SUBSECTION 2.1.1.3
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

2.1.1.3.1

Adoption

Effective Date:

Sept. 1, 1998

Generally accepted accounting principles (GAAP) are uniform minimum standards of and guidelines to financial accounting and reporting. The Office of Financial Management (OFM) adopts GAAP as applicable to state governments.

2.1.1.3.2

GAAP Hierarchy

Effective Date:

Sept. 1, 1998

The hierarchy of GAAP governs what constitutes GAAP for state governments, including government-owned colleges and universities and health care providers. It details the priority sequence of pronouncements that the state should look to for accounting and reporting guidance. The Financial Accounting Foundation (FAF) has established the following hierarchy for state and local governments:

2.1.1.3.2.a

Governmental Accounting Standards Board (GASB) Statements and Interpretations. Also, American Institute of Certified Public Accountants (AICPA) and Financial Accounting Standards Board (FASB) pronouncements specifically made applicable to state and local governmental entities by GASB Statements or Interpretations. For proprietary activities, all applicable FASB pronouncements, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins (ARBs) issued on or before November 30, 1989, have been specifically included unless they conflict with or contradict GASB pronouncements. This includes all FASB statements through Statement 102.

2.1.1.3.2.b

GASB Technical Bulletins. Also, AICPA Industry Audit and Accounting Guides and AICPA Statements of Position, if specifically made applicable to state and local governmental entities by the AICPA and cleared by the GASB.

2.1.1.3.2.c

AICPA AcSEC Practice Bulletins if specifically made applicable to state and local governmental entities and cleared by the GASB. Also, consensus positions of a group of accountants organized by the GASB that attempts to reach consensus positions on accounting issues applicable to state and local governmental entities.

2.1.1.3.2.d

Implementation Guides (Q&A's) published by the GASB staff. Also, practices widely recognized and prevalent in state and local government.

2.1.1.3.2.e

Other accounting literature, including GASB Concepts Statements and AICPA and FASB pronouncements when not specifically made applicable to state and local governmental entities.

2.1.1.3.3

Reporting Entity

Effective Date:

Sept. 1, 1998

The financial reporting entity consists of (a) the primary government, (b) component units for which the primary government is financially accountable, and (c) other stand-alone governments (including special purpose governments, joint ventures, jointly governed organizations, and pools) for which the nature and significance of their relationship with the primary government is such that exclusion would cause the reporting entity’s financial statements to be misleading or incomplete.

The primary government consists of all funds, agencies, departments, and organizations that make up its legal entity. With respect to component units, financial accountability is manifest when the primary government appoints a voting majority of the component unit’s governing body and (1) is able to impose its will on the component unit or (2) there is a potential for the component unit to provide specific financial benefits to, or impose specific financial burdens on, the primary government.

2.1.1.3.4

Fund Accounting

Effective Date:

Sept. 1, 1998

Among the basic principles of governmental GAAP is fund accounting. Because of the diverse nature of governmental operations and the numerous legal and fiscal constraints under which those operations must be conducted, it is impossible to record all governmental financial transactions and balances in a single accounting entity. Therefore, unlike a private business which is accounted for as a single entity, a governmental unit is accounted for through several separate funds and account groups, each of which is a fiscal accounting entity with a self-balancing set of accounts.

2.1.1.3.5

Fund and Account Group Categories

Effective Date:

Sept. 1, 1998

2.1.1.3.5.a

Funds are categorized by type to indicate both the sources of the fund's financial resources and the nature of activities financed. There are three broad categories of funds used in governmental accounting.

2.1.1.3.5.a(1)

Governmental Funds - are used to account for most typical governmental functions. The acquisition, use, and balances of a government's expendable financial resources and the related current liabilities, except those accounted for in proprietary funds, are accounted for through governmental funds. There are four types of governmental funds:

• General Fund - is used to account for activities of the general government not accounted for in some other fund.

• Special Revenue Funds - are used to account for the collection and disbursement of specifically earmarked monies.

• Debt Service Funds - are used to account for the accumulation of resources for and the payment of general long term debt principal and interest.

• Capital Projects Funds - are used to account for the acquisition and construction of general fixed assets.

2.1.1.3.5.a(2)

Proprietary Funds - are used to account for a government's ongoing organizations and activities that are similar to businesses found in the private sector. These funds are considered self-supporting in that the services rendered by them are generally financed through user charges or on a cost reimbursement basis. There are two types of proprietary funds:

• Enterprise Funds - are used to account for operations (a) where the intent of the government is to fully recover costs of providing goods or services to the general public through user charges; or (b) where the governing body has decided that periodic determination of net income is appropriate for capital maintenance, public policy, management control, accountability or other purpose. Enterprise funds are required to be used for governmental hospitals and public entity risk pools.

