrangements are not available to support the government's own programs.
Custodial Funds - used to account for resources held by the state in a purely custodial capacity for other governments, private organizations, or individuals that are not required to be reported in pension and other employee benefit trust funds, investment trust funds, or private-purpose trust funds. It should contain the following sections: Introductory section.
The introductory section includes the table of contents and letter of transmittal. Financial section. Refer to Subsection Statistical section. The statistical section includes additional financial, economic, and demographic information. The financial reporting entity of the state consists of: Primary government. The primary government consists of all funds, agencies, departments, and organizations that make up the legal entity of the state.
Organizations for which the primary government is financially accountable. Financial accountability exists if a primary government appoints a voting majority of the organization's governing body and is either 1 able to impose its will on that organization or 2 there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. A primary government is also financially accountable if an organization is fiscally dependent on and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government regardless of whether the organization has 1 a separately elected governing board, 2 a governing board appointed by a higher level of government, or 3 a jointly appointed board.
An organization is fiscally dependent if it is unable to determine its budget without another government having the substantive authority to approve or modify that budget, levy taxes or set rates or charges without substantive approval by another government, or issue bonded debt without substantive approval by another government. An organization has a financial benefit or burden relationship with the primary government if, for example, any one of these conditions exists: 1 The primary government is legally entitled to or can otherwise access the organization's resources; 2 The primary government is legally obligated or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization; 3 The primary government is obligated in some manner for the debt of the organization.
Other organizations. Other organizations including component units, joint ventures, jointly governed organizations, and other stand-alone governments that do not meet the financial accountability criteria may be included in the reporting entity if the nature and significance of their relationship with the primary government is such that exclusion would cause the reporting entity's financial statements to be misleading.
Flow of economic resources focus considers all of the assets available to the governmental unit for the purpose of providing goods and services. Under this focus, all assets and liabilities, both current and long-term, are recorded within the fund and depreciation is recorded as a charge to operations. Flow of current financial resources focus measures the extent to which financial resources obtained during a period are sufficient to cover claims incurred during that period.
The emphasis of this focus is on cash and assets that will become cash during or shortly after the current period. Long-term capital assets and long-term obligations are not recorded within a fund under this measurement focus.
Accrual basis of accounting records revenues in the period in which they are earned and become measurable; expenses are recorded in the period incurred, if measurable. Modified accrual basis of accounting recognizes revenues in the period in which they become available and measurable. Revenues are considered available when they will be collected either during the current period or soon enough after the end of the period to pay current year liabilities.
Revenues are considered measurable when they are reasonably estimable. Expenditures are generally recognized when the fund liability is incurred, if measurable. Under GAAP, the measurement focus and basis of accounting applied varies with fund type category. Governmental funds focus primarily on the sources, uses and balance of current financial resources and often have a budgetary orientation.
They employ the flow of current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become measurable and available. Expenditures are generally recognized when incurred, if measurable. Exceptions include unmatured interest on general long-term obligations and compensated absences, which are recognized when due.
Undesignated, unreserved fund balance is the difference between total fund balance and the portion that is reserved and designated. This is the balance available for legal appropriation and expenditure if a government budgets on a GAAP basis for its governmental funds. Within proprietary and fiduciary fund statements of net assets, net asset balances are classified into three components: Invested in capital assets, net of related debt represents the net amount invested in capital assets original cost, net of accumulated depreciation, and capital-related debt.
Restricted represents the amount of net assets for which limitations have been placed by creditors, grantors, contributors, laws, and regulations. For example, school districts that account for food services within an enterprise fund may have restrictions related to certain proceeds or commodities imposed by the USDA.
Internal actions through enabling legislation and constitutional provisions may also lead to restricted net assets. Unrestricted is the amount of net assets that is not restricted or invested in capital assets, net of related debt. Governmentwide Financial Statements: Statement of Net Assets The difference between an entity's assets and liabilities in the Statement of Net Assets represents its net assets. Net assets have three components: Invested in capital assets, net of related debt Restricted net assets Unrestricted net assets Table 3 defines each component.
