Knowledge check

1. Choose the correct statement regarding the government-wide financial statements.
   1. The government-wide financial statements are used to address fiscal accountability.
   2. Government-wide statements were created with the advent of GASB Statement No. 68, Accounting and Financial Reporting for Pensions — An Amendment of GASB Statement No. 27.
   3. The purpose of the government-wide financial statements is to demonstrate operational accountability.
   4. The fund financial statements are used to address operational accountability.
2. Which fund type is excluded from the government-wide statements?
   1. Fiduciary funds.
   2. Proprietary funds.
   3. Governmental funds.
   4. Capital project funds.

The government-wide statements

The two government-wide financial statements follow:

• The statement of net position
• The statement of activities

In both statements, information is reported in separate columns to distinguish between resources and activities of the primary government and its component units¹. In addition, separate columns and rows are used to distinguish between the primary government’s governmental activities and business-type activities. Governmental activities are usually reported in governmental funds and internal service funds. Business-type activities are usually reported in enterprise funds. The government-wide statements must report the following columns:

• Primary government’s governmental activities
• Primary government’s business-type activities
• Total for the primary government
• Component units (if there is more than one component unit, each major component unit may be displayed in separate columns or this information may be displayed in other sections of the basic financial statements)

The government also has an option to report a total column for the reporting entity.

The statement of net position

The statement of net position is like a balance sheet in that it reports assets plus deferred outflows of resources, liabilities plus deferred inflows of resources, and net position for the government. Governments are encouraged to use a net position format (assets + deferred outflows of resources – liabilities – deferred inflows of resources = net position) for this statement, but a balance sheet format (assets + deferred outflows of resources) = (liabilities + deferred inflows of resources + net position) may also be used. Governments should present assets and liabilities in order of their relative liquidity (although a classified approach is also allowed). For liabilities that have average maturities of more than one year, separate amounts are reported for the amount due within one year and the amount due in more than one year.

The statement of net position should minimize the reporting of internal balances (the reporting of receivables and payables among the different parts of the government). Interfund receivables and payables among the funds that make up governmental activities are eliminated. The same is true for business-type activities. Payables and receivables between governmental activities and business-type activities are eliminated in the total primary government column. Receivables and payables between the primary government and its component units are treated as external transactions and are not eliminated.

The difference between assets plus deferred outflows of resources and liabilities plus deferred inflows of resources should be reported as net position. Net position is divided into the following three components:

1. Net investment in capital assets is the component of net position that represents the government’s net equity in its capital assets. It consists of capital assets, net of accumulated depreciation less any outstanding debt related to the capital assets. If there are unspent debt proceeds related to capital assets, both the unspent proceeds and related debt should be reported as part of restricted net position.
2. Restricted net position is used when constraints are placed on net position. The constraints can be either externally imposed (for example, debt covenants or grantor restrictions) or imposed by constitutional provisions or enabling legislation. In cases where there are endowment-type funds, two components of restricted net position should be displayed: expendable and nonexpendable net position.
3. Unrestricted net position includes all other net position not included in the previous two categories. Unlike fund balance, designations of unrestricted net position should not be reported on the face of the financial statements.

The statement of activities

The statement of activities reports the results of operations for the government. In some regards, it is like an income statement but looks nothing like one that a business would produce. This is because the purpose of a business is to generate income in such a fashion that it also generates net income for its owners. The purpose of government is to provide certain services to the public and to generate sufficient revenues to pay for those services. Therefore, the statement of activities begins with expenses, which are followed by revenues.

In the statement of activities, expenses are reported in three categories: governmental activities, business-type activities, and component units. Governmental activity expenses should be reported in at least as much detail as they are reported in governmental fund statements. Business-type activities expenses should be reported by different identifiable activities.

The statement format is designed to report the net expense or revenues of the different functions of governments. The first column in the statement of activities reports the expenses of the different functions of government. The next three columns are used to report different types of program revenues. Program revenues reduce the net cost of the function. The net (expense) revenue of a function indicates the function’s relative benefit to or burden on the taxpayers and other general revenues of the government.

Separate columns are used in the statement of activities to report the net (expense) revenues for governmental activities, business-type activities, total for the primary government, and component units.

