Learning objectives

• Identify major funds for reporting purposes.
• Recognize the format and requirements of governmental fund financial statements.
• Recognize the format and requirements of proprietary fund financial statements.
• Identify fiduciary fund financial statements.

Refer to appendix A for financial statement samples.

Reviewing fund performance

Fund financial statements provide important information on how the separate components (funds) of a government performed for the year. How much was received, spent, and what remains for a certain purpose can best be determined with fund financial statements. These statements are also used to determine compliance with finance-related laws, rules, and regulations. Through the budget process, governments often make resource-allocation decisions on a fund-by-fund basis. To demonstrate accountability, governments must likewise provide financial information on a fund-by-fund basis.

General-purpose financial statements

The financial statements for governments include both fund-based and government-wide statements. Generally accepted accounting principles (GAAP) require that the general-purpose external financial statements contain, at minimum, the following elements:

• Management’s discussion and analysis (MD&A)
• Basic financial statements
  • Government-wide financial statements
  • Fund financial statements
  • Notes to the financial statements
• Required supplementary information (RSI) (other than MD&A)

The relationship among the different elements required for general-purpose financial statements can be seen in the following chart. This chapter focuses on fund financial statements.

A government may have three different types of funds: governmental, proprietary, and fiduciary. These fund types have different operating objectives and use different measurement focuses and bases of accounting; they measure and report financial activities differently. Because of this, each fund type will have its own set of financial statements.

Reporting by major funds

The number of individual funds a government has can vary from just a few to several dozen. Generally, a government should have the minimum number of funds necessary for sound financial management and to meet legal and accounting requirements. Some governments need more funds than do others to meet this requirement.

Can information for each fund be reported in the basic financial statements? Yes, but the reports may become quite long. One alternative might be to report information by fund type; however, information about individual funds would be lost. The best alternative — and the one to use — is to present information about the largest, most important funds separately and combine information about the other funds into a single column. This is the major fund approach; it enables financial statement users to focus on the government’s most important funds.

Reporting by major funds applies only to governmental funds and enterprise funds. It does not apply to internal service funds or fiduciary funds, which are reported in columns by fund type.

In governmental and proprietary fund financial statements, governments report each major fund in a separate column. Nonmajor funds and internal service funds are combined and reported in single columns.

Now that we understand that reporting is done by major funds, how do we determine which funds qualify as major funds? There are three ways that a fund can be designated as major.

1. The general fund is always major.
2. Apart from the general fund, governments must annually test all governmental and enterprise funds to determine whether they are major and must therefore be reported in a separate column.
3. A government can present any governmental or enterprise fund as “major” if the government believes the fund is important to financial statement users.

When performing the annual test, a fund is a major fund when it meets both of the following criteria:

• Total assets plus deferred outflows of resources and liabilities plus deferred inflows of resources, revenues, or expenditures divided by expenses of a fund equal at least 10% of the corresponding total for those items for all funds of that category (governmental or enterprise).
• Total assets plus deferred outflows of resources and liabilities plus deferred inflows of resources, revenues, or expenditures divided by expenses of a fund equal at least 5% of the corresponding total for all governmental and enterprise funds combined.

Only when a fund item (total revenues, for example) passes the first test is the second test done. Furthermore, the same item (total revenues, in this example) must meet both criteria. It should be noted that only one item in a given fund needs to pass both tests for that fund to be considered major.

For example, the first test would compare a special revenue fund’s total assets plus deferred outflows of resources and liabilities plus deferred inflows of resources, revenues, and expenditures with the total for these same items for all governmental funds. If none of these listed items for the special revenue fund exceeds 10% of the total for all governmental funds, the fund would not be considered major and the second test would not be done.

However, if total revenue for the special revenue fund was the only item that passed the 10% test, then total revenue of the special revenues fund would be tested to determine whether that amount was at least 5% of the total revenue of governmental and enterprise funds combined. If so, the special revenue fund would be determined to be major. The same item must pass both tests.

The major-fund tests need to be done annually. A fund that meets the criteria to be major in one year might not do so in the next year. It is therefore possible that, year to year, the major funds reported in separate columns in the fund financial statements will be different.

For example, a government may have a large capital project one year and none the next year. During the period where there is much activity, the fund could meet the major fund criteria and be reported in a separate column in the fund financial statements. In periods where there is little activity, the fund can be combined and reported with other nonmajor funds. However, it is important to remember that a government has the option of continuing to report the fund as major if the government believes the fund is important to financial statement users.

The table that follows is a sample major-fund calculation for a special revenue fund.

Governmental funds

Governmental funds are used to report what financial resources were received during the year, how they were spent, and what amounts remain at year-end. These funds follow the flow of financial resources measurement focus and the modified accrual basis of accounting. Capital assets and long-term liabilities are not reported in governmental fund financial statements.

