CHAPTER 16

ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS

(PART ONE)

Chapter Outline

I. State and local government units are different than for-profit entities in a number of specific
ways.
A. Governments serve a broader group of stakeholders.
B. Most government revenues are raised through involuntary taxes and tolls.
C. Monitoring compliance with budgeted public policy priorities is central to public
accountability.
D. Governments exist longer than for-profit businesses.
E. The primary purpose of governments is to enhance or maintain the well-being of its
citizens.

II. State and local government units produce two complete and distinct sets of financial
statements.
A. User needs for governmental financial information are so diverse that the Governmental
Accounting Standards Board (GASB) requires two sets of statements to be prepared.
The fund financial statements are more for the citizens whereas the government-wide
statements are more for investors, such as bondholders.
B. Fund financial statements are designed primarily to present information about the
General Fund and other major activities. This approach stresses the governments fiscal
accountability over its financial resources.
a. For governmental funds, all current financial resources and claims to those financial
resources are presented using modified accrual accounting for timing purposes.
b. For proprietary funds and fiduciary funds, all economic resources are reported using
accrual accounting for timing purposes.
C. Government-wide financial statements (a statement of net position and a statement of
activities) are designed to present an overview of the government as a whole and
emphasizes operational accountability.
a. In these statements, all economic resources are measured using accrual accounting
for timing purposes.
b. The governmental funds and most of the internal service funds are combined and
reported together as governmental activities.
c. The enterprise funds and any remaining internal service funds are combined and
reported as business-type activities.
d. Because the government does not have control over the use of the assets held in the
fiduciary funds, they are excluded from the government-wide financial statements.

III. For internal purposes, governmental accounting records its individual activities within a
number of self-balancing sets of accounts known as funds.
A. Governmental funds account for activities where service to the public is the main
emphasis.

a. General fund
b. Special revenue funds
 c. Capital projects funds
d. Debt service funds
e. Permanent funds
B. Proprietary funds account for activities of the government where a user charge is
assessed.
a. Enterprise funds
b. Internal service funds
C. Fiduciary funds account for assets held in a trustee capacity for external parties.
a. Investment trust funds
b. Private-purpose trust funds
c. Pension trust funds
d. Agency funds

IV. In reporting current financial resources and the claims to the current financial resources of a
governmental fund, the Fund Balance account indicates the use that can be made of these
resources by government officials.
A. Fund-BalanceNonspendable the amount of resources reported by a fund that cannot
be spent by government officials.
B. Fund-BalanceRestricted the amount of resources held by a fund that must be spent
in a manner designated by an external party.
C. Fund-BalanceCommitted the amount of resources designated for a particular
purpose by the highest level of decision-making authority in the government.
D. Fund-BalanceAssigned the amount of resources designated for a particular purpose
internally but not by the highest level of decision-making authority.
E. Fund-BalanceUnassigned the amount of resources where no use has yet been
specified. This is only found in the General Fund because resources only appear in
other funds if there is some intended use for them.

V. Governmental accounting has traditionally stressed establishing control over current

financial resources to ensure appropriate usage of the publics money.
A. Budgets are required to be approved by the citizens of the government, represented by
the governing body for example, city council, state legislature. When amendments are
made to the budget, the governing body has to approve them also.
B. Budgetary entries are recorded for a number of the activities within the governmental
funds.
a. The entry is recorded at the start of the year and is then reversed to remove at the
end of the year.
b. Budget amendments may be recorded during the year.
C. Financial commitments (such as contracts and purchase orders) are recorded during
the year as encumbrances.
a. These entries help avoid overspending of appropriated amounts.
b. Encumbrances are removed from the records when the commitment becomes a
liability.

VI. In government-wide financial statements, acquiring a capital asset is reported as a capital

asset and incurring an expense is reported as an expense in the same manner as a for-
profit business. However, in reporting the governmental funds within the fund financial
statements, the purchase of a capital asset, incurrence of an expense, and payment of a
noncurrent debt are all reported as expenditures to reflect the reduction in current financial
resources. Through this reporting, the statements report the usage made of the current
financial resources held by the government activity.
 A. On the fund financial statements, supplies and prepaid items can be reported by either
the consumption method (expenditure is recorded as the acquired item is consumed) or
the purchases method (expenditure is recorded when liability is incurred). The
consumption method is required for the government-wide statements.
B. On the government-wide financial statements, acquisitions of infrastructure items such
as bridges and sidewalks are required to be recorded as capital assets.