For example, assume that the public safety function reports $100,000 of expenses for the year. Also assume that this function generated $25,000 in fees and charges for services and received $10,000 in grants (restricted for this purpose) from other governments. The net cost of this function would be $65,000 ($100,000 − $25,000 − $10,000), which must be paid from taxes and other general revenues. The reporting of net (expense) revenues of functions is unique to the government-wide statements. The fund financial statements do not show the relationship of program revenues to expenditures.

Program revenues relate to the different functions of governments and reduce the net costs of these functions. They are generally generated from fees, fines, and forfeitures and charges for services from the different functions; they also may come from parties other than the government’s taxpayers or citizens (such as intergovernmental grants restricted to a particular function). All taxes, even if restricted in purpose, should be reported as general revenue.

Program revenues are normally reported in the statement of activities using the following three separate columns:

1. Charges for services — This category includes charges to customers or applicants for the purchase of goods and services or for privileges provided. Some examples are fees charged for services (water and garbage collection), licenses and permits (dog licenses and building permits), and for operating special assessments (street cleaning and street lights). Fines and forfeitures would also be reported under this category (parking tickets and court fines).
2. Operating grants and contributions — This category includes revenues generated from mandatory and voluntary nonexchange transactions (for example, grants and contributions) with other governments, organizations, and individuals; these revenues are restricted for use in a particular program. The grants and contributions reported in this category should be for operating purposes. Restricted operating grants and contributions reduce the net expenses of certain functions for the reporting government.
3. Capital grants and contributions — This category is very similar to operating grants and contributions; however, in this category, program revenue is for capital purposes. For example, grants for the purchase, construction, or renovation of a capital asset would fall into this category.

Revenues that do not fit the definition of program revenues are classified as general revenues. All taxes and interest, grants, and contributions that are not restricted to a particular program are reported as general revenues. General revenues of the government are reported in the bottom of the statement.

Any contributions to endowments and permanent funds, special and extraordinary items, and transfers are reported immediately after general revenues in the statement of activities.

The statement also reports the change in net position for the year. This is the bottom-line measure for the results of operations for the government.

Generally, the statement of activities should eliminate the double recording of expenses related to goods and services provided by internal service funds. Only the programs that consume the goods and services should report the expenses (this is discussed in more detail later in the chapter). However, the revenues and expenses of services provided and used between different functions of governments should not be eliminated. For example, the sale of water by an enterprise fund to the general government should be reported as revenue by the function providing the water and as an expense by the function consuming the water.

This completes the discussion of the requirements and general format of the two government-wide statements. The next section discusses how the statements are prepared.

Capital assets adjustments

Because capital assets are not reported by governmental funds, they play a major role in the conversion of governmental funds from the flow of financial resources to the flow of economic resources measurement focus. The government must maintain detailed capital assets records to support this conversion.

To convert the balance sheet of governmental funds to the statement of net position for governmental activities, capital assets — net of accumulated depreciation — need to be added to assets and an equal amount added to net position.

Several adjustments related to capital assets are needed to convert the statement of revenues, expenditures, and changes in fund balances for governmental funds to the statement of activities for governmental activities. Governmental funds report capital purchases as expenditures. No depreciation is recorded. Also, if a government sells a general capital asset, the proceeds from the sale are recorded in a governmental fund as other financing source.

The adjustments convert the information in the statement of revenues, expenditures, and changes in fund balances to the flow of economic resources measurement focus. The following list of adjustments indicates either an increase or decrease to the reconciliation schedule for the amount reported as changes in fund balances for governmental funds and the amount reported as change in net position for governmental activities:

• Add capital assets purchased. The purchase of a capital asset is not reported as an expense in the statement of activities but is recorded as an expenditure by governmental funds. Therefore, the amount of capital assets purchased is added back on the reconciliation. This amount would reduce reported expenses in the worksheet for the functional areas that reported the purchase.
• Subtract depreciation. Depreciation expense reduces net position but is not recorded in the fund financial statements. Therefore, the amount of depreciation expense is subtracted on the reconciliation. This amount would increase expenses in the worksheet for the function that used the capital assets.
• Subtract the book value of capital assets disposed of during the year. Gains and losses from disposal of assets should be reported in the statement of activities — not proceeds — from sale of capital assets reported by governmental funds. Proceeds can be converted to gains and losses by subtracting the book value of the assets sold. This adjustment on the worksheet will convert an other financing source to a gain or loss from the sale of capital assets, which generally is reported as general revenue.