Governmental funds report the following two financial statements:

• Balance sheet
• Statement of revenues, expenditures, and changes in fund balance

A governmental fund balance sheet reports current financial assets, current liabilities, and fund balances. Each major fund is reported in a separate column; nonmajor funds are aggregated and reported in a single column. A total column for all governmental funds is also required.

Governments are required to provide a summary reconciliation of the amount reported in the balance for total governmental fund balance to the amount reported as net position for governmental activities in the statement of net position. The summary reconciliation may be reported at the bottom of the balance sheet or in an accompanying schedule.

The governmental funds’ statement of revenues, expenditures, and changes in fund balances reports inflows, outflows, and ending balances of current financial resources. Again, separate columns are used to report each major fund and one column is used to report nonmajor funds in the aggregate. A total column for all governmental funds is also required.

Governments are required to use the following format in the statement of revenues, expenditures, and changes in fund balances:

A summary reconciliation is also required for the amount reported as change in governmental fund balances to the amount reported as change in net position for governmental activities in the statement of activities. The summary reconciliation may be reported at the bottom of the statement of revenues, expenditures, and changes in fund balances or in an accompanying schedule.

Governments are also required to report budgetary comparison schedules for the general fund and for each major special revenue fund with a legally adopted annual budget. These schedules are normally reported as part of RSI. However, governments may elect to report these schedules as budgetary comparison statements as part of the fund financial statements.

Proprietary funds

Proprietary funds are used to report a government’s business-type activities and follow business-type accounting. These funds follow the flow of economic resources measurement focus and the accrual basis of accounting. Their financial statements report all assets and liabilities belonging to the funds.

Proprietary funds report the following three financial statements:

• Statement of net position or balance sheet
• Statement of revenues, expenses, and changes in net position
• Statement of cash flows

The financial statements report each major enterprise fund in a separate column; nonmajor enterprise funds aggregated into a single column; and all enterprise funds in a combined total column, followed by a column for the combined total for all internal service funds. Internal service funds are reported as a fund type; they are not combined with enterprise funds.

Normally, a reconciliation of the proprietary funds’ financial statements to the government-wide financial statements is not needed. The totals for net position and changes in net position for the enterprise funds are often the same for net position and changes in net position reported for business-type activities in the government-wide statements. When differences do exist, reconciliations should be presented in the fund financial statements or in an accompanying schedule.

Proprietary funds may present either a statement of net position (assets + deferred outflows of resources – liabilities – deferred inflows of resources = net position) or a balance sheet (assets + deferred outflows of resources = liabilities + deferred inflows of resources + net position). Although presentation of either the statement of net position or the balance sheet is permitted, the statement of net position format is encouraged. The statement should be presented in a classified format, separating current assets (and the current portion of deferrals) and liabilities (and the current portion of deferrals) from long-term assets and liabilities. Net position is reported in three broad categories: net investment in capital assets, restricted, and unrestricted. Any designations of net position are not reported on the face of the financial statements.

The proprietary fund financial statement — as in, the statement of revenues, expenses, and changes in net position — is analogous to the operating statement in for-profit reporting. The statement separates operating revenues and expenses from nonoperating revenues and expenses and other items. This format allows the fund to report an amount for operating income (or loss).

Governments should adopt a policy that defines operating revenues and expenses in a manner appropriate for a given activity. GAAP does not directly define what should be classified as “operating” but states that how items are classified in a cash flow statement should be considered. The classifications used for cash flow statements are discussed shortly.

The following table shows the format of a statement of revenues, expenses, and changes in net position.

Proprietary funds report a statement of cash flows. The purpose of a statement of cash flows is to provide relevant information about cash receipts and disbursements for the period. This information should assist users in determining the following:

• The entity’s ability to generate future cash flows
• Its ability to meet obligations when they become due
• Its needs for external financing
• The reasons for differences between operating income and cash flows from operating activities
• The effects on the entity’s financial position on its cash and its noncash investing, capital, and financing transactions during the period

The GASB defines four types of cash flows: operating activities, noncapital financing activities, capital and related financing activities, and investing activities. The following table describes what should be included in each category of cash flow.

Cash flows from operating activities are reported under the direct method using the following minimum classes of receipts and payments:

• Cash receipts from customers
• Cash receipts from quasi-external operating transactions with other funds
• Other operating cash receipts, if any
• Cash payments to employees for services
• Cash payments to other suppliers of goods or services
• Cash payments for quasi-external operating transactions with other funds
• Other operating cash payments, if any

Proprietary funds must also report a schedule that reconciles cash flows from operating activities to the amount reported as operating income (loss) in the statement of revenues, expenses, and changes in net position. This schedule should be presented on the same page as the statement of cash flows, if space permits.

Governments may acquire assets by directly assuming a liability. For example, a building may be acquired by entering into a mortgage agreement. A separate schedule should be presented describing such noncash transactions. The schedule can be in either a narrative or a tabular format. Again, this schedule should be presented on the same page as the statement of cash flows, if space permits.