VII. Governments often have nonexchange transactions where revenues such as taxes and
grants are received without a corresponding earning process. To guide the timing of
recognition of such transactions, four separate categories have been identified.
A. Derived tax revenuessuch as income taxes and sales taxesare recognized when the
underlying event occurs.
B. Imposed nonexchange transactionssuch as property taxes, fines, and penaltiesare
recognized as revenues when the resources are required to be used or in the first period
when use is permitted.
C. Government-mandated nonexchange transactions, usually a government grant to fulfill a
legally required objective, are recognized when all eligibility requirements have been
met.
D. Voluntary nonexchange transactionssuch as most grants and giftsare recognized
when all eligibility requirements have been met.

VIII. Governments often raise significant amounts of financial resources by issuing long-term
bonds.
A. In the government-wide financial statements, the debt is a liability on the Statement of
Net Position.
B. In the fund financial statements for the governmental funds, the inflow of financial
resources is reported as an other financing source. Eventual payment of the debt is
shown as an expenditure. Noncurrent debt balances are not shown in the fund financial
statements for the governmental funds.

IX. Transfers are separated into three categories: intra-activity transactions, interactivity
transactions, and internal exchange transactions.

Answers to Problems note that all problems are same between 12 th and 11th
edition with the exception that a new #22-23 was inserted in the 12 th edition and
all problems #22 on in 11th edition have been pushed out by two questions.

1. B (Internal service fund is a proprietary fund)

2. A

3. D

4. D
5. A (The term interperiod equity refers to incurring a cost in one period that

is paid for in a later period.)

6. C

7. D

8. A

9. D (Capital assets are not reported as assets in the fund financial statements

of the governmental funds. Only current financial resources as well as

prepaid items and supplies are reported as assets in this set of financial

statements.)

10. B (Because the assistant treasurer was not the highest level of decision-

making authority, his decision to use the money in this way was indicated by

showing a Fund Balance-Assigned. The city council is the highest level of

authority. Therefore, councils designation switches the fund balance

amount from assigned to committed.

11. C (When the budget is passed, Estimated Revenue is debited and the

Appropriations account is credited. That entry is reversed off the records at

the end of the year.)

12. B (As a governmental fund, the General Fund records expenditures rather

than expenses.)

13. C (The claim on current financial resources [the expenditure] is actually

$3,020.)

14. B
15. B (Depreciation is an expense and not a reduction in current financial

resources. Therefore, it is not recorded in the fund financial statements for

the governmental funds.)

16. C (Under the consumption method, the inventory is recorded when acquired

and then reclassified as an expenditure as consumed.)

17. A

18. C (A law was passed and then a government provided money to meet the

requirements of that law. That is a government-mandated nonexchange

revenue.)

19. C (Because of the reimbursement clause, the grant is actually earned by

making appropriate expenditures.)

20. B (This is not a long-term liability and is, therefore, reported the same in the

fund financial statements as in the government-wide financial statements.)

21. A

Questions #22-23 are new questions in 12th edition that are not included in 11th

edition. These questions will not be included in the coverage on the quiz.

Note that questions 22-23 (etc) in the 11th edition are the same questions as

the ones with numbers two numbers higher in the 12 th edition so they will be

covered in the exam

22. C (Debt issuance costs are not capitalized in state and local government

accounting; thus, for government-wide financial statements, the amount is

expensed.)
23. C (Any loss on the refunding of a debt is reported as a deferred outflow of

resources and amortized over time.)

24. (#22 11th) C (As a noncurrent liability, the balance is not reported in the fund

financial statements.)

25. (#23 11th) D (Because the city has a liability in connection with this project, all

amounts must be recorded as with normal governmental fund transactions.)

26. (#24 11th) C

27. (#25 11th) D (The transfer here is between a Government Activity and a

Business-Type Activity.)

28. (#26 11th) A (The transfer occurred entirely within the Government Activities

and created no net impact on the total amounts reported.)

29. (27 11th) B

30. (28 11th) D (This transaction was the same as might have occurred with an

outside party and is accounted for in the same manner.)

31. (29 11th) C (This transaction was the same as might have occurred with an

outside party and is accounted for in the same manner.)