A few additional comments are needed about infrastructure assets. Infrastructure assets are long-lived capital assets that are normally stationary in nature and can be preserved for a long time. Roads, bridges, tunnels, and dams are some examples. Governments were required for the first time to report general infrastructure assets under GASB Statement No. 34. GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, amends GASB Statement No. 34.

An important point about infrastructure assets is that governments are given the option to use a modified approach for these capital assets. Under the modified approach, infrastructure assets that are part of a network or subsystem of a network are not depreciated provided that two requirements are met. The requirements are (1) that the government maintains an asset management system and (2) that the assets are being preserved at or above a condition level established by the government. If this approach is used, all expenditures made to maintain the assets are expensed. In addition, certain information about these assets must be reported in the required supplementary information section of the financial statements.

GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, addresses the accounting and reporting for intangible assets and requires that all intangible assets covered by its scope be classified as capital assets. Therefore, intangible assets may require adjustments. As an update to the information presented herein, it also should be noted that paragraph 6 (identifiable intangible assets) and footnote 4 of GASB Statement No. 51 are amended by paragraph 8 of GASB Statement No. 63.

The previously listed adjustments are needed to properly reflect capital-asset activities in the conversion of governmental funds from the flow of financial resources to the flow of economic resources measurement focus.

A final comment regarding capital assets is that GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, addresses the accounting and financial reporting for impairment of capital assets and for insurance recoveries.

Pensions, postemployment benefits other than pensions, long-term liabilities, and deferred inflows and outflows of resources adjustments

Because pension, postemployment benefits other than pensions (OPEB), and long-term liabilities are not reported by governmental funds, they also play a major role in the conversion of governmental funds from the flow of financial resources to the flow of economic resources measurement focus. The government must maintain detailed long-term liabilities records to support this conversion.

To convert the balance sheet for governmental funds to net position for governmental activities, pensions and long-term liabilities need to be added to liabilities and an equal amount needs to be subtracted from net position. The adjustment for long-term liabilities should include any unamortized premiums or discounts on debt.

Several adjustments related to long-term liabilities are needed to convert the statement of revenues, expenditures, and changes in fund balances for governmental funds to the statement of activities for governmental activities. Governmental funds report in the statement of revenues, expenditures, and changes in fund balances transactions that deal with capital-related long-term liabilities. Payment of long-term debt principal is reported as an expenditure. Proceeds from the issuance of debt are reported as an other financing source.

Activities related to noncapital long-term liabilities are not reported in the statement of revenues, expenditures, and changes in fund balances. This includes liabilities for compensated absences, claims and judgments, landfill closure costs, net pension obligations, OPEB, termination benefits, pollution remediation obligations, and asset retirement obligations.

GASB Statement No. 68 brought significant changes to how pension expense is measured and reported in government-wide statements. This statement uses an accounting approach instead of a funding approach to report pension costs.

GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, requires that OPEB follow similar accounting and reporting requirements for pensions as those under GASB Statement No. 68. Some governments extend financial guarantees for the obligations of another organization without directly receiving equal or approximately equal value in exchange (a nonexchange transaction). GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, provides guidance for these types of costs.

GASB Statement No. 70 requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data, if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee. The amount of the liability to be recognized should be the discounted present value of the best estimate of the future outflows related to the guarantee expected to be incurred. When there is no best estimate but a range of the estimated future outflows can be established, the amount of the liability to be recognized should be the discounted present value of the minimum amount within the range.

