Governmental Accounting
PROPRIETARY-TYPE FUNDS
Proprietary-type funds are used when a governmental unit handles its financial operations in a manner generally similar to that of business enterprises. Activities that use proprietary fund accounting and reporting charge user fees for their services and focus on determining operat- ing income (or cost recovery) and changes in net position. Examples of such activities include operation of electric and water utilities, airports, mass transit facilities, and central motor pools. Although sometimes subsidized by transfers (often from the General Fund), these activities are financed by user charges that at least partially cover operating and capital costs. As a result, accounting principles followed by proprietary-type funds are similar to those fol- lowed by commercial entities; that is, they use an economic resources measurement focus and the accrual basis of accounting. Accrual-basis accounting provides governmental units with accurate measures of revenues and expenses to help in developing user charges; cash flows information is also provided to help determine user charges and any subsidy needed to run an activity.
The two types of proprietary funds are Enterprise Funds and Internal Service Funds. Table 2-7 summarizes the purposes of these funds and gives examples of their use.
Enterprise Funds
Enterprise Funds may be used to account for any activity whose products or services are sold for a fee to external users, such as the general public. Enterprise Funds may also sell to the government
itself, but those sales represent only a small part of the total fund revenues. Enterprise Funds must be used if any one of the following criteria is met:
• The activity is financed with debt that is secured solely by a pledge of the net revenues from the activity’s fees and charges. (This type of debt is referred to as revenue bonds.)
• Laws or regulations require that the costs of providing services, including capital costs (such as depreciation or debt service), be recovered through fees and charges, rather than with taxes. • The activity’s pricing policies set fees and charges that are designed to recover its costs,
including capital costs (such as depreciation or debt service).
As noted previously, operations accounted for in Enterprise Funds may include munici- pally owned utilities, mass transit facilities, toll roads and toll bridges, airports, parking facilities, and lotteries. Generally, a separate fund is established for each type of activity. As discussed in Chapter 9 , many of these business-type activities are organized as public authorities or public benefit organizations, legally separate from the parent government. When that happens, they use enterprise-type accounting, but are reported as separate “component units” rather than as Enter- prise Funds of the parent government.
Internal Service Funds
Internal Service Funds are used to account for providing goods or services within the reporting governmental unit (including its agencies and departments, other funds, and component units) or to other governments, on a user-charge, cost-reimbursement basis. Internal Service Funds should be used only if the reporting government is the predominant participant in its activity; otherwise, the activity should be reported as an Enterprise Fund. Activities typically performed by Internal Service Funds (a separate fund is established for each activity) are motor pool opera- tions, data processing, printing services, and supplies acquisition and distribution.
Internal Service Funds are established primarily to achieve cost savings by means of (1) con- solidating similar support-type activities performed by several agencies into a single unit and (2) purchasing in volume. The accounting system used for Internal Service Funds is designed to accu- mulate the total cost of goods or services provided, leading to the calculation of user charges based on the cost per unit of service or product or total cost for a specific job. For example, depreciation of machinery is part of the cost of providing printing services. Therefore, as with Enterprise Funds, the economic resources measurement focus and full accrual basis of accounting are used.
Internal Service Funds bill the funds receiving the goods or services (often the General Fund). The amounts billed are reported as revenues of the Internal Service Fund and as expendi- tures (expenses) of the recipient fund. As discussed in Chapter 10 , these interfund billings are eliminated when the government-wide financial statements are prepared.
TABLE 2-7 Purposes of Proprietary-Type Funds Fund Type To Account For
Enterprise Resources used to supply goods and services, for a fee, to users who are entirely or primarily external to the governmental unit Examples: Municipal airport, municipal electric utility
Internal Service Resources used to supply goods or services, based on cost reimbursement, within the governmental unit and to other governments
Reporting on Proprietary-Type Funds
Three financial statements are prepared for proprietary-type funds: an operating statement (called a statement of revenues, expenses, and changes in fund net position), a statement of net position, and a statement of cash flows. To illustrate them (see Tables 2-8 , 2-9 , and 2-10 ), we use the statements prepared by the Mt. Lebanon Parking Authority, a legally separate component unit of Mt. Lebanon that accounts for and reports on its activities in the same manner as an Enterprise Fund. (After these statements were issued, the Mt. Lebanon Com- missioners “folded” the authority into the municipality, which now operates the activity as an Enterprise Fund.)