Table 3. Net Asset Classification Invested in Capital Assets, Net of Related Debt Restricted Net Assets Unrestricted Net Assets All capital assets including restricted capital assets net of accumulated depreciation and reduced by outstanding balances of debt relating to the acquisition, construction, or improvement of these assets If the entity has capital assets but no related debt, the account should be titled "invested in capital assets" so that readers are not misled.
Net assets on which limitations have been placed by creditors, grantors, contributors, laws, and regulations of other governments. Also, internal actions may lead to restricted net assets in some cases such as constitutional provisions or enabling legislation. All other net assets not included in the "Invested in capital assets, net of related debt" category or the "Restricted net asset" category.
Internal designations may not be shown in this statement. The accounting and financial reporting for revenues within a governmental entity is determined by the economic substance of the underlying transactions.
Generally accepted accounting principles have established criteria for recognition based on the classification and characteristics of the transaction. Within governmental entities, transactions may be classified as either exchange or exchange-like transactions or nonexchange transactions.
Exchange transactions are those in which the parties involved give up and receive essentially equal values.
Within a commercial enterprise, transactions between businesses and their customers meet this definition. Within a proprietary fund of a governmental entity, fees or charges made for goods or services represent exchange transactions.
Although similar to exchange transactions, exchange-like transactions represent situations in which the values exchanged may not be equal or the direct benefits may not be exclusively for the parties involved in the transaction. Examples include permits and professional or regulatory licensing fees. To clarify and expand existing guidance in the accounting and financial reporting of nonexchange transactions within governments, GASB issued Statement 33, Accounting and Financial Reporting for Nonexchange Transactions, and Statement 36, Recipient Reporting for Certain Shared Nonexchange Revenues an amendment of Statement These standards establish recognition criteria for nonexchange transactions reported on the accrual basis or the modified accrual basis of accounting.
Statement 33 describes four classifications of nonexchange transactions: Derived tax revenues result from assessments imposed on exchange transactions, such as income taxes and sales taxes. Derived tax revenues and the related receivables normally should be recognized when the underlying transaction occurs with the criteria extended to include the availability criteria for revenues accounted for on the modified accrual basis.
Imposed nonexchange revenues result from assessments imposed on nongovernmental entities, other than assessments on exchange transactions. Property taxes, ad valorem taxes on personal property, and fines are common examples. A receivable is usually recognized at the time an enforceable legal claim arises. Imposed nonexchange revenues should be recognized in the first period in which the use of the revenues is permitted or required.
For imposed nonexchange revenues accounted for on a modified accrual basis, recognition also depends on the availability of the resources. Government-mandated nonexchange transactions occur when a government at one level provides resources to a government at another level and requires the recipient to use them for a specific purpose in accordance with the provider's enabling legislation.
An example is the federal funds provided for food and nutrition programs in school districts. Voluntary nonexchange transactions result from legislative or contractual agreements, other than exchanges, entered into willingly by two or more parties. Certain grants and entitlements and most donations are examples of this type of transaction. Frequently, purpose restrictions and eligibility requirements are established by the provider.
For both government-mandated nonexchange transactions and voluntary nonexchange transactions, revenues and receivables should be recognized when all eligibility requirements have been met. For revenues accounted for on a modified accrual basis, the criteria are extended to include the availability of the resources. Revenues are measurable when the amount of the revenue is subject to reasonable estimation. To be available, revenues must be subject to collection within the current period, or after the end of the period, but in time to pay liabilities outstanding at the end of the current period.
Revenues in the proprietary funds are recognized using the accrual basis of accounting, i. They are classified either as operating or nonoperating revenues. Operating revenues are generated by the primary activity of the fund.
Conversely, nonoperating revenues are not generated by the primary activity of the fund, but by other means, such as through grants or interest earnings.
Governmental entities account for a variety of revenues that generally may be presented in the financial statements of governmental funds in three broad categories. Local and intermediate sources are those revenues that are collected from the citizens of the district's service area and governmental and nongovernmental entities both within and outside the school district.
Such revenues include property taxes, tuition, and interest income. State revenues are those revenues received from the state, excluding funds passed through the state from the federal government. Such revenues include state grants and state education foundation funding. Federal revenues are those revenues received from the federal government or its agencies either directly or through the state.
Such revenues are primarily from federal programs. Proprietary fund revenues include charges for services, charges to other funds for services rendered, and grant revenues. Governmentwide Reporting GASB Statement 34 introduces a number of new reporting concepts for revenues in the governmentwide statements.
Essentially, revenues must be classified as either program or general revenues on the Statement of Activities. The following sub-section outlines the basic reporting criteria established for revenues. Program Revenues Program revenues are revenues that are directly attributable to a specific functional activity.
GAAP requires these revenues to be presented separately in the appropriate functional areas, providing a calculation of net expense for each activity.
This net expense often represents the level of support required from the government's own resources. Program revenues include fees collected from those who benefit from the program, grants, and other contributions required by the resource provider to support a specific activity. Program revenues are reported on the Statement of Activities in the following three categories, if applicable: Charges for services are revenues that arise from charges to customers or applicants who purchase, use, or directly benefit from the goods, services, or privileges provided.
Examples are rental fees for school buses or facilities, athletic participant or spectator fees, summer school tuition, or library fines. Program-specific operating grants and contributions are revenues that occur from mandatory and voluntary nonexchange transactions with other governments, organizations, or individuals that are restricted for use in a particular program.
An example is a business grant to provide a scholarship for staff training. If controls to prevent unauthorized access to assets are not effective, assets may be lost or stolen.
If detective control procedures such as physical inventory counts are appropriately performed, shortages should be discovered in a timely manner. In some cases, unauthorized access to assets may be gained through vulnerable accounting records-especially records maintained on computer systems. For example, if warehouse requisitions can be issued through a computer terminal, access to inventory may be gained through the system. Controls over unauthorized access to assets through computer records may be physical e.
Monitoring the control procedures that address unauthorized access includes observing physical control procedures, reviewing established access privileges with the manager of information systems, or reviewing reports of attempted computer access violations.
Internal auditors often perform such activities. Access controls, however, do not prevent individuals who have authorized access to assets from misappropriating them. Individuals who have authorized access to both assets and related accounting records may be in a position to conceal shortages of assets in the records. However, if duties are properly segregated, persons with access to assets will not have access to related accounting records, which may be altered to conceal shortages.
Controls over authorized access to assets are important to an organization, not only to prevent thefts, but also to ensure that assets are committed only after proper consideration by individuals who are knowledgeable and experienced. Authorization and approval are types of controls designed to prevent invalid or inappropriate transactions from occurring.
An example is a procedure designed to ensure that disbursements are made only when authorized orders for goods and services have been received. In many systems, access to computerized records e. Reconciliation and Comparison of Assets with Records Reconciling and comparing assets with accounting records establish a system of independent verification, either through preparing an independent control document used to reconcile accounting records and assets or by directly comparing accounting records with related assets.
Examples of these procedures include the reconciliation of physical inventory to accounting records and the preparation of a bank reconciliation. Analytical Reviews The purpose of analytical reviews is to evaluate summarized information by comparing it with expected results. Management personnel often perform analytical reviews to determine whether the entity is performing as planned.
For example, a common analytical review procedure is the comparison of budgeted to actual performance, with investigation of any significant or material variances as determined by the analyst. Often, analytical reviews may be used to monitor other underlying control procedures.
Authorization and Approval Authorization and approval procedures prevent invalid transactions from occurring. Thus, this type of control typically involves authorization or approval of transactions at specific dollar thresholds and manual e. The effectiveness of these procedures often depends on general computer controls over information security. Reviews of Output Reviews of output should be performed by district personnel who have the knowledge and experience to identify errors.
Such reviews could be performed in both computer and manual systems. These reviews check the validity and accuracy of output by comparing it in detail with expected results.
For example, a purchasing manager may compare recorded amounts or quantities purchased with separate records of purchase orders. Transactional Reviews Transactional reviews check the validity and accuracy of transaction processing by comparing it in detail with expected results.
Reviews often use exception reports usually computer-generated , which list items that failed to be processed because they did not meet specified criteria. For example, a computer-generated check may be rejected if it exceeds some dollar amount and requires a manual signature.
Monitoring these types of control procedures involves reviews of results performed by management. General Computer Controls Computer systems frequently have common areas of control and related control procedures referred to as general computer controls. These controls directly or indirectly affect all systems that operate within a computer-processing environment. General computer controls include the usual elements of effective internal control, that is, an individual or group responsible for control procedures and monitoring activities.
Managers of the information systems function usually monitor the performance of general computer controls. Monitoring activities include observation, exception reporting, reviews of work performed, reviews of program changes, oversight by information system steering committees, and the monitoring of user complaints.
For example, the effectiveness of programmed control procedures such as edit checks and approvals depends on general computer controls that ensure that program changes are not made improperly. General computer controls include controls over computer operations; systems acquisition, development, and maintenance; information security; and information systems support, as detailed below: Computer operations. The computer operations staff is responsible for the day-to-day processing activities of the entity's system.
It ensures that jobs are scheduled and processed as planned, data are properly stored on the system or tapes, and reports are distributed in a timely and accurate fashion. Systems acquisition, development, and maintenance.
The systems acquisition, development, and maintenance staff is responsible for planning, acquiring or developing, testing, and implementing new application systems and changes to existing application systems.
Such controls are usually important in larger processing environments where there is more development and maintenance activity. The systems are more complex and there is less reliance on purchased software. Information security. The information security function is responsible for administering and maintaining an entity's information security program, including both physical and logical security. The primary goal of such a program is to ensure that access to program data, online transactions, and other computing resources is restricted to authorized users.
Information systems support. Information systems support includes such functions as system software maintenance, database administration, communications and network management, end-user computing, and other groups with technical and administrative support responsibilities.
Certain governmental entities may use external service organizations for executing and recording certain transactions, such as payroll processing.
In such situations, the entity needs to ensure that the service organization has adequate controls over processing the transactions. In the final analysis, maintaining the internal control environment and related control procedures is an integral part of management's responsibilities. In the context of governmental accounting and reporting, the control environment has a direct impact on an entity's ability to collect and present accurate financial information.
Thus, the internal control environment and related procedures are key areas of concern to an entity's external auditor. School districts are the most common special governmental units. In some states, school districts operate as a fiscally dependent part of another local governmental entity such as a city or county; in other states, school districts are legislatively independent with authority to levy taxes and set budgets. School districts may or may not have common boundaries with another political subdivision.
Regardless of whether districts are component units of another financial reporting entity, are joint ventures of several reporting entities such as consolidated educational agencies , or meet the definition in GASB Codification, Section as separate reporting entities, many school districts prepare separate financial statements to accomplish one or more of the following: Support state or federal aid applications Report financial activities to parent, taxpayer, and citizen groups Prepare a financial report for use in an official statement for bond issuance purposes Although school districts are a common type of government, they face a number of unique issues that make them distinct from states, cities, counties, or other local governmental entities.
These issues often result in internal control and operational challenges that district management must address. The following chapter outlines a number of unique educational issues; however, this list is not exhaustive.
Attendance reporting. Most school districts receive state aid on the basis of average daily membership ADM , average daily attendance ADA , or a similar pupil count method.
ADM and ADA data typically are determined at individual school sites and then reported to a central attendance unit. That unit prepares reports for state aid and, in many cases, for federal aid, such as impact aid.
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