The adjustments convert the information in the statement of revenues, expenditures, and changes in fund balances to the flow of economic resources measurement focus. The following list of adjustments indicates either an increase (add) or decrease (subtract) to the reconciliation schedule for the amount reported as changes in fund balances for governmental funds and the amount reported as change in net position for governmental activities:

• Add principal payments. The payment of principal is not reported as an expense in the statement of activities but is reported as an expenditure by governmental funds. Therefore, the amount of expenditures reported for principal payments is added back on the reconciliation. This amount would reduce reported expenses in the worksheet for principal payments.
• Subtract debt proceeds. Debt proceeds do not increase net position in the statement of activities but increase fund balance for governmental funds. Therefore, the amount reported as an other financing source for debt proceeds is subtracted on the reconciliation. This amount would eliminate the amount reported for debt proceeds in the worksheet.
• Add or subtract changes in noncapital long-term liabilities. The changes in these liabilities are not reported in the fund financial statements. Therefore, the amount of changes in these liabilities needs to be reported on the reconciliation. For example, if the liability for compensated absences increases for the year, an increase in expenses needs to be recorded and this amount subtracted in the reconciliation. The increase in expense would adjust the appropriate functional expenses on the worksheet (for example, the functional areas related to employees who earned the compensated absences).
• Add or subtract changes in unamortized discounts and premiums. Interest expense in the statement of activities should reflect the amortization of any premiums or discounts on debt issued. The statement of revenues, expenditures, and changes in fund balances does not report such amortization. Therefore, the amount of amortization is reported on the reconciliation. The adjustment would either increase or decrease interest expense on the worksheet.
• Add or subtract changes in deferred inflows and outflows of resources. Deferred inflows and outflows of resources need to be amortized over their respective amortization periods.

The preceding adjustments are needed to properly reflect long-term liability activities in the conversion of governmental funds from the flow of financial resources to the flow of economic resources measurement focus.

Other adjustments

There are a few additional adjustments needed to convert the fund financial information from the modified accrual basis to the accrual basis of accounting.

The first adjustment is related to recognition of revenues. Governmental funds recognize revenues under the modified accrual basis when it is measurable and available. Under the accrual basis, revenues do not need to be available to be recognized. For example, property taxes must be collected during the year or no later than 60 days after the end of the year to be reported as revenues by the general fund. However, the full amount of the tax levied for that year (less the amount expected to be uncollectible) should be reported as revenue under the accrual basis of accounting.

The second adjustment is related to recognition of interest expense. Governmental funds recognize interest expenditures when they become due. Under accrual accounting, interest expense should be recognized when incurred. This would include accruing interest at year-end and amortizing any premiums or discounts on debt issued.

The last major adjustment is related to debt refunding. Debt refunding is reported differently for governmental funds than it is for proprietary funds. Adjustments are needed to report debt refunding consistent with the treatment used by proprietary funds.

Remember that, in most cases, the adjustments needed to produce the government-wide statements would be made only on worksheets. Governments will generally maintain accounting records on a fund basis using the flow of financial resources measurement focus and modified accrual basis of accounting for governmental funds. Worksheets will have to be prepared anew each year.

Government combinations

GASB Statement No. 69, Government Combinations and Disposals of Government Operations, addresses certain types of combinations. The statement defines these as mergers, acquisitions, and transfers of operations. Government mergers include combinations of legally separate entities without the exchange of significant consideration. This statement requires the use of carrying values to measure the assets and liabilities in a government merger and certain transfers of operations.

Government acquisitions are transactions in which a government acquires another entity, or its operations, in exchange for significant consideration. GASB Statement No. 69 requires measurements of assets acquired and liabilities assumed generally to be based on their acquisition values.

In some cases, the consideration paid in an acquisition will exceed the amount of net position acquired. The acquiring government should report the excess as a deferred outflow of resources. For other acquisitions where the consideration is less than the amount of net position acquired, the excess net position should be eliminated by reducing the noncurrent assets (other than financial assets) that are acquired. If the allocation reduces noncurrent assets to zero, the remaining amount should be recognized as a special item in the government-wide statement of activities.

Knowledge check

3. Which statement is correct regarding the government-wide financial statements?
   1. The format of the statement of activities keeps a government from reporting the net (expenses) revenues of the different functions of the government.
   2. The challenge in producing the government-wide statements is with converting proprietary activities to governmental activities.
   3. The government-wide statements for governmental activities are generally produced each year using a worksheet approach.
   4. The government-wide statements for governmental activities report five separate columns of program revenue.