Fiduciary funds

Fiduciary funds (trust and custodial funds) are used to account for resources held by a government for other individuals or organizations. Like proprietary funds, fiduciary funds report using the flow of economic resources measurement focus and the accrual basis of accounting. The fiduciary financial statements should report all fiduciary funds of the primary government and any fiduciary component.

Fiduciary funds report the following two financial statements:

• Statement of fiduciary net position
• Statement of changes in fiduciary net position

Unlike governmental and proprietary funds, fiduciary fund financial statements are presented by fund type. For example, if a government has several private-purpose trust funds, only one column should be presented in the financial statements for this fund type. Also, total columns are not used in the financial statements.

The statement of fiduciary net position reports the assets, liabilities, and net position for each type of fiduciary fund. The statement does not include certain actuarial liabilities of defined benefit pension plans and other similar defined benefit plans. In most cases, a liability should be recognized in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources. Fiduciary funds generally report net position simply as net position held in trust for others. The requirement to report net position in three separate classes does not apply to fiduciary funds.

The statement of changes in fiduciary net position reports additions to and deductions from net position for each fiduciary fund type. Revenues and expenses are not reported. A government that reports a pension plan or postemployment benefit plan other than pension plan in a pension (or other employee benefit) trust fund should report the plan’s assets, deferred outflows of resources, liabilities, deferred inflow of resources, and fiduciary net position.

GASB Statement No. 84, Fiduciary Activities, issued in January 2017 and effective for fiscal years beginning after December 15, 2018, sets forth that agency funds are no longer to be reported upon the application of this statement.

Summary

Financial statements for governments include both fund-based and government-wide statements. There are separate sets of fund financial statements for each fund type: governmental, proprietary, and fiduciary. Fund financial statements focus on major funds. Each major fund is reported in separate columns; nonmajor funds are combined and reported as a separate column. Major fund reporting applies only to governmental and enterprise funds. Internal service funds and fiduciary funds report separate columns for each fund type.

The required financial statements for each fund type are different. Governmental funds report a balance sheet and a statement of revenues, expenditures, and changes in fund balances. Proprietary funds report a statement of net position (or balance sheet); a statement of revenues, expenses, and changes in net position; and a statement of cash flows. Fiduciary funds report a statement of fiduciary net position and a statement of changes in fiduciary net position.

Practice questions

Please note that the following practice questions are not required reading material.

1. Separate sets of fund financial statements are prepared for which fund category?
   1. Fiduciary.
   2. Governmental.
   3. Proprietary.
   4. All the above.
2. In the fund financial statements, a government should include a separate column for each of these except
   1. Each major enterprise fund.
   2. Each major internal service fund.
   3. Each major capital projects fund.
   4. Each major special revenue fund.
3. Which funds must always be reported in a separate column in the fund financial statements?
   1. Capital projects fund.
   2. Debt service fund.
   3. General fund.
   4. Enterprise fund.
4. Which is not correct?
   1. Major fund reporting is required for all proprietary funds.
   2. The general fund is always major.
   3. Major fund reporting is required for all governmental funds.
   4. A government can report any fund as major.
5. Which column would not appear in a proprietary fund financial statement?
   1. Each major enterprise fund.
   2. Total for all enterprise funds.
   3. The internal service fund type.
   4. Total for all proprietary funds.
6. Which fund financial statements are required for governmental funds?
   1. Balance sheet.
   2. Statement of revenues, expenditures, and changes in fund balances.
   3. Budgetary comparison statement for all funds with annual budgets.
   4. Both (a) and (b).
7. Which set of fund financial statements would normally contain a reconciliation of the fund financial statement information to the government-wide financial statements?
   1. Governmental.
   2. Proprietary.
   3. Fiduciary.
   4. All the above.
8. Which fund type would report additions and deductions in the fund financial statements?
   1. Enterprise funds.
   2. Internal service funds.
   3. Permanent funds.
   4. Pension (and other employee benefit) trust funds.
9. Which is not a cash flow category used by an enterprise fund in the statement of cash flows?
   1. Financing activities.
   2. Capital and related financing activities.
   3. Operating activities.
   4. Noncapital financing activities.
10. Explain when a fund must be reported in a separate column in the fund financial statements.

     

     

11. What statements are included in the fund financial statements?

     

     

12. How would the following items be reported in the statement of cash flows for a proprietary fund? Operating activities (OA), noncapital financing activities (NC), capital and related financing activities (CA), investing activities (IA), or not reported (NR).
    • Cash paid for supplies
    • Cash received from sale of equipment
    • Cash transferred from the general fund (noncapital)
    • Cash received from state grant (noncapital)
    • Cash paid for investments
    • Cash received from short-term borrowing
    • Cash paid for interest on capital-related debt
    • Cash received from customers
    • Cash received for interest from investment