 CHAPTER 17
ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS
(PART TWO)

Chapter Outline
I. This chapter looks at the reporting for a number of significant transactions that are common
for state and local governments. For example, these entities often obtain property by
lease rather than by purchase.
A. Leases are recorded as either capital leases or operating leases based upon the criteria
first established by the Financial Accounting Standards Board (FASB) for the reporting
of for-profit businesses. Thus, a lease that meets any one of the following criteria is a
capital lease for either a state or local government or a for-profit business.
a. The lease transfers ownership of the property to the lessee by the end of the lease
term.
b. The lease contains an option to purchase the leased property at a bargain price.
c. The lease term is equal to or greater than 75 percent of the economic life of the
leased property.
d. The present value of minimum lease payments equals or exceeds 90 percent of
the fair value of the leased property.
B. For a state or local government, the recording of a capital lease depends on the set of
financial statements being prepared.
a. In government-wide financial statements, a capital lease is reported as an asset
and liability at the present value of the minimum leases payments and then
depreciation expense (of the assets cost) and interest expense (on the liability
balance) are recognized over time.
b. In fund financial statements for the governmental funds, the present value of the
minimum lease payments is recorded as an expenditure and as an other financing
source. Eventual interest and principal payments are recorded as expenditures.
No depreciation is reported because capital assets are not recognized in the
governmental funds.

II. Governments often establish solid waste landfills for use by the citizens and businesses.
These facilities can be recorded either within the proprietary funds, if a user fee is
assessed, or as part of the General Fund if the landfill is open to the public without a
charge.
A. A landfill can eventually create a large liability for a government because of closure
costs and postclosure maintenance and monitoring.
B. On government-wide financial statements, recognition of this liability is based on
accrual accounting and the economic resource measurement focus. Thus, the liability is
recognized proportionally as the available space becomes filled. If the landfill is
recorded as an Enterprise Fund, this same reporting is also appropriate for fund
financial statements.
C. If the landfill is reported within the General Fund, a liability is only reported on the fund
statements when a claim to current financial resources comes into existence.

III. Many state and local government entities have defined benefit pension plans for their
employees such as school teachers and police officers. Pension trust funds are often set
 up as fiduciary funds to manage the money and investments held to pay for these
pensions. As fiduciary funds, these pension trust funds are not included in government-
wide financial statements.
A. Government-wide financial statements must now report a net pension liability if the
present value of the estimated future payments that relate to past work is greater than
the net position of the pension trust fund. That is a net pension liability.
B. GASB requires that in most cases, but not all, the present value of the future benefits is
determined based on the estimated long-term investment yield for plan assets. That
decision has created a significant amount of controversy because it creates a lower
amount of reported debt.
C. The components to be recognized as pension expense are the service cost for the
current period, interest expense on the total pension liability, and projected earnings on
plan investments. In addition, any increases or decreases in the liability caused by
changes in benefit terms are also included in pension expense immediately.

IV. Works of art and historical treasures

A. Artworks, historical treasures, and similar assets should be capitalized at cost (or fair
value at the date of donation) in government-wide financial statements.
B. An expense rather than an asset can be recorded but only if the item does not generate
economic benefits and meets the following three criteria.
a. Held for public exhibition, education, or research in furtherance of public service,
rather than financial gain.
b. Protected, kept unencumbered, cared for, and preserved.
c. Subject to the policy that revenues generated from sales of items in the collection be
used to add to the collection.
C. If capitalized, depreciation is not required if this type of asset is considered to be
inexhaustible.
D. On fund financial statements for the governmental funds, expenditures are recognized
for any purchases because the acquired property is not a current financial resource.

V. Infrastructure Assets and Depreciation

A. Newly-acquired infrastructure assets (such as roads, bridges, and sidewalks) are
capitalized at historical cost in the government-wide financial statements and also in
fund financial statements for proprietary funds.
A. In fund financial statements for the governmental funds, these acquisitions are recorded
as expenditures.
B. If capitalized, depreciation of all capital assets other than land and inexhaustible
artworks is required.
C. Infrastructure assets are also subject to depreciation. However, the modified
approach allows the expensing of maintenance costs in lieu of depreciation for
infrastructure assets if specified criteria are met.
a. A minimum acceptable condition level is established for a network of infrastructure
assets and documentation is provided to verify that this minimum level has been
maintained.
b. An asset management system must be in place to monitor the condition of the items
in this system of assets.

VI. Primary governments produce a comprehensive annual financial report (CAFR) which
includes general purpose external financial statements. These statements are divided into
three distinct sections.
 A. Managements discussion and analysis (MD&A) which provides a broad range of
information to help decision-makers evaluate the operations and financial position of the
government entities.
B. Financial statements
a. Government-wide financial statements.
b. Fund financial statements.
c. Notes to the financial statements.
C. Other required supplementary information.

