LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

• Differentiate the two measurement focuses used by governments.
• Differentiate the two bases of accounting used by governments.
• Recognize special terminology used to account for certain items and transactions.

JUST WHAT IS IT THAT YOU WANT TO MEASURE?

As it turns out this is an important question in governmental accounting. The same transaction can be reported differently by different funds. What and when a fund records certain transactions all depends on the fund's operating objective. It all comes down to what measurement focus and basis of accounting is being used.

KNOWLEDGE CHECK

2.     What is accurate regarding the measurement focus used for proprietary funds?

1. Proprietary funds do not really have a measurement focus.
2. Proprietary funds would account for only noncurrent assets and liabilities.
3. The financial statements measure whether the economic resources have increased or decreased for the accounting period.
4. Proprietary funds use a flow of current financial resources.

3.     Which statement is accurate regarding basis of accounting for governmental financial reporting?

1. Both governmental funds and proprietary funds use the same basis of accounting.
2. The basis of accounting used by governments is not linked with the measurement focus.
3. Basis of accounting is concerned with when a transaction or event is recognized in the accounting system.
4. All governments use a special purpose framework basis of accounting.

GOVERNMENT-WIDE STATEMENTS' MEASUREMENT FOCUS AND BASIS OF ACCOUNTING

Government-wide statements report activities for governmental and business-type activities as well as a total for the primary government. In order for the statement to be meaningful, all activities should be reported using the same measurement focus and basis of accounting. All activities reported in the government-wide statements use the flow of economic resources and accrual basis of accounting. This is the same method used by proprietary funds. However, governmental funds need to be converted to this measurement focus and basis of accounting.

FIDUCIARY FUNDS MEASUREMENT FOCUS AND BASIS OF ACCOUNTING

Trust funds generally follow the same measurement focus and basis of accounting as do proprietary funds. Agency funds only report assets and liabilities and are not considered to have a measurement focus. They do follow the accrual basis of accounting.

INTERFUND TRANSACTIONS

Often there will be transactions between different funds of a government. Activities among the funds are classified as either reciprocal interfund activity or as nonreciprocal activity.

Reciprocal interfund activity includes loans and services provided and used. Interfund loans should be reported separately in the financial statements as interfund receivables and payables. If repayment of the loan is not expected within a reasonable time, the amount recorded as a loan should be reduced and reported as a transfer.

Interfund services provided and used are treated as an internal exchange-like transaction. Revenue is recorded in the seller fund and expenditures or expenses are recorded in the purchaser fund.

Nonreciprocal interfund activity includes transfers and reimbursements. Interfund transfers represent a flow of assets from one fund to another that will not be repaid. In governmental funds, these transfers are reported as other financing sources (by the fund receiving the transfer) or other financing uses (by the fund making the transfer). Proprietary funds would report transfers after non-operating revenues and expenses on the statement of revenues, expenses, and changes in fund net position.

Interfund reimbursements represent the repayment for a particular expenditure or expense by a fund responsible for the charge to the fund that initially paid for the item. The net effect of a reimbursement is that the expense or expenditure in one fund would be reduced, while expense or expenditure in another fund would be increased.

SPECIAL ITEMS AND EXTRAORDINARY ITEMS

Governments report separately transactions or events that meet the definition of special items and extraordinary items. These items are reported at the bottom of the fund financial operating statements for governmental and proprietary funds and at the bottom of the government-wide statement of activities.

Extraordinary items are transactions or events that are both unusual in nature and infrequent in occurrence.

Special items are significant transactions or events within the control of management that are either unusual in nature or infrequent in occurrence.

DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES

GASB Statement No. 65, Items Previously Reported as Assets and Liabilities lists several specific items that should now be reported as either deferred outflows of resources or deferred inflows of resources. In addition, GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, GASB Statement No. 60, Service Concession Arrangements, GASB Statement No.68 Accounting and Financial Reporting for Pensions, GASB Statement No. 69, Government Combinations and Disposals of Government Operations, GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, and GASB Statement No. 81, Irrevocable Split-Interest Agreements, also identified items that should be reported as deferred inflows of resources or deferred outflows of resources.