• Internal Service Funds - are used to account for the provision of goods or services by one department or agency to other departments or agencies of the government, or to other governmental units, on a cost-reimbursement basis. Internal service funds may be used to account for a government’s own risk financing activities.

2.1.1.3.5.a(3)

Fiduciary Funds - are used to account for assets held by a governmental unit in a trustee capacity or as an agent for individuals, private organizations, other governmental units, and/or other funds. There are four types of fiduciary funds:

• Expendable Trust Funds - are used to account for assets held by the government in a trustee capacity where both principal and income may be expended for the trust's activities.

• Non-expendable Trust Funds - are used to account for assets held by the government in a trustee capacity where only income earned on the trust's assets may be expended in accordance with the trust agreement.

• Pension and Investment Trust Funds - are used to account for public employment retirement systems and external investment pools.

• Agency Funds - are used to account for assets held by the government as an agent for other funds, governments, organizations or individuals.

2.1.1.3.5.b

Account groups are used to provide management and accounting control over the government's general fixed assets and the unmatured principal of its general long-term obligations. Account groups are not funds in that they do not reflect available financial resources and related liabilities. There are two account groups:

2.1.1.3.5.b(1)

General Fixed Assets Account Group - is used to account for the government's fixed assets other than those accounted for in the proprietary and similar trust funds.

2.1.1.3.5.b(2)

General Long-Term Obligations Account Group - is used to account for the unmatured portion of the government's long term obligations other than those accounted for in the proprietary and similar trust funds.

2.1.1.3.6

Measurement Focus and Basis of Accounting

Effective Date:

Sept. 1, 1998

2.1.1.3.6.a

Measurement focus is concerned with what financial transactions and events will be recognized in the accounting records and reported in the financial statements. Measurement focus is concerned with the inflow and outflow of resources - what is being measured. While there are a number of measurement focuses, the following two are fundamental to current governmental accounting principles:

2.1.1.3.6.a(1)

Flow of economic resources focus considers all of the assets available to the governmental unit for the purpose of providing goods and services. Under this focus, all assets and liabilities, both current and long-term, are recorded within the fund and depreciation is recorded as a charge to operations.

2.1.1.3.6.a(2)

Flow of current financial resources focus measures the extent to which financial resources obtained during a period are sufficient to cover claims incurred during that period. The emphasis of this focus is on cash and assets that will become cash during or shortly after the current period. Long-term capital assets and long-term obligations are not recorded within a fund under this measurement focus.

2.1.1.3.6.b

Basis of accounting refers to when transactions and events will be recognized in the accounting records and presented in the financial statements. Governmental accounting transactions and events are recognized on either the accrual basis or the modified accrual basis.

2.1.1.3.6.b(1)

Accrual basis of accounting records revenues in the period in which they are earned and become measurable; expenses are recorded in the period incurred, if measurable.

2.1.1.3.6.b(2)

Modified accrual basis of accounting recognizes revenues in the period in which they become available and measurable. Revenues are considered available when they will be collected either during the current period or soon enough after the end of the period to pay current year liabilities. Expenditures are generally recorded when they are incurred, if measurable.

2.1.1.3.6.c

Under generally accepted accounting principles, the measurement focus and basis of accounting applied varies with fund type category.

2.1.1.3.6.c(1)

Governmental funds employ the flow of current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized in the accounting period in which they become measurable and available. Expenditures are recognized when incurred, if measurable, except for unmatured interest on general long-term obligations, which is recognized when due. Prepayments and capital expenditures are not recorded as deferred costs to be allocated over future periods, but rather as current expenditures. Assets and liabilities reported on the financial statements are limited to those representing current available resources or requiring expenditure of said resources.

2.1.1.3.6.c(2)

Proprietary funds utilize the flow of economic resources measurement focus and the accrual basis of accounting. Revenues are recognized in the period in which they are earned and become measurable; expenses are recognized in the period incurred, if measurable. This approach recognizes the deferral and capitalization of expenditures and the deferral of revenues. Assets and liabilities reported represent all of the assets available and all of the liabilities outstanding.

2.1.1.3.6.c(3)

Fiduciary funds use a measurement focus and basis of accounting consistent with the fund's accounting measurement objective. Nonexpendable trust and pension and investment trust funds use the flow of economic resources measurement focus and the accrual basis of accounting. Expendable trust funds use the modified accrual basis and the current financial resources measurement focus. Agency funds are custodial in nature and do not involve the measurement of results of operations and so do not use a measurement focus. Agency funds employ the modified accrual basis of accounting.