TABLE 2-8 Enterprise Fund—Statement of Revenues, Expenses, and Changes in Net Position
Mt. Lebanon Parking Authority
Statement of Revenues, Expenses, and Changes in Net Position Year Ended June 30, 2010
(in thousands of dollars) Operating Revenues
Vehicle space rental $ 835
Meter collections 378
Fine collections 203
Rental income 159
Total operating revenues $ 1,575
Operating Expenses
Personnel 531
Insurance 58
Contracted services 104
Utilities 78
Repair and maintenance supplies 54
Depreciation and amortization 452
Total operating expenses 1,277
Operating income 298
Nonoperating Revenues (Expenses)
Intergovernmental revenues 5
Interest income 4
Interest expense (161)
Total nonoperating revenues (expenses) (152)
Net income 146
Net position, beginning of year 5,430
Net position, end of year $ 5,576
Source: Adapted from the Financial Statements, Mt. Lebanon Parking Authority, for the years ended June 30, 2010 and June 30, 2009, and presented here as an Enterprise Fund.
TABLE 2-9 Enterprise Fund—Statement of Net Position Mt. Lebanon Parking Authority
Statement of Net Position June 30, 2010 (in thousands of dollars) Assets
Current assets:
Cash and cash equivalents—unrestricted $ 820
Cash and cash equivalents—restricted 335
Investments 204
Accounts receivable 8
Due from Municipality of Mt. Lebanon 2
Prepaid expenses 112
Total current assets $ 1,481
Capital assets not being depreciated 2,727
Capital assets, net of accumulated depreciation of $6,571 5,990
Total assets 10,198
Liabilities Current liabilities:
Current portion of long-term debt 545
Accrued interest payable 73
Accounts payable and accrued payroll 60
Unearned income 33
Current portion of note due to Mt. Lebanon 34
Total current liabilities 745
Noncurrent liabilities:
Long-term debt 3,285
Note due to Municipality of Mt. Lebanon 592
Total noncurrent liabilities 3,877
Total liabilities 4,622
Net Position
Invested in capital assets, net of related debt 4,317
Restricted 334
Unrestricted 925
Total net position $ 5,576
Source: Adapted from the Financial Statements, Mt. Lebanon Parking Authority, for the years ended June 30, 2010 and June 30, 2009, and presented here as an Enterprise Fund. (We changed the format to show the effects of accounting standards issued after this statement was prepared.)
TABLE 2-10 Enterprise Fund—Statement of Cash Flows Mt. Lebanon Parking Authority
Statement of Cash Flows Year Ended June 30, 2010
(in thousands of dollars) Cash Flows from Operating Activities
Receipts from customers $1,573
Payments for goods and services (393)
Payments to employees (419)
Net cash provided by operating activities $ 761
Cash Flows from Investing Activities
Purchase of investments (204)
Sale of investments 203
Interest income 4
Net cash provided by investing activities 3
Cash Flows from Capital and Related Financing Activities
Payment of long-term debt (564)
Payment of interest on long-term debt (169)
Acquisition of property and equipment (217)
Net cash (used in) capital, related financing activities (950)
Net decrease in cash and cash equivalents (186)
Cash and cash equivalents (restricted plus unrestricted):
Beginning of year 1,341
End of year $1,155
Reconciliation of Operating Income to Net Cash Provided by Operating Activities
Operating income $ 298
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization $ 452
Change in operating assets and liabilities:
Accounts receivable 0
Prepaid expenses 9
Accounts payable and accrued payroll 4
Unearned income (2)
Total adjustments 463
Net cash provided by operating activities $ 761
Note: End of year cash ($1,155) is the total of unrestricted cash ($820) and restricted cash ($335) shown in the balance sheet.