VII. In governmental accounting, a general purpose government (such as a city, town, county,
state or the like) is a primary government that must produce a CAFR. In creating this
CAFR, the government might also have to include component units which are legally
separate organizations or activities.
A. Any agency, board, or the like that meets either of the following two criteria is reported
as a component unit within the CAFR of the primary government even though the
separate organization is an independent operation.
a. It must be fiscally dependent upon the primary organization and the primary
government and the component unit must be financially interdependent (there is a
relationship of potential financial benefit or burden between the two of them) or
b. The primary government must appoint a voting majority of the governing board and
either be able to impose its will on the board or the separate organization provides a
financial benefit or imposes a financial burden on the primary government.
B. Once identified, component units can be discretely presented in a separate column on
the right side of the government-wide statements or blended with the primary
government as if it made up one of the funds within the primary government.
C. In addition, a special purpose government (such as a school board, university, or water
commission) qualifies as a primary government if it meets the following three criteria:
a. It has a separately elected governing body.
b. It is legally independent
c. It is fiscally independent of any other state and local governments

VIII. Government entities will occasionally combine. These transactions can be recorded as
acquisitions or as mergers.
A. In a merger, significant consideration is not exchanged. The governments simply
come togetheroften to form a new government unit. The net carrying value of all
assets, liabilities, deferred outflows of resources, and deferred inflows of resources
are retained. No excess consideration is paid nor recognized.
B. In an acquisition, significant consideration is exchanged. Assets, liabilities, deferred
outflows of resources, and deferred inflows of resources are recorded at acquisition
valuethe amount required to buy or dispose of the items on that day. Any excess
consideration is recorded as a deferred outflow of resources and amortized to expense
over a period of time determined based on a number of factors.

IX. Public colleges and universities are required to meet GASB standards for reporting
purposes, whereas private schools are required to use FASB standards.
A. Private colleges and universities generally depend more on tuition and usually have
larger endowments whereas governments generally provide a major part of the support
for public schools.
 B. GASB assumes public colleges and universities are special purpose entities so that
they must use the same reporting model as a state or local government. However,
many of these schools assume that they function solely as an Enterprise Fund (open to
the public for a user charge). Thus, they are allowed to produce fund financial
statements (for a proprietary fund) without need for government-wide statements. The
government-wide statements are viewed as redundant.

Answers to Problems note that all problems in 12 th and 11th edition are exactly
the same except two new problems for #10-11 were created in the 12 th edition and
replaced #10-11 in the 11th edition. #10-11 from either edition will not be covered
on the quiz.

1. A (Both the asset and liability are reported at the present value of the
minimum lease payments.)

2. D (Record $49,000 in expenditures on the first day of the capital lease and
then $70,000 more in the form of payments made over the life of the
lease)

3. B (Only the amount of the initially reported liability is identified as an other

financing source)

4. D (Interest is the $69,000 balance times 10 percent.)

5. A (At this time, there is no claim to current financial resources.)

6. D

7. C (The liability must be increased from 8 percent of $1 million to 19

percent. The 11 percent jump is recorded as expense.)

8. C (Same handling as in 7)

9. A (The landfill creates no claim to current financial resources)

Note question 10 and 11 out of both editions will be excluded from coverage on

this quiz. All questions for chapter 17 were the same for both editions except

these two questions for which new questions were created in the 12 th edition to

replace the questions in the 11th edition

10. 12th edition -B (The present value of the pension payments that have been
earned to date is $49.8 million. The net position of the pension trust fund
is $32.7 million. Thus, the $17.1 million difference is the net pension.
liability.)
11th edition - C

11. 12th edition -D (Changes in the amount of the pension liability that are
necessary because of a change in economic or demographic assumptions
are not expensed immediately. Instead, those amounts are recorded as
either deferred outflows of resources or deferred inflows of resources and
amortized to pension expense over a length of time that is set based on
a number of factors.)
11th edition - B

12. C

13. A

14. B

15. A (Sidewalks do not have an indefinite life and are depreciated unless the
modified approach is used.)

16. D

17. B

18. B (Special purpose governments do not have boundaries in the traditional

style.)

19. A

20. C

21. B (In a merger, these assets are combined at their net carrying amounts.)

22. C

23. A

24. A

25. C

26. C