2.1.1.3.7

Accounting for Fixed Assets and Long-Term Obligations

Effective Date:

Sept. 1, 1998

2.1.1.3.7.a

Fixed Assets of a government are accounted for at cost or, if the cost is not practicably determinable, at estimated cost. The cost of a fixed asset includes its purchase price or construction cost, as well as the ancillary charges necessary to place the asset in its intended location and condition for use. Donated fixed assets are recorded at their estimated fair value at the time received.

Due to the distinctive nature of governmental activities and fund accounting requirements, some fixed assets are accounted for in certain funds (fund fixed assets) while others are accounted for through an account group (general fixed assets).

2.1.1.3.7.a(1)

Fund fixed assets - Fixed assets used in proprietary and similar trust funds, where the flow of economic resources is measured, are accounted for in the appropriate fund. Proprietary fund fixed assets are capitalized in the accounting records of the fund because the fixed assets are used in the production of the goods or services provided or sold.

Depreciation of fixed assets accounted for in a proprietary or similar trust fund is recorded in the accounting records of that fund.

2.1.1.3.7.a(2)

General fixed assets - General fixed assets are fixed assets used in the operations of governmental and expendable trust funds where the primary accounting purpose is to reflect the sources and uses of current financial resources. General fixed assets do not represent financial resources available for expenditure, but are items for which financial resources have been expended and over which accountability should be maintained. They are not assets of any particular fund but of the general government and are accounted for in the General Fixed Assets Account Group.

The General Fixed Assets Account Group (GFAAG) is an account group, and not a fund. It is a record keeping mechanism that provides a basis for accountability and control over fixed assets which are appropriately not recorded in a fund.

Public domain or "infrastructure" fixed assets (e.g., roads, bridges, sidewalks, lighting systems) that are immovable and of value only to the government are not required to be reported in the GFAAG.

Depreciation of general fixed assets is not recorded in the accounting records of governmental funds. Depreciation of general fixed assets may be calculated for managerial purposes and accumulated depreciation may be recorded in the GFAAG.

2.1.1.3.7.b

Long-Term Obligations--Due to the fund accounting requirements of a government's operations, some long-term obligations are accounted for in certain funds (fund long-term obligations) and others are accounted for in an account group (general long-term obligations).

2.1.1.3.7.b(1)

Fund long-term obligations - Long-term obligations associated with and expected to be paid from proprietary and similar trust funds should be reported in those funds as liabilities. These obligations may be secured by a specific fund asset or revenue or may be backed by the full faith and credit of the governmental unit.

2.1.1.3.7.b(2)

General long-term obligations - All long-term obligations that are not accounted for in a proprietary or similar trust fund are considered general obligations of the government and must be accounted for in the General Long-Term Obligations Account Group. General long-term obligations represent debt that will be met by expending resources other than those considered current and available as of current balance sheet year end.

2.1.1.3.8

Budget and Budgetary Accounting

Effective Date:

Sept. 1, 1998

Budgeting is a critical element of governmental planning, control and evaluation processes. GAAP budgetary requirements include:

• Budget(s) should be adopted by every government.

• The accounting system should provide the basis for appropriate budgetary control.

• Budgetary comparisons should be included in the appropriate financial statements and schedules for governmental funds for which budgets have been adopted.

2.1.1.3.9

Financial Reporting

Effective Date:

Sept. 1, 1998

2.1.1.3.9.a

Interim Reports - In order to facilitate management control, legislative oversight or other purposes, appropriate interim financial statements and reports of financial position, operating results and other pertinent information should be prepared.

2.1.1.3.9.a

Comprehensive Annual Financial Report - A governmental entity should annually prepare and publish a Comprehensive Annual Financial Report (CAFR) covering all funds and account groups. The CAFR should include an introductory section; appropriate combined, combining and individual fund statements; notes to the financial statements; required supplementary information; schedules; narrative explanations; and statistical tables.

2.1.1.3.9.c

Comprehensive Annual Financial Reports of Component Units - A Comprehensive Annual Financial Report (CAFR) of individual component units of a primary government may be prepared and published as deemed necessary. A CAFR of a component unit should include an introductory section; appropriate combined, combining and individual fund statements; notes to the financial statements; required supplementary information; schedules; narrative explanations; and statistical tables. The notes to the financial statements should clearly indicate that the reporting entity is a component unit of another government.