Source: Adapted from the Financial Statements, Mt. Lebanon Parking Authority, for the years ended June 30, 2010 and June 30, 2009, and presented here as an Enterprise Fund. (We changed the format to show the effects of accounting standards issued after this statement was prepared.)
The operating statement for Enterprise Funds is presented in multistep format, with sepa- rate captions for operating income (or loss), nonoperating revenues and expenses, and other items. The general format for this statement is as follows:
5 GASB Cod. Sec. 2200.170, as amended. Operating revenues (detailed) Total operating revenues Operating expenses (detailed) Total operating expenses Operating income (loss)
Nonoperating revenues and expenses (detailed)
Income before other revenues, expenses, gains, losses, and transfers Capital contributions (grant, developer, and others), additions to endowments, special and extraordinary items (detailed), and transfers
Increase (decrease) in net position Net position—beginning of period Net position—end of period 5
Operating revenues earned by Enterprise Funds usually result primarily from user charges. Enterprise Fund operating expenses depend on the type of operations but usually include the cost of services, supplies used, utilities, depreciation, and so forth. Notice the charge for depreciation in Table 2-8 . Because Enterprise Funds use the economic resources measurement focus and accrual basis of accounting, depreciation must be included as an expense. Nonoperating revenues and expenses include investment revenue and interest expense. Capital contributions include grants from higher-level governments to acquire capital assets and contributions from developers. Extraordinary items are transactions and events that are unusual in nature and occur infrequently, such as a municipal bankruptcy. Special items refer to transactions and events within the control of management that are either unusual in nature or occur infrequently, such as a large one-time rev- enue from the sale of capital assets. Transfers include subsidies received from another fund.
Notice that the illustrative statement of net position ( Table 2-9 ) is prepared in classified form. A classified statement of net position presents the assets and liabilities so as to distinguish between those that are current and those that are noncurrent (or long term). Current assets include cash and items that will be converted to cash or used up in operations within 1 year. Noncurrent assets include capital assets like land, buildings, and equipment. A parking facility, such as the one illustrated here, is also likely to include significant site improvements. Current liabilities are debts that are due to be paid within 1 year, while noncurrent liabilities are debts that will be paid more than 1 year in the future.
Notice also that the statement of net position in Table 2-9 is presented in this format: assets − liabilities = net position. The statement may also be presented in the traditional balance sheet format: assets = liabilities + net position. The Mt. Lebanon Parking Authority has no items that the GASB has identified as deferred outflows or deferred inflows of resources; if it did, the statement of net position would be presented in this format: (assets + deferred outflows of resources) − (liabilities + deferred inflows of resources) = net position. The net position is displayed in three major components: invested in capital assets, net of related debt; restricted; and unrestricted. Financial statement formats and the details of net position (as well as related calculations) are discussed in detail in Chapter 7 .
Finally, notice the presence of restricted cash and cash equivalents in Table 2-9 . Restricted resources generally result from a contractual, legal, or regulatory requirement, such as a debt covenant requiring that cash be set aside to pay debt service on a bond. The restricted designation signifies that the resources are not available for general purposes. The restricted assets shown here are being held to pay currently due debt service, as required by a debt covenant.
Because Enterprise Funds use the economic resources measurement focus, their operating statements do not report financing transactions and capital asset acquisitions. Therefore, a statement of cash flows, illustrated in Table 2-10 , is prepared for Enterprise Funds. Cash flow statements pre- pared for governmental Enterprise Funds differ from their commercial counterparts in two ways: (a) they report four classifications of cash flows (operating, investing, noncapital financing, and capital and related financing activities) rather than three; and (b) they are prepared on the direct method (showing, for example, the purposes of cash flows for operating purposes), rather than the indirect method. In Table 2-10 , notice particularly the section on cash flows from capital and related financing activities. (Noncapital financing activities are not shown here because there were none.)