A deferred outflow of resources is a consumption of net assets by the government that is applicable to a future reporting period. The following is a list of items that GASB has identified that should be reported as deferred outflows of resources:

• Grant paid in advance of meeting timing requirement
• Deferred amounts from refunding of debt (debits)
• Cost to acquire rights to future revenues (intra-entity)
• Deferred loss from sale-leaseback
• Differences between expected and actual experience in the measurement of the total pension liabilities (TPL)
• Changes in assumptions
• Net difference between projected and actual earnings on pension plan assets
• Changes in employer's proportion
• Transactions involving government combinations and disposals of government operations

A deferred inflow of resources is an acquisition of net assets by the government that is applicable to a future reporting period. The following is a list of items that GASB has identified that should be reported as deferred outflows of resources:

• Grants received in advance of meeting timing requirement
• Deferred amounts from refunding of debt (credits)
• Proceeds from sales of future revenues
• Deferred gain from sale-leaseback
• “Regulatory” credits
• Differences between expected and actual experience in the measurement of the total pension liabilities (TPL)
• Changes in assumptions
• Net difference between projected and actual earnings on pension plan assets
• Changes in employer's proportion
• Contributions to the pension plan after the measurement date
• Transactions involving government combinations and disposals of government operations
• A government's unconditional interest in an irrevocable split-interest agreement when the government is both the intermediary and the lead or remainder interest beneficiary

Governmental funds recognize revenue when it is measurable and available. When an asset is recorded in a governmental fund, but the revenue is not available, a deferred inflow of resources should be reported.

TRANSACTIONS REPORTED BY GOVERNMENTAL FUNDS

Governmental funds report certain transactions in a separate section of the statement of revenues, expenditures, and changes in fund balances called other financing sources and uses. These transactions either provide or use financial resources but are not considered revenues or expenditures.

Other financing sources and uses include the face value of debt issued, capital leases, issuance premiums or discounts, certain payments to escrow agents for bond refundings, transfers, some insurance proceeds, and sales of capital assets (unless the sale meets the criteria to be reported as a special item).

Only items that are identified above can be reported as other financing sources and uses.

FUND BALANCE

Governmental funds use the term Fund Balance to represent the difference between current financial assets and current financial liabilities. As illustrated in the following, under GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, governments have five classifications.

Under GASB Statement No. 54, fund balance for governmental funds should be reported in classifications that comprise a hierarchy based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent.

GASB Statement No. 54 does allow some flexibility in the level of detail presented. For example, the two components of nonspendable fund balance (for example, not in spendable form and legally or contractually required to be maintained intact) may be presented separately, or nonspendable fund balance may be presented in the aggregate. However, if nonspendable fund balance is displayed in the aggregate on the face of the balance sheet, amounts for the two nonspendable components should be disclosed in the notes to the financial statements.

GASB Statement No. 54 has several disclosure requirements. For example, governments should disclose the following about their fund balance classification policies and procedures:

	For committed fund balance: (1) the government's highest level of decision-making authority and (2) the formal action that is required to be taken to establish (and modify or rescind) a fund balance commitment.
	For assigned fund balance: (1) the body or official authorized to assign amounts to a specific purpose and (2) the policy established by the governing body pursuant to which that authorization is given.
	For the classification of fund balances in accordance with paragraph 18 of GASB Statement No. 54: (1) whether the government considers restricted or unrestricted amounts to have been spent when an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available and (2) whether committed, assigned, or unassigned amounts are considered to have been spent when an expenditure is incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used.

NET POSITION

The term net position is used to represent the difference between assets ( + deferred outflow of resources) and liabilities ( + deferred inflow of resources) for proprietary funds and in the government-wide statements. Net position is divided into three components:

1. The Net Investment in Capital Assets component of net position consists of capital assets and net of accumulated depreciation, reduced by the outstanding balances of bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Deferred outflows and inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt should also be included in this component of net position. If there are significant unspent related debt proceeds or deferred inflows of resources at the end of the reporting period, the portion of the debt or deferred inflows of resources attributable to the unspent amount should not be included in the calculation of net investment in capital assets. Instead, that portion of the debt or deferred inflows of resources should be included in the same net position component (restricted or unrestricted) as the unspent amount.

2. The Restricted component of net position consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets. Generally, a liability relates to restricted assets if the asset results from a resource flow that also results in the recognition of a liability or if the liability will be liquidated with the restricted assets reported. Constraints can be either externally imposed (for example, debt covenants or grantor restrictions), or imposed by constitutional provisions or enabling legislation.

   Note: GASB Statement No. 46, Net Assets Restricted by Enabling Legislation, provides additional guidance in this area.

3. The Unrestricted component of net position is the net amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted component of net position. Unlike fund balance, designations of unrestricted net assets should not be reported on the face of